Société Générale / Risk Report - Pillar III

6 CREDIT AND COUNTERPARTY CREDIT RISK CREDIT AND COUNTERPARTY CREDIT RISK MONITORING AND SURVEILLANCE SYSTEM

Credit and counterparty credit risk corresponds to the risk of losses arising from the inability of the Group’s customers, issuers or other counterparties to meet their financial commitments. Credit risk includes the counterparty risk linked to market transactions and securitisation activities. In addition, credit risk may be further amplified by individual, country and sector concentration risks.

CREDIT AND COUNTERPARTY CREDIT RISK 6.1 MONITORING AND SURVEILLANCE SYSTEM

General principles governing risk taking The risk approval process is based on three fundamental principles: the analysis and the validation of the files fall respectively to the p sector of commercial follow-up of the client and to the dedicated risk units within the risk management function. In order to guarantee a consistent approach to Group risk-taking, this commercial monitoring sector and this risk unit examine all authorisation requests relating to a given client or category of clients. This commercial monitoring sector and this risk unit must be independent of each other; the internal rating of counterparties is a key criterion in the granting p policy. These ratings are proposed by the commercial monitoring sector and validated by the dedicated risk unit; for retail customers, the granting process is based on risk analysis p tools (score) controlled by the risk units. Credit decisions are subject to compliance with the granting criteria previously defined in credit policies whose effectiveness is regularly evaluated; a system of delegation of competence, largely based on the internal p rating of the counterparties, confers decision-making capacities to the risk units on the one hand and the commercial monitoring sector on the other. The business line assumes the burden of provisions and losses related to its credit decisions as the first line of defense. The Risk Department submits recommendations to CORISQ on the evolution of the granting policy, with limits on credit portfolios, for the countries, geographic areas, sectors, products or types of customers presenting high concentration risks. The monthly risk monitoring report presented to CORISQ by the Risk Department comments on the evolution of the Group’s credit portfolio and ensures compliance with the guidelines. Changes in the credit portfolio, changes in credit policy validated by CORISQ and respect for the Group’s risk appetite are presented at least quarterly to the Risk Committee of the Board of Directors. Monitoring individual concentration Societe Generale complies with regulations governing large exposures (major regulatory risks exposure cap of 25% of equity). Moreover, the Group has set a stricter internal limit at 10% of consolidated shareholders’ equity applying to any concentrated exposure on linked clients. Since 1 July 2018, the High Council for Financial Stability has imposed an exposure limit on France's most indebted companies at a maximum level of 5% of eligible equity. Due to the size of the Group and its diversification, compliance with this constraint remains compatible with the individual support of our customers.

An internal process is implemented to identify and manage the risks of individual concentrations. Concentration thresholds, depending on the internal rating, are set by the CORISQ and define the validation governance of limits on individual concentrations. Exposures on connected clients that are considered significant by the Group are reviewed by the Large Exposure Committee chaired by the General Management. In Business Units, concentration levels on related client groups are defined during Concentration Committees (Concentration Committee for Global Banking and Investor Solutions and French Retail Banking or Local Risk Committees, CORISQ Corporate Region and Regional Major Risk Committees for the former International Retail Banking and Financial Services division). The Group uses credit derivatives to reduce some exposures considered to be overly significant. Furthermore, the Group systematically seeks to mutualise risks with other banking partners by avoiding keeping an excessive share in the banking pool of large-scale companies. Monitoring country risk Country risk arises when an exposure (loan, security, guarantee or derivative) becomes susceptible to negative impact from changing regulatory, political, economic, social and financial conditions. Country risk breaks down into two major categories: political and non-transfer risk covers the risk of non-payment p resulting from either actions or measures taken by local government authorities (decision to prohibit the debtor from meeting its commitments, nationalisation, expropriation, non-convertibility, etc.), domestic events (riots, civil war, etc.) or external events (war, terrorism, etc.); commercial risk occurs when the credit quality of all counterparties p in a given country deteriorates due to a national economic or financial crisis, independently of each counterparty’s individual financial situation. This could be a macroeconomic shock (sharp slowdown in activity, systemic banking crisis, etc.), currency depreciation, or sovereign default on external debt potentially entailing other defaults. Overall limits and strengthened monitoring of exposures have been established for countries based on their internal ratings and governance indicators. Supervision is not limited to emerging countries. Country limits are approved annually by General Management. They can be revised downward at any time if the country’s situation deteriorates or is expected to deteriorate.

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PILLAR 3 - 2020 | SOCIETE GENERALE GROUP |