## _cr04344

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### Executive summary — overall assessment
- France’s financial sector is strong and well supervised; "no weaknesses that could cause systemic risks were identified."
- High conformity to supervisory and regulatory standards approved by the Basel Committee, IAIS, IOSCO, FATF, and CPSS.
- Degree of observance of the transparency code is high in all relevant areas.

### Financial sector structure and recent evolution
- Key features:
  - Modernized and restructured over the past two decades.
  - Consolidation resulted in six large universal, vertically integrated banking groups dominating the domestic market; four of the six are organized on a mutual basis.
  - Mutual groups have driven consolidation; system largely privatized though government influence persists via administered savings schemes and tax provisions.
  - Wholesale banking more open to international competition than retail; emphasis on "national champions" may limit cross-border cooperation.

### Banking sector soundness, risks, and recommendations
- Soundness and resilience:
  - Banking sector well capitalized; Tier I risk-weighted capital "at about 10 percent".
  - Reported NPLs stable through the recent downturn; NPLs to gross loans: 1999 5.7; 2000 5.0; 2001 5.0; 2002 5.0; 2003 4.8.
  - Profitability improved markedly over the past decade; ROA and ROE in line with euro-area levels; cost-to-revenue ratios about "65 percent now".
  - Stress tests: no bank’s capital adequacy ratio fell below the required "8 percent" level; losses could be absorbed by profits at 2003 levels.
- Identified vulnerabilities:
  - Concentration may raise "too big to fail" and collusion concerns.
  - Large and growing portfolios of fixed-rate residential housing loans could be at risk if funding costs rise and/or real estate prices fall; household short-term vulnerabilities low.
  - Rapid capital accumulation by mutual banks (payout ratio around 10 percent vs. 30–35 percent at large commercial banks) may encourage expansion into risky activities.
  - Corporate governance and risk-taking need monitoring when banks expand into unfamiliar activities.
  - Legal and operational impediments to creditor rights: improve creditor legal rights; allow banks to write off nonperforming loans without jeopardizing legal claim on the debtor.
- Key banking recommendations (selected):
  - Accelerate reform of government influence over savings allocation and aim for orderly phase-out of administered schemes.
  - Eliminate the "ni-ni" rule prohibiting payment of interest on current accounts and charging for checkbooks; relax the limit on "usurious" lending rates.
  - Preserve competition given concentration; improve disclosure and pricing transparency.
  - Separate La Poste’s banking activities, subject them to standard prudential requirements, ensure level playing field in tax/status, and consider eventual privatization.
  - Introduce a positive credit registry; ease barriers to return of profits and changes in ownership structure; encourage more negotiable equity holdings.

### Insurance sector soundness, risks, and recommendations
- Soundness and resilience:
  - Systemic vulnