## EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2019/1fraea2019010.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1fraea2019010.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1fraea2019010.pdf.json)

---

### Macroprudential framework and institutional arrangements
- Macroprudential policy in France is the joint responsibility with several European institutions.
- With the operationalization of the EU Capital Requirement Directive and Capital Requirement Regulation (CRD/CRR), the French authorities have implemented several capital buffers, as well as the liquidity coverage ratio (LCR), based on this framework.
- Haut conseil de stabilité financière (HCSF) is the macroprudential authority established in accordance with recommendation European Systemic Risk Board (ESRB)/2011/13 and the designated authority established in accordance with Article 136 of CRD and is in charge of activating several measures in the CRD/CRR framework as well has direct responsibilities over several tools outside this framework, for example borrower-based tools.

### HCSF composition, mandates, and operational features
- HCSF’s financial stability mandate includes the power to formulate macroprudential policy based on well-defined intermediate objectives.
- HCSF composition:
  - Minister for the Economy (chair), Governor of the Banque de France (BdF), the Vice-Chairman of the French Prudential Supervision and Resolution Authority (ACPR), the Chairmen of the French Financial Markets Authority (AMF) and the French Accounting Standards Authority (ANC) and three external members.
  - At least four meetings a year.
- BdF and ACPR and AMF have formal mandates for financial stability, strengthening HCSF’s willingness to act.
- HCSF must rely on its member authorities for systemic risk analysis and implementation of macroprudential tools as it has no staff of its own.
- HCSF intermediate objectives (five): mitigating excessive credit growth and leverage; limiting reliance on short-term funding and market illiquidity; limiting exposure concentrations; limiting systemic moral hazard incentives; strengthening resilience of financial infrastructures.

### Powers, tools, and recent actions
- HCSF has broad powers to access information from both regulated and unregulated entities.
- HCSF has direct (hard) powers over a wide-range of macroprudential tools; as well as soft powers to issue opinions or warnings.
- Recent HCSF actions:
  - Strengthened large exposure (LE) limits on globally and domestically systemically important banks’ exposure to highly indebted corporates.
  - Activated counter-cyclical capital buffer (CCyB): buffer rate increased to 0.25 percent (announced June 11, 2018) and further increased to 0.50 percent in HCSF’s 20th meeting on March 18, 2019; Banks must comply starting July 1, 2019.
  - Used soft power to communicate risks in the Commercial Real Estate (CRE) market (April 2016).
- Some tools remain entrusted with HCSF’s member institutions; HCSF can issue public recommendations to member institutions without a formal ‘comply or explain’ mechanism.

### Accountability, transparency, and decision disclosure
- HCSF accountability and transparency features:
  - Accountable to the national parliament; Chairman may appear before Finance committees.
  - Publishes press releases after sessions and a public annual report.
  - Issues ad hoc reports on thematic reviews.
  - Record of legally binding decisions published in Journal Officiel de la République Française and on HCSF website.
- Current practice allows proposed policy action by the BdF to be outvoted without public disclosure; Governor of BdF may decide to make his proposals public.
- Recommendation: consider requiring proposed policy decisions and how decisions were made to be publicly disclosed in the summary of meetings to enhance transparency.

### Analytical capacity and systemic risk monitoring
- HCSF’s member institutions (BdF, ACPR, AMF) have strong analytical capacity and framework for monitoring systemic risks; framework largely oriented to the banking sector.
- BdF and ACPR lead in producing risk statements discussed in HCSF meetings, covering:
  - risk identification (through leading indicators),
  - impact assessment (through risk models),
  - resilience analysis (through structural models).
- Indicators focus on banking sector, households, corporates and increasingly insurance sector.
- Recommendations:
  - Add key indicators on French investment funds to the risk dashboard (assets under management, leverage, liquidity and returns).
  - Deepen analytical capability to understand transmission of shocks between financial balance sheets within financial groups, given dominance of financial groups and the bancassurance model.
  - Develop macro stress-testing capacity for nonbank financial institutions (asset management, insurance) and for conglomerates.

### Corporate sector vulnerabilities and policy responses
- Corporate debt levels and trends:
  - Unconsolidated nonfinancial corporate debt increased by 20 percent of GDP between 2010 and 2017 and stands at 133 percent of GDP.
  - Consolidated corporate debt is 74 percent of GDP (2018:Q3) and increased by 12 percentage points of GDP since 2010, mainly from net bond issuances.
  - Intercompany loans and bonds account for about half of nonfinancial companies’ debt as of end-2016.
- Debt-at-risk:
  - Debt owed by listed firms with interest coverage ratio (ICR) less than 2 doubled to nearly 6 percent of GDP by 2016.
  - Aggregate cash buffers have increased, but cash buffers have gone down for vulnerable firms (ICR < 2).
- HCSF measures and limits:
  - LE limit: French G-SIBs and D-SIBs required to set a five percent exposure limit (of their own funds) to highly indebted large corporations, effective July 1, 2018 (lasting two years); an NFC is classified as highly indebted if its ultimate parent company has a net leverage ratio greater than 100 percent and its interest coverage ratio is below three; exposures affected are those greater than €300 million.
  - Drawbacks: LE limit may contain concentration risk but may not prevent corporates diversifying debt across banks or accumulating market debt.
- Policy options:
  - Consider sectoral Systemic Risk Buffer (SRB) calibrated to corporate exposures if vulnerabilities intensify; SRB would affect all corporate exposures and could be calibrated to penalize riskier exposures more heavily.
  - Fiscal measures to incentivize corporate equity finance could complement macroprudential actions; potential measures include:
    - Interest deductibility based on fixed debt-to-equity rule (deny interest deductibility if debt-to-equity exceeds fixed value).
    - Allowance for corporate equity (ACE) to supplement interest deductibility with a deduction for the normal return on equity.
  - HCSF should evaluate effects of LE limit on financial system resilience and corporate borrowing behavior once sufficient data is available and stand ready to act if vulnerabilities increase.

