Société Générale / Risk Report - Pillar III

6 CREDIT AND COUNTERPARTY CREDIT RISK CREDIT RISK HEDGING

CREDIT RISK HEDGING 6.2

Guarantees and collateral The Group uses credit risk mitigation techniques for both market and commercial banking activities. These techniques provide partial or full protection against the risk of debtor insolvency. There are two main categories: personal guarantees are commitments made by a third party to p replace the primary debtor in the event of the latter’s default. These guarantees encompass the protection commitments and mechanisms provided by banks and similar credit institutions, specialised institutions such as mortgage guarantors (e.g. Crédit Logement in France), monoline or multiline insurers, export credit agencies, etc. By extension, credit insurance and credit derivatives (purchase of protection) also belong to this category; collateral can consist of physical assets in the form of property, p commodities or precious metals, as well as financial instruments such as cash, high-quality investments and securities, and also insurance policies. Appropriate haircuts are applied to the value of collateral, reflecting its quality and liquidity. In order to reduce its risk-taking, the Group is pursuing active management of its securities, in particular by diversifying them: physical collateral, personal guarantees and others (including CDS). During the credit approval process, an assessment is performed on the value of guarantees and collateral, their legal enforceability and the guarantor’s ability to meet its obligations. This process also ensures that the collateral or guarantee successfully meets the criteria set forth in the Capital Requirements Directive (CRD). Guarantor ratings are reviewed internally at least once a year and collateral is subject to revaluation at least once a year. The Risk function is responsible for approving the operating procedures established by the core businesses for the regular valuation of guarantees and collateral, either automatically or based on an expert opinion, whether during the approval phase for a new loan or upon the annual renewal of the credit application. In accordance with the requirements of European Regulation No. 575/2013 (CRR), the Group applies minimum collateralisation frequencies for all collateral held in the context of commitments granted (financial collateral, commercial real estate, residential real estate, other security interests, leasing guarantees). Closer valuations must be carried out in the event of a significant change in the market concerned, the default or litigation of the counterparty or at the request of the risk management function. In addition, the effectiveness of credit risk hedging policies is monitored as part of the LGD. It is the responsibility of the risk management function to validate the operational procedures put in place by the business lines for the periodic valuation of collateral (guarantees and collateral), whether automatic valuations or on an expert opinion and whether during the

credit decision for a new competition or during the annual renewal of the credit file. The amount of guarantees and collateral is capped at the amount of outstanding loans less provisions, i.e. EUR 302.31 billion at 31 December 2019 (compared with EUR 290.17 billion at 31 December 2018), of which EUR 139.24 billion for retail customers and EUR 163.07 billion for other types of counterparty (compared with EUR 140.37 billion and EUR 149.80 billion at 31 December 2018, respectively). The oustanding loans covered by these guarantees and collateral correspond mainly to loans and receivables amounted to EUR 238.27 billion at 31 December 2019, and to off-balance sheet commitments amounted to EUR 56.85 billion (compared with EUR 237.18 billion and EUR 50.46 billion at 31 December 2018 respectively). The amounts of guarantees and collateral received for performing outstanding loans (Stage 1) and under-performing loans (Stage 2) with payments past due amounted to EUR 4.50 billion at 31 December 2019 (EUR 2.07 billion at 31 December 2018), including EUR 1.54 billion on retail customers and EUR 2.96 billion on other types of counterparties (versus EUR 1.05 billion and EUR 1.01 billion at 31 December 2018 respectively). The amount of guarantees and collateral received for non-performing outstanding loans at 31 December 2019 amounted to EUR 3.92 billion (compared to EUR 4.77 billion at 31 December 2018), of which EUR 1.90 billion on retail customers and EUR 2.02 billion on other types of counterparties (compared to EUR 2.21 billion and EUR 2.57 billion respectively at 31 December 2018). These amounts are capped at the amount of outstanding individually impaired loans. Use of credit derivatives to manage Corporate concentration risk Within Corporate and Investment Banking, the Performance & Scarce Resources management (PSR) team is responsible for working in close cooperation with the Risk Division and the businesses to reduce excessive portfolio concentrations, react quickly to any deterioration in the creditworthiness of a particular counterparty and suggest actions improving the capital allocation. PSR is part of the department responsible for the definition and effective deployment of the strategy, performance and scarce resources management for the credit and loan portfolio. The Group may use credit derivatives for in the management of its Corporate credit portfolio, primarily to reduce individual, sector and geographic concentrations and to implement a proactive risk and capital management approach. Total outstanding purchases of protection through Corporate credit derivatives increased to EUR 2.5 billion at end of December 2019 (compared to EUR 0.4 billion at end of December 2018). New operations have mainly been performed to approve capital allocation (+EUR 2 billion) and to a lower extend reduce concentration risk (EUR 71 million).

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PILLAR 3 - 2020 | SOCIETE GENERALE GROUP |