Société Générale / Risk Report - Pillar III

6 CREDIT AND COUNTERPARTY CREDIT RISK COUNTERPARTY CREDIT RISK

Credit valuation adjustment for counterparty credit risk Derivatives and security financing transactions are subject to Credit Valuation Adjustment (CVA) to take into account counterparty credit risk. The Group includes in this adjustment all clients that are not subject to a daily margin call or for which the collateral only partially covers the exposure. This adjustment also reflects the netting agreements existing for each counterparty. CVA is determined on the basis of the Group entity’s positive expected exposure to the counterparty, the counterparty’s probability of default, and the loss in the event of default. Furthermore, since 1 January 2014, financial institutions have had to determine capital requirements related to CVA, covering its variation over ten days. The scope of counterparties is limited to financial counterparties as defined in the EMIR or certain corporates that may use derivatives beyond certain thresholds and for purposes other than hedging. Societe Generale has implemented an internal model to calculate these capital requirements, covering a significant part of the scope. The method is similar to the one used for the market VaR computation (see “Market risk” Chapter): it consists of carrying out a historical simulation of the change in CVA due to the variations observed in the credit spreads of the portfolio counterparties, with a 99% confidence interval. The calculation is made on the credit spreads variation observed, on the one hand, over a one-year rolling period (VaR on CVA), and, on the other hand, over a fixed one-year historical window corresponding to the period of greatest tension in terms of credit spreads (stressed VaR on CVA). The associated capital requirements are equal to the sum of these two computations multiplied by a factor set by the regulator, specific to each bank. For the remaining part determined according to the standardised method, Societe Generale applies the rules defined by the Capital Requirements Regulation: weighting by a normative factor of the EAD multiplied by a recomputed maturity (for the breakdown of the RWA related to CVA between standardised method and internal model approach, refer to the table "Exposure and RWA relating to Credit Valuation Adjustment (CVA)” in section 6.9 "Counterparty risk detail"). The management of this exposure and of the regulatory capital charge led the Group to buy protection (such as Credit Default Swaps) from major financial institutions. In addition to reducing the credit risk, it decreases the variability of CVA and of the regulatory capital charge deriving from changes in the credit spreads of counterparties.

WrongWay Risk Wrong-way risk is the risk of the Group’s exposure to a counterparty increasing significantly, combined with a simultaneous increase in the probability of the counterparty defaulting. Two types of wrong-way risk exist: general wrong-way risk, where there is a significant correlation p between certain market conditions and the creditworthiness of the counterparty; specific wrong-way risk, where the amount of exposure is directly p related to the credit quality of the counterparty. The specific wrong-way risk is subject to dedicated regulatory capital requirements, through an add-on applied when calculating the capital requirements. The EEPE indicator for transactions identified as facing a specific wrong-way risk is reassessed based on the assumption of a default from the counterparty. This process leads to stricter capital requirements regarding counterparty credit risks on such transactions. The replacement risk calculated in these specific risk situations is also increased, thereby limiting the exposure on such transactions, as there is no change in the risk limit framework. The general wrong-way risk is monitored through stress tests (stress tests based on mono- or multi-risk factors covering all transactions with a given counterparty, relying on the same scenarios as used in the market risk stress tests) based on: a quarterly analysis of the stress tests regarding all counterparties, p making it possible to identify the most adverse scenarios linked to a joint deterioration in the quality of the counterparties and the associated positions; regarding Systemically Important Financial Institutions (SIFI), p monthly monitoring of dedicated multi-risk factor stress test, subject to limits per counterparties; regarding hedge funds and proprietary trading groups, weekly p monitoring of dedicated mono-risk factor stress test, subject to limits. This framework is supplemented by an adverse stress test which quantify the potential loss on house transactions and agency business in case of change in market conditions, significant enough to trigger defaults on a such type of counterparties.

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| SOCIETE GENERALE GROUP | PILLAR 3 - 2020