### Toolkit and EU-level engagement
- The macroprudential policy toolkit should be strengthened further; current European framework has limited tools to address corporate sector risks in a targeted way.
- Recommendation: French authorities should actively engage at the EU level (ESRB, EBA, ESMA, ECB) to broaden toolkit (liquidity and leverage related tools for insurers and investment funds) and to develop guidance for sectoral instruments.
- Recommendation: enhance reporting, monitoring and analytical capacity to address risks from interconnectedness within financial groups (report intra-group exposures and transactions quarterly on a flow and stock basis; introduce liquidity management requirements and liquidity stress tests at conglomerate level).

### Key recommendations (selected; timing codes: I = immediate (within one year), NT = near term (1–3 years))
- Empower the HCSF to make recommendations to member institutions on tools entrusted to them (O-SII buffer, Articles 124 and 164 CRR for ACPR; leverage limits for AMF), with a ‘comply or explain’ mechanism. — HCSF — I
- Consider publication of summary of meetings including the policy proposals discussed. — HCSF — I
- Expand the role of external members, including greater involvement at an earlier stage of the HCSF decision process. — HCSF — I
- Develop analytical framework for borrower-based measures for corporates. Consider sectoral SRB if risks intensify. — HCSF — NT
- Evaluate options to further incentivize corporates to finance through equity rather than debt. — HCSF, MoF — NT
- Actively engage with the ESRB and others for a speedy development of liquidity and leverage related tools for insurers and investment funds. — HCSF, BdF, ACPR, AMF, ESRB — NT
- Report intra group exposures and transactions within conglomerates on a flow and stock basis, at quarterly frequency. — ACPR, AMF — NT
- Introduce liquidity management requirements and liquidity stress tests at the conglomerate level. — HCSF, ACPR, ECB — NT
- Develop specific guidance to address direct exposures within conglomerates and common exposures of entities in the conglomerate. — ACPR, AMF — NT
- Add to the HCSF dashboard indicators on investment funds (assets under management, leverage, liquidity and returns). — HCSF, AMF — I
- Develop capacity for macro stress test of investment funds. — AMF — NT

### Systemic risks and financial institutions — selected figures and findings
- Banking-sector resilience:
  - Basel III leverage ratio in the banking system is above the regulatory minimum of 3 percent.
  - Capital conservation buffer fully phased-in: equal increments of 0.625 percent each year resulted in uniform 2.5 percent level on January 1, 2019.
- Household sector:
  - Household debt-to-GDP reached a historical high of 58 percent (2018:Q1).
  - Loans to households for house purchase account for more than 80 percent of total loans to households.
  - Median DSTI was 30 percent in 2018:Q2.
  - Share of households with DSTI above 35 percent was about 24 percent in 2017 (below 2012 level of 28 percent).
  - Housing loans fixed-rate: 99 percent of new housing loans and 93 percent of the stock in 2017.
- Funding and liquidity:
  - Loan-to-deposit ratio declined to 97 percent in 2018:Q2.
  - LCR in total currencies is well above phased-in regulatory requirement of 100 percent.
- Nonbank sector and interconnectedness:
  - Banking share of financial sector assets fell from 64 percent in 2012 to 60 percent in 2017; insurers and investment funds expanded.
  - Four G-SIBs (BNP Paribas, Groupe Credit Agricole, Societe Generale and Groupe BPCE) hold 78 percent of the banking sector’s assets on a consolidated basis; Groupe Credit Mutuel holds further 9 percent.
  - Bancassurance groups cumulatively account for 47 percent of life insurance market share (2017).
  - On-balance exposures toward parent bank can reach more than 50 percent of insurer’s eligible capital for some insurers.

### Systemically Important Institutions (O-SII) — as of January 1, 2019
- BNP Paribas: O-SII Buffer (Phase-In) 2018 = 1.125 (Percent); 2019 = 1.5 (Percent)
- Groupe Credit Agricole: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Societe Generale: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Groupe BPCE: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Groupe Credit Mutuel: 2018 = 0.375 (Percent); 2019 = 0.5 (Percent)
- La Banque Postale: 2018 = 0.1875 (Percent); 2019 = 0.25 (Percent)

### Criteria for designation and buffer calibration (selected rules)
- Mandatory indicators weights (Percent):
  - Size: Total assets = 25
  - Importance (Substitutability/Financial System Infrastructure): Value of domestic payment transactions = 8.33; Private sector deposits from depositors in the EU = 8.33; Private sector loans to recipients in the EU = 8.33
  - Complexity/Cross Border Activity: Value of over-the-counter derivatives (notional) = 8.33; Cross-jurisdictional liabilities = 8.33; Cross-jurisdictional claims = 8.33
  - Interconnectedness: Intra-financial system liabilities = 8.33; Intra-financial system assets = 8.33; Debt securities outstanding = 8.33
- Institutions with an O-SII score higher than 350 basis points are automatically identified as O-SIIs; score lower than 4.5 basis points are automatically excluded.
- Determination of O-SII Buffers Based on Scores (Bucketing Approach):
  - <500 bps: O-SII Buffer (Percent) = 0.25
  - 500 bps – 1000 bps: 0.5
  - 1000 bps – 2000 bps: 1
  - 2000 bps – 3000 bps: 1.5
  - >3000 bps: 2

*Source: IMF staff summary of the France Executive Summary (1fraea2019010).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Macroprudential framework and institutional arrangements
- Macroprudential policy in France is the joint responsibility with several European institutions.
- With the operationalization of the EU Capital Requirement Directive and Capital Requirement Regulation (CRD/CRR), the French authorities have implemented several capital buffers, as well as the liquidity coverage ratio (LCR), based on this framework.
- Haut conseil de stabilité financière (HCSF) is the macroprudential authority established in accordance with recommendation European Systemic Risk Board (ESRB)/2011/13 and the designated authority established in accordance with Article 136 of CRD and is in charge of activating several measures in the CRD/CRR framework as well has direct responsibilities over several tools outside this framework, for example borrower-based tools.

### HCSF composition, mandates, and operational features
- HCSF’s financial stability mandate includes the power to formulate macroprudential policy based on well-defined intermediate objectives.
- HCSF is composed of the Minister for the Economy (chair), Governor of the Banque de France (BdF), the Vice-Chairman of the French Prudential Supervision and Resolution Authority (ACPR), the Chairmen of the French Financial Markets Authority (AMF) and the French Accounting Standards Authority (ANC) and three external members.
- In addition to the HCSF, BdF, ACPR, and AMF also have a formal mandate for financial stability, which strengthens HCSF’s willingness to act.
- HCSF must rely on its member authorities for systemic risk analysis as well as implementation of macroprudential tools as it has no staff of its own.

### Powers, tools, and recent actions
- HCSF has broad powers to access information from both regulated and unregulated entities.
- HCSF has direct (hard) powers over a wide-range of macroprudential tools; as well as soft powers to issue opinions or warnings.
- Recent HCSF actions include:
  - strengthening large exposure (LE) limits on globally and domestic systemically important banks’ exposure to highly indebted corporates;
  - activating counter-cyclical capital buffer (CCyB) with a buffer rate of 50 basis point;
  - using soft power to communicate risks in the Commercial Real Estate (CRE) market.
- Some tools remain entrusted with HCSF’s member institutions; HCSF can issue public recommendations to member institutions, without a formal ‘comply or explain’ mechanism.

### Accountability, transparency, and decision disclosure
- HCSF has a strong accountability and transparency framework:
  - accountable to the national parliament;
  - publishes press releases after sessions;
  - publishes a public annual report;
  - issues ad hoc reports on thematic reviews.
- Current practice allows proposed policy action by the BdF to be outvoted without disclosure, although the Governor of the Banque de France may decide to make his proposals public.
- Recommendation: consider requiring proposed policy decisions and how the decisions were made to be publicly disclosed in the summary of meetings to enhance transparency.

### Analytical capacity and systemic risk monitoring
- HCSF’s member institutions have strong analytical capacity and framework for monitoring systemic risks; the framework is largely oriented to the banking sector.
- BdF and ACPR lead in producing risk statements discussed in HCSF meetings, covering:
  - risk identification (through leading indicators),
  - impact assessment (through risk models),
  - resilience analysis (through structural models).
- Indicators used in regular systemic risk monitoring focus on the banking sector, households, corporates and increasingly insurance sector.
- Recommendation: add key indicators on French investment funds to the risk dashboard given the size and importance of this sector.
- Recommendation: deepen analytical capability to understand transmission of shocks between financial balance sheets within financial groups, given dominance of financial groups and the bancassurance model.

### Corporate sector vulnerabilities and policy responses
- HCSF should evaluate effects of tools introduced to mitigate risks from corporate leverage, including impact on:
  - resilience of the financial system, and
  - corporate borrowing behavior, once sufficient data is available.
- Consideration of a sectoral systemic risk buffer (SRB) calibrated to corporate exposures if vulnerabilities intensify:
  - Unlike the LE limit, a sectoral SRB could affect all corporate exposures and provide added resilience in the event of wide-spread corporate distress.
  - Calibration should penalize the riskier corporate exposures more heavily.
  - A well targeted SRB could enhance resilience through increased loss absorbing capacity; however it may still fall short of limiting risks from rising market debt issued by corporates.
- Fiscal measure to incentivize corporate equity finance:
  - Such a measure would affect both bank and market-based finance by impacting demand for credit rather than supply.
  - HCSF can issue a recommendation to the Ministry of Finance on this matter.
  - Potential measures to complement current reduction in marginal corporate income tax (CIT):
    - (i) an interest deductibility based on fixed debt-to-equity rule, i.e., denying interest deductibility if debt-to-equity exceeds some fixed value;
    - (ii) an allowance for corporate equity, which supplements deductibility of interest with a similar deduction for the normal return on equity.

### Toolkit and EU-level engagement
- The macroprudential policy toolkit should be strengthened further.
- The current European framework has limited tools to address corporate sector risks in a targeted way.
- Recommendation: French authorities should actively engage at the EU level to broaden the toolkit.
- Recommendation: enhance reporting, monitoring and analytical capacity to address risks from interconnectedness within financial groups.

### Key recommendations (Table 1 excerpt)
- Empower the HCSF to make recommendations to member institutions on tools entrusted to them (O-SII buffer, Articles 124 and 164 CRR for ACPR; leverage limits for AMF), with a ‘comply or explain’ mechanism. — HCSF — I
- Consider publication of summary of meetings including the policy proposals discussed. — HCSF — I
- Expand the role of external members, including greater involvement at an earlier stage of the HCSF decision process. — HCSF — I
- Develop analytical framework for borrower-based measures for corporates. Consider sectoral SRB (Systemic Risk Buffer) if risks intensify. — HCSF — NT
- Evaluate options to further incentivize corporates to finance through equity rather than debt. — HCSF, MoF — NT
- Actively engage with the ESRB and others for a speedy development of liquidity and leverage related tools for insurers and investment funds. — HCSF, BdF, ACPR, AMF, ESRB — NT
- Report intra group exposures and transactions within conglomerates on a flow and stock basis, at quarterly frequency. — ACPR, AMF — NT
- Introduce liquidity management requirements and liquidity stress tests at the conglomerate level. — HCSF, ACPR, ECB — NT
- Develop specific guidance to address direct exposures within conglomerates and common exposures of entities in the conglomerate. — ACPR, AMF — NT
- Add to the HCSF dashboard indicators on investment funds (assets under management, leverage, liquidity and returns). — HCSF, AMF — I
- Develop capacity for macro stress test of investment funds. — AMF — NT

(I = immediate (within one year), NT = near term (1–3 years), MT = medium term (3–5 years).)

*Source: IMF staff summary of the France Executive Summary.*

### INTRODUCTION

### INTRODUCTION

### Institutional responsibilities and EU context
- French institutions share macroprudential policy responsibilities with European institutions under the SSM regulation and CRDIV/CRR.
- Country authorities can initiate and implement macroprudential measures subject to notification and coordination with the ECB.
- The ECB has a “top up” power to apply more stringent requirements of any capital buffer in the CRDIV/CRR.
- The ESRB is responsible for macroprudential oversight at the EU level: collecting and analyzing data, identifying and analyzing systemic risks, issuing warnings, and cooperating within the ESFS.
- The EU-level macroprudential framework was assessed in the Euro Area (EA) FSAP.

### Scope of CRDIV/CRR and national discretion
- CRDIV/CRR introduce instruments including:
  - countercyclical capital buffer (CCyB),
  - systemic risk buffer,
  - capital surcharges for systemically important institutions,
  - Article 458 CRR “flexibility package” (tools on own funds, LE requirements, public disclosure, capital conservation buffer, liquidity, risk-weights for property sectors, intra-financial exposures).
- Other tools remain under national authorities, notably borrower-based tools (loan-to-value caps, debt-service-to-income caps), loan-to-deposit caps, margin and haircut requirements.
- In France, HCSF is the designated authority for macroprudential policy (established in accordance with Article 136 of CRD).

### Purpose and structure of the note
- This background note evaluates France’s domestic macroprudential framework and ability to address emerging vulnerabilities, assessing:
  - (i) domestic institutional arrangements;
  - (ii) systemic risk monitoring framework;
  - (iii) adequacy of the macroprudential policy toolkit.
- Assessment follows IMF guidance: Staff Guidance Note (IMF, 2014a), background note (IMF, 2014b), and other IMF policy papers.
- The note also assesses current and emerging financial vulnerabilities in France and provides policy recommendations.
- Structure:
  - Section II: domestic institutional arrangements and recommendations.
  - Section III: strengths and weaknesses of systemic risk monitoring and enhancement options.
  - Section IV: maps systemic vulnerabilities into macroprudential policy recommendations.
  - Section V: conclusion.

*This Technical Note has been prepared by Umang Rawat, Economist from the Monetary and Capital Markets Department of the IMF.*

---

### INSTITUTIONAL FRAMEWORK

### Objectives for institutional design
- A strong institutional framework must:
  - generate willingness to act (counter policy inaction bias),
  - foster ability to act when systemic risk builds,
  - promote effective cooperation and coordination between financial stability institutions.
- The note evaluates France’s arrangements against these three principles (Staff Guidance Note on Macroprudential Policy).

### Principle I: Willingness to Act — main findings
- HCSF strengthened post-crisis via July 2013 Banking Reforms Act, transforming Corefris into HCSF with explicit financial stability mandate and broad macroprudential binding powers.
- HCSF composition:
  - eight members: Minister for the Economy (chair), Governor of the BdF, Vice-Chairman of the ACPR, Chairmen of the AMF and ANC, and three external members.
  - At least four meetings a year.
- HCSF intermediate objectives (five):
  - mitigating and preventing excessive credit growth and leverage;
  - limiting overreliance on short-term funding or excessive risk mismatch, and mitigating market illiquidity;
  - limiting direct and indirect exposure concentrations;
  - limiting systemic impact of misaligned incentives to reduce moral hazard;
  - strengthening resilience of financial infrastructures.
- BdF has a special role:
  - Financial Stability Department (DSF) and Treasury’s Financial Sector Economic Analysis Division jointly provide HCSF Secretariat.
  - Governor of BdF has monopoly of proposals regarding macroprudential tools and ability to issue a public statement on proposals.
- Decision rules:
  - Decisions involving legally binding tools must be proposed by BdF Governor.
  - Hard power decisions adopted only if at least four members vote in favor.
  - Voting rules and quorum set by decree (half of members must be present).
- External members:
  - Currently largely advisory despite voting rights; recommendation to formalize role (e.g., technical meetings before plenary, direct access to technical groups).
- Accountability and transparency:
  - HCSF accountable to Parliament: annual report and Chairman may appear before Finance committees.
  - Record of decisions when measures are introduced published in Journal Officiel de la République Française and on HCSF website.
  - Press releases issued after meetings.
  - No public ex-post record when a measure was outvoted.

### Principle II: Ability to Act — main findings and gaps
- HCSF has broad powers to access information from regulated and unregulated entities.
  - Transparency, Fight against Corruption and Modernization of Economic Life Act (December 2016) empowered HCSF to gather necessary information from third parties (credit institutions, financing companies, investment firms, investment management companies, portfolio management companies, insurance companies, mutual and pension funds, and other relevant actors).
  - Note: no framework currently reported to penalize third parties that provide low-quality information.
- HCSF possesses direct (hard) powers over a wide range of macroprudential tools and soft powers to issue opinions/warnings.
- Some tools remain outside HCSF legal domain per EU framework:
  - ACPR is competent authority for activation of O-SII buffer and targeted capital tools on residential or commercial real estate (Articles 124 and 164 CRR).
  - AMF can use leverage limits in asset management industry as a macroprudential tool and suspension of redemptions.
- Coordination in practice:
  - Strong coordination exists in HCSF and within BdF/ACPR via “Pôle de stabilité financière.”
- Recommendation:
  - Enhance HCSF powers with a formal ‘comply or explain’ mechanism.

### Principle III: Effective Coordination and Cooperation — main findings
- Legal basis: Article L.631-2-1 of the French monetary and financial code tasks HCSF with ensuring cooperation and exchange of information among member institutions and with HCSF.
- ACPR and AMF can provide HCSF with information including that protected by professional secrecy.
- Cross-participation: ACPR, AMF, and ANC have representatives on each other’s boards; MoF is represented non-voting on these boards—strengthening information sharing.
- European dialogue:
  - French institutions participate in ECB and ESRB working groups: Macroprudential forum (MPF), macroprudential policy group (MPPG), macroprudential analytical group (MPAG), General Board, ATC, IWG, AWG, AT.
  - AMF represented in ESMA standing committees and ESMA quarterly risk survey.
  - Banque de France has a member in ESRB’s AT assessing national macroprudential measures and reciprocity needs.

---

### SYSTEMIC RISK MONITORING

### Monitoring approach and data inputs
- France uses a guided discretion approach: key indicators guide risk identification, decision-making relies on judgement incorporating all relevant information.
- Indicators and tools:
  - regular statistics: macrofinancial time series, macroeconomic forecasting, financial data, microprudential data;
  - model-based indicators: composite indicator of systemic stress (CISS), joint probability of default from CDS prices;
  - analytical tools: early warning system (EWS) developed by BdF.
- A comprehensive chart pack of indicators is circulated before HCSF meetings.
- BdF and ACPR produce semi-annual assessments of risks to financial stability; BdF publishes a risk assessment report twice a year (publicly available).

### Four-block strategy for systemic risk monitoring (Figure 1)
- (i) risk assessment and macro models for scenario design;
- (ii) assessing impact of stress scenarios on solvency at individual bank level (credit risk models, market risk models);
- (iii) using network and contagion models to assess aggregate banking sector solvency impact (interbank contagion and liquidation of assets);
- (iv) integrating scenarios in a structural DSGE model with financial variables to conduct welfare analysis and calibrate macroprudential tools.
- BdF has developed macroprudential stress tests that complement microprudential stress tests with bank amplification (contagion) and macro amplification channels to obtain aggregate macro impact.

### Scope limitations and ongoing work
- Analytical framework largely oriented toward the banking sector; indicators focus on banking sector, households, corporates, and increasingly insurance.
- AMF prepares an annual risk outlook for financial markets and runs a quarterly risk committee; scope for better integration of AMF analysis into HCSF common risk assessment.
- Gap identified: insufficient dashboard coverage of French investment funds (assets under management, leverage, liquidity, profitability) despite sector size.
- Ad hoc working groups have addressed gaps:
  - CRE market resilience: BdF developed CRE stress scenario; ACPR and AMF conducted sensitivity analysis; HCSF found no systemic risk and used communication as a soft tool (April 2016).
  - Asset management interconnections: report found fund liabilities remain more concentrated than fund assets and show significant exposure to entities of the same group.
- Ongoing priorities:
  - increase scope of financial links studied;
  - implement macro stress tests that include nonbank financial institutions (asset management, insurance);
  - deepen analytical capability to understand intra-group shock transmission and extend macro stress testing to nonbank entities.

---

### SYSTEMIC RISKS AND MACROPRUDENTIAL TOOLS

### Assessment approach
- Systemic vulnerabilities assessed using multiple signaling indicators, FSAP financial sector risk analysis, and IMF Staff Guidance Note (IMF, 2014) approach.
- Recommendations map vulnerabilities to macroprudential policy tools.

### Broad-based vulnerabilities — key findings
- Credit developments indicate increasing broad-based risks.
- Two measures of credit-to-GDP gap are used:
  - Total credit to GDP gap (ESRB/BIS approach; HP-filter detrending);
  - Bank credit to GDP gap.
- All measures show a positive credit gap reflecting broad-based credit growth especially since 2015.

---

*Prepared by the IMF Monetary and Capital Markets Department technical team as presented in "INTRODUCTION" (Technical Note).*

### 1. Credit to GDP Gap

### 1. Credit to GDP Gap

### Credit Growth
- Indicator unit: (Percent)
- Sources: Banque de France; and IMF staff calculations. Source: Banque de France.
- Findings:
  - Bank credit to private sector has accelerated ...
  - ... driven by credit to households and to firms.

### Bank Credit to Nonfinancial Private Sector
- Indicator unit: (Percent of GDP)

### MFI Credit to Residents
- Indicator unit: (Percent contribution, y-y)
- Source: Haver Analytics.

### Cost of Borrowing
- Indicator unit: (Percentage)
- Findings:
  - The financial cycle is reinforced by low borrowing costs ...
  - ... and bank balance sheets have strengthened.

*Source: 1fraea2019010 - 1. Credit to GDP Gap (PDF).*

### 6. Financial Institutions’ Balance Sheets Developments

### 6. Financial Institutions’ Balance Sheets Developments

### A. Banking-sector resilience and capital buffers
- Bank credit to the nonfinancial private sector in France has continued to grow, in contrast with other large euro area countries.
- The Basel III leverage ratio in the banking system is above the regulatory minimum of 3 percent.
- Capital ratios are high, making the banking system more resilient to risks.
- Countercyclical capital buffer (CCyB):
  - HCSF uses a range of indicators (other than the Basel credit-to-GDP gap) capturing credit, household, corporate, banking sector and market risks to assess systemic risk and decide on CCyB activation.
  - On June 11, 2018, HCSF announced a rise in the CCyB to 0.25 percent.
  - The buffer rate was further increased to 0.50 percent in HCSF’s 20th meeting on March 18, 2019.
  - Banks have to comply with the new requirement starting July 1, 2019.
- FSAP assessment:
  - Growth expected to slow in 2019 but remain above potential; credit cycle is accelerating and judged already advanced.
  - Recommendation: CCyB should be activated at an early stage of the financial cycle to build buffers that can be used as the cycle turns; CCyB would be relaxed in the event of a reversal to enable banks to mobilize capital to preserve credit supply, notably to small and medium sized firms.

### B. Vulnerabilities from housing and household sector
- House prices and valuation:
  - Real house price growth has subdued after acceleration in 2015 and remains below euro area average.
  - Model-based results show house prices broadly in line with fundamentals.
  - Price-to-income and price-to-rent ratios are broadly in line with euro area average and do not show signs of overheating.
  - Sudden tightening of financial conditions could be associated with a downturn in the housing market.
- Household debt and balance sheets:
  - Household debt-to-GDP reached a historical high of 58 percent (2018:Q1), driven by consumer lending (closely linked to car financing) and loans for house purchase.
  - Loans to households for house purchase account for more than 80 percent of total loans to households.
  - About half of homeowners have debt.
  - Debt servicing costs have gone down recently.
  - Aggregate households continued to build financial net worth by accumulating financial assets faster than debts.
  - Median DSTI was 30 percent in 2018:Q2.
  - Share of households with DSTI above 35 percent was about 24 percent in 2017 (below 2012 level of 28 percent).
  - Loan-to-value (LTV) ratio on new loans has remained largely stable.
- Data gaps and recommendations:
  - The extent to which lower-income and younger households have accumulated vulnerabilities is still unknown due to lack of disaggregated survey data.
  - Recommendation: gather, monitor and analyze more granular data related to housing loans and household balance sheets; consider activating borrower-based instruments if future analysis uncovers vulnerabilities.
- Structural features that increase resilience:
  - Housing loans are predominantly fixed-rate (99 percent of new housing loans and 93 percent of the stock in 2017), insulating households from interest rate risk.
  - Loans are usually extended based on borrower’s financial assessment, not house value.
  - Households cannot extract home equity (no borrowing using home equity as collateral), limiting wealth effects.
  - Mandatory insurance against death and disability; protection mechanisms exist for lenders in case of default for majority (about 95 percent) of loans.
  - Interest rate risks are transferred to banks’ balance sheets, which are better positioned to hedge them; other uncertainty-driven risks are shifted to insurance companies.

### C. Vulnerabilities from corporate sector
- Corporate debt levels and trends:
  - Unconsolidated nonfinancial corporate debt increased by 20 percent of GDP between 2010 and 2017 and stands at 133 percent of GDP.
  - Consolidated corporate debt (netting out intercompany loans) is 74 percent of GDP (2018:Q3) and increased by 12 percentage points of GDP since 2010, mainly from net bond issuances.
  - Intercompany loans and bonds account for about half of nonfinancial companies’ debt as of end-2016.
  - Bank credit to nonfinancial firms has increased more moderately.
- Debt-at-risk and cash buffers:
  - Debt owed by listed firms with an interest coverage ratio (ICR) less than 2 doubled to nearly 6 percent of GDP by 2016.
  - Aggregate cash buffers have increased, but cash buffers have gone down for vulnerable firms (ICR < 2).
  - A sudden increase in interest rates could significantly increase the debt burden of already vulnerable firms.
- Macro-financial channels of corporate distress:
  - Macroeconomic channel: corporate distress weakens investment, employment, and activity, causing financial distress in other sectors.
  - Uncertainty channel: market uncertainty about exposures raises banks’ funding costs, reducing credit supply.
  - Liquidity channel: distressed corporates withdraw funds to service external debt, pressuring banks’ liquidity and potentially causing a credit crunch.
- Macroprudential actions and limitations:
  - HCSF tightened large-exposure (LE) limits to highly indebted corporates:
    - French globally and domestically systemically important banks required to set a five percent exposure limit (of their own funds) to highly indebted large corporations, effective July 1, 2018 (lasting two years).
    - An NFC is classified as highly indebted if its ultimate parent company has a net leverage ratio greater than 100 percent and its interest coverage ratio is below three.
    - Exposures affected are those greater than €300 million.
  - Drawbacks of the LE limit:
    - May help contain risk concentration but may not prevent further debt accumulation of targeted group from banking system.
    - Much of the increase in debt for highly indebted large corporates is sourced outside banking system; effectiveness may rely on signaling to markets.
    - May enhance shift toward market-based funding.
- Policy options suggested:
  - Consider sectoral systemic risk buffer (SRB) calibrated to corporate exposures to affect all corporate exposures and add resilience in event of widespread corporate distress.
  - Calibrate SRB to penalize riskier corporate exposures more heavily and allow differentiation across sectors.
  - Use fiscal options to affect demand for credit (outside HCSF macroprudential toolkit), including:
    - interest deductibility based on fixed debt-to-equity rule (deny deductibility if debt-to-equity exceeds fixed value);
    - allowance for corporate equity to supplement interest deductibility with a deduction for normal return on equity.
- Assessment and recommendations:
  - Solvency stress test indicates no bank would face CET1 capital below 6.5 percent under adverse scenario, though capital depletions can be relatively high.
  - Some banks’ exposures to large indebted corporates may increase notably under stress.
  - Recommendation: HCSF should evaluate effects of LE limit and stand ready to act if corporate vulnerabilities increase.
  - Observation: current toolkit is insufficient to effectively address corporate exposure risks; discussion needed on expanding toolkit.

### D. Vulnerabilities from funding and liquidity
- Aggregate liquidity:
  - Liquidity Coverage Ratio (LCR) in total currencies is well above phased-in regulatory requirement of 100 percent.
  - Loan-to-deposit ratio declined to 97 percent in 2018:Q2.
  - Liquid assets as share of short-term liabilities are significantly lower than euro area peers.
- U.S. dollar liquidity and NSFR:
  - LCR in U.S. dollar has shown improvements and is above 100 percent on average but remains volatile.
  - Maintaining Net Stable Funding Ratio (NSFR) in U.S. dollars above 100 percent is challenging for some banks; no regulatory NSFR constraint in USD at European level.
- Recommendations to mitigate wholesale funding disruptions:
  - Consider policies to minimize impact of disruptions in wholesale funding markets, including U.S. dollars.
  - Cash-flow based liquidity analysis suggests banks may face challenges in event of large wholesale funding outflows despite adequate buffers over five-day and one-month horizons.
  - Liquidity gap in U.S. dollars appears manageable (only up to 1 percent of total assets) but could cause contagion risk.
  - Recommendation: authorities could consider requiring wholesale funding providers to hold buffers to cover at least 50 percent of outflows over a horizon of up to five working days in all major currencies; link requirements with monitoring of banks’ use of collateral swaps to improve liquidity ratios.

### E. Vulnerabilities from nonbank sector
- Growing role of nonbanks:
  - Share of banking in financial sector assets fell from 64 percent in 2012 to 60 percent in 2017; insurers and investment funds expanded.
- Insurance sector:
  - Solvency II (entered into force in 2016) introduced risk-based solvency framework; ACPR remains competent insurance supervisor.
  - Solvency II includes volatility adjustment and matching adjustment (formulaic countercyclical valuation measures) and symmetric equity risk adjustment; matching adjustment not usable for French market products.
  - Solvency stress tests show solvency coverage ratio does not drop below 100 percent regulatory threshold for any company.
  - French insurance groups are more vulnerable to combination of higher interest rates and mass lapse event due to life insurance product features (redeemable savings product, tax advantage after eight years, full ownership of past returns); sector has significant liquid reserves relative to historical outflow pressures.
  - Lapse rates in France are slightly higher than EU average; 2018 lapse rates lower than prior years and no major spikes since 2013.
  - Insurance groups within conglomerates often have large exposures to other conglomerate entities, posing spillover risk.
- Macroprudential powers and monitoring:
  - HCSF granted new powers effective December 2016 to set up technical provision for profit-sharing for insurance sector and to take preventive macroprudential measures, including temporarily:
    - limit certain operations and activities (including writing of premium);
    - restrict free use of portfolio assets;
    - limit redemption payments for whole portfolio or subset;
    - limit or delay policyholder arbitrage or prepayments for whole portfolio or subset;
    - limit distribution of dividends to shareholders.
  - Temporary powers can be activated for maximum three months (suspension of redemptions can be imposed for maximum six consecutive months).
  - ACPR monitors lapse rates through weekly reporting.
- Asset management and investment funds:
  - French asset management industry is one of the largest in the euro area; AMF proactively monitors risks and implements FSB, IOSCO, and ESRB recommendations.
  - Main macroprudential risks for investment funds: excessive leverage and mismatch between asset liquidity and redemption terms.
  - AMF findings: French AIFs’ main risk indicators appear consistent with strategies on fund-by-fund basis (AMF 2019).
  - Recommendation: AMF should continue work with ESRB and ESMA to enhance data quality and design macroprudential limits for AIFs; develop stress-test capacity from systemic perspective for risky segments of investment fund industry.

### F. Structural vulnerabilities and interconnectedness
- Concentration and bancassurance:
  - The French financial system is dominated by large financial groups active across business lines.
  - BNP Paribas, Groupe Credit Agricole, Societe Generale and Groupe BPCE—four G-SIBs—hold 78 percent of the banking sector’s assets on a consolidated basis; Groupe Credit Mutuel holds further 9 percent.
  - These groups are active in insurance and asset management; cumulatively account for 47 percent of life insurance market share (2017).
  - Bancassurance groups show concentrated on-balance exposures: market value of on-balance sheet exposures toward parent bank can reach more than 50 percent of insurer’s eligible capital for some insurers.
- Interconnectedness and spillovers:
  - FSAP analysis indicates increasing cross-sector interconnectedness: funds have large direct exposures to banks (asset side) and to insurers (liabilities side).
  - Network of marketable securities is relatively sparse but clustered around a few important banks and insurance companies.
  - Common exposures between banks and insurers exist both domestically and cross-border.
  - Concentrated intragroup exposures and cross-holdings can amplify risks and spillovers.
- Recommendations to address conglomerate risks:
  - Recommend reporting flow data on intragroup transactions in a conglomerate at quarterly frequency.
  - Develop capacity for liquidity stress tests at the conglomerate level.
  - Consider development of specific guidance to address direct exposures and common exposures of entities in a conglomerate.
  - Undertake preemptive planning through development of liquidity risk management plans, at least for large insurers in the context of EIOPA work program.
- Systemically important institutions and buffers:
  - Six banks are assessed by ACPR to be systemically important and therefore subject to O-SII/G-SII buffer (assessment in place since 2014; from January 1, 2019 six banking groups assessed as O-SII or G-SII).
  - Capital conservation buffer is fully phased-in: phase-in began January 2016 with equal increments of 0.625 percent each year, resulting in uniform 2.5 percent level on January 1, 2019.

*Source: IMF staff calculations.*

### CONCLUSIONS AND RECOMMENDATIONS

### CONCLUSIONS AND RECOMMENDATIONS

### Institutional framework and powers
- HCSF’s financial stability mandate includes the power to formulate macroprudential policy and to employ a broad range of macroprudential tools.
- HCSF has hard powers over a wide range of macroprudential tools, and soft powers to issue opinions or warnings.
- Some tools remain outside HCSF’s legal domain and are entrusted to HCSF’s member institutions; HCSF can issue recommendations to them but without a formal ‘comply or explain’ mechanism.

### Analytical capacity and risk monitoring
- HCSF’s member institutions have strong analytical capacity and framework for monitoring systemic risks, largely oriented towards the banking system.
- Risk statements in HCSF meetings cover time and structural dimensions and incorporate:
  - risk identification (through leading indicators),
  - impact assessment (through risk models), and
  - resilience analysis (through structural models).
- Analytical tools and models are largely focused on the banking sector.
- Recommendations:
  - deepen analytical capability to understand (i) transmission of shocks between financial balance sheets within a group, and (ii) extend macro stress testing to nonbank entities, notably asset management industry and insurance.

### Macroprudential toolkit and sectoral measures
- A sectoral SRB calibrated to corporate exposures could be considered if vulnerabilities intensify:
  - LE limit contains concentration of individual banks’ exposure to large indebted corporates but may not prevent corporates diversifying debt across banks.
  - A sectoral SRB would affect all corporate exposures and provide added resilience in the event of wide-spread corporate distress.
  - The SRB should be calibrated to penalize the riskier corporate exposure more heavily.
  - A well-targeted SRB would enhance resilience through increased loss absorbing capacity but may still fall short of limiting risks from rising market debt issued by corporates.
- Macroprudential policy toolkit could be strengthened further:
  - At the EU level, consider broadening the toolkit, e.g., developing analytical framework to introduce borrower-based tools for corporates.
  - Concerted effort needed at EU and national level to effectively monitor and limit risks related to concentrated exposures within a financial conglomerate.

### Fiscal measures to address corporate leverage
- Fiscal measures that incentivize corporates to finance through equity rather than debt can complement banking-focused measures.
- HCSF measures are largely focused on the banking system; much recent increase in corporate debt is driven by market debt.
- HCSF could recommend the Ministry of Finance consider measures (beyond the planned reduction in CIT) to further incentivize equity financing, affecting demand for credit across bank and market-based finance.

### Systemically Important Institutions (O-SII) — as of January 1, 2019
- BNP Paribas: O-SII Buffer (Phase-In) 2018 = 1.125 (Percent); 2019 = 1.5 (Percent)
- Groupe Credit Agricole: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Societe Generale: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Groupe BPCE: 2018 = 0.75 (Percent); 2019 = 1 (Percent)
- Groupe Credit Mutuel: 2018 = 0.375 (Percent); 2019 = 0.5 (Percent)
- La Banque Postale: 2018 = 0.1875 (Percent); 2019 = 0.25 (Percent)

### Criteria for designation of O-SII and buffer calibration
- Step 1: Mandatory Indicators (Weights (Percent))
  - Size: Total assets = 25
  - Importance (Substitutability/Financial System Infrastructure):
    - Value of domestic payment transactions = 8.33
    - Private sector deposits from depositors in the EU = 8.33
    - Private sector loans to recipients in the EU = 8.33
  - Complexity/Cross Border Activity:
    - Value of over-the-counter derivatives (notional) = 8.33
    - Cross-jurisdictional liabilities = 8.33
    - Cross-jurisdictional claims = 8.33
  - Interconnectedness:
    - Intra-financial system liabilities = 8.33
    - Intra-financial system assets = 8.33
    - Debt securities outstanding = 8.33
- Institutions with an O-SII score higher than 350 basis points are automatically identified as O-SIIs; score lower than 4.5 basis points are automatically excluded.
- Step 2: Optional (Country-Specific) Indicators
  - Market share in retail loans (corporates and individuals) living in France, minimal threshold 350 basis points.
  - Market share in retail deposits (corporates and individuals) living in France, excluding centralised deposits at the Caisse des Dépôts et Consignations, minimal threshold 350 basis points.
  - Institutions with systemic score between 4.5 and 350 basis points from step 1 are examined on these optional indicators; exceeding 350 basis points on an optional indicator leads to O-SII assessment.
- Determination of O-SII Buffers Based on Scores (Bucketing Approach)
  - <500 bps: O-SII Buffer (Percent) = 0.25
  - 500 bps – 1000 bps: 0.5
  - 1000 bps – 2000 bps: 1
  - 2000 bps – 3000 bps: 1.5
  - >3000 bps: 2

### Annex I — Macroprudential policy options to address corporate vulnerabilities

A. Capital-Based Tools
- Increasing risk weights on corporate exposures is constrained under CRDIV/CRR:
  - Article 124 CRR allows higher risk weights for exposures secured by real estate.
  - Article 164 CRR allows increase in minimum loss given default for exposures secured by real estate.
  - Article 458 CRR allows increasing risk weights on property-related exposures across a wider group of institutions or on intra-financial exposures.
  - These measures are largely targeted to real estate and are not available for NFC indebtedness.
- Sectoral counter-cyclical capital requirement (sectoral CCyB) is not available in the current framework; CCyB is broad-based and does not adequately target corporate sector risks.
  - Sectoral CCyB is being considered by the Basel Committee on Banking Supervision (BIS, 2018).
  - Switzerland has an active sectoral CCyB: 2 percent buffer for the residential mortgage market.
  - Countries may introduce sectoral CCyB in national legislation; Spain instituted sectoral CCyBs in December 2018 as a national flexibility measure.
  - Effectiveness may be limited by lack of reciprocity and potential conflict with CRDIV/CRR.
- Sectoral systemic risk buffer (SRB) will be available in CRDV but sub-sectors need EBA guidelines:
  - SRB has larger scope than the LE limit and adds resilience; can be used cyclically (turned off in stress).
  - Main drawback: lack of delineation between cyclical and structural instruments.
  - Calibration can penalize riskier corporate exposures more heavily using balance sheet variables (e.g., net-debt to equity, interest coverage ratio).

B. Borrower-Based Tools
- Borrower-based tools are well established for households (e.g., LTV limits active in 55 countries; debt-service-to-income limits binding in 39 countries).
- Advantages:
  - Activity-based; can in principle affect corporate leverage beyond banking system.
  - Can be applied to all providers of credit (examples: Finland, Hungary, Latvia, Netherlands apply LTV to all providers of household credit).
  - Apply to flows (prevent lending once limit binds) and act earlier in cycle, less procyclical than capital measures.
- Challenges and design considerations for corporates:
  - Heterogeneity across corporates suggests possible need for differentiated limits:
    - Sectoral heterogeneity: consider two complementary measures of leverage:
      - flow-based: interest coverage ratio,
      - stock-based: debt to equity.
    - Corporate structure heterogeneity: old vs new firms; stand-alone vs group-affiliated firms.
    - Loan heterogeneity: applicability to long-term vs short-term loans; differentiation by loan-tenor.
  - Practical challenge to apply borrower-based limits to market finance (asset managers, private investors).
- Example: U.S. interagency guidance on leveraged lending:
  - Transactions where borrower’s total debt divided by EBITDA exceeds six would generally raise concerns for most industries.
  - Guidance applied to supervised financial institutions and led to substitution toward less-regulated intermediation.
  - Similar guidance issued by the ECB.

C. Fiscal Tools
- Fiscal measures can cover market-based finance and affect demand for credit (broadest reach).
- Tax bias favoring debt due to corporate income tax considerations:
  - CIT rate at 33.3 percent in 2017 made interest deductions attractive.
  - Reduction of corporate tax rate to 25 percent (passed in the 2018 Finance Act) will lead to lower incentives to leverage.
- Interest deductibility restrictions in France:
  - Since 2013, only 75 percent of financial expenses are deductible.
  - 2019 budget plan introduced an earnings-stripping rule: net financial expenses deductible up to maximum of €3 million or 30 percent of EBITDA.
  - Portugal introduced a similar measure in 2013: maximum of €1 million or 30 percent of EBITDA.
  - Given €3 million cap, primarily medium and large companies are directly affected in France.
- Drawbacks of earnings-stripping rules:
  - Not specifically targeted to financial distress risk; can bind for firms with temporarily low earnings, reinforcing financial constraints during weak cash flow.
  - BEPS Action 4 proposes earnings-stripping rules; ATAD includes such rules.
  - Carry forward of disallowed interest expense may be allowed (e.g., proposed French scheme allows use during the following five financial years) but liquidity impact remains.
- Alternative: Interest deductibility rule based on fixed debt-equity ratio:
  - Less sensitive to cyclical fluctuations; firms with debt-to-equity above threshold denied interest deductibility.
- Alternative: Allowance for Corporate Equity (ACE):
  - Supplements interest deductibility with deduction for normal return on equity.
  - Applied in countries including Belgium, Cyprus, Italy, Portugal, and Turkey.
  - Hebous and Ruf (2015) find ACE implementation in 2006 reduced average debt ratio for nonfinancial firms in Belgium by almost 20 basis points.
  - ACE can have significant negative fiscal revenue impact; mitigation options include:
    - incremental application (apply ACE only to equity increases relative to base year), and
    - combining ACE with limitation to interest deductibility to neutralize revenue loss.

*Prepared by Umang Rawat and Erlend Nier (Both MCMMP). Source: CONCLUSIONS AND RECOMMENDATIONS (1fraea2019010).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1fraea2019010.pdf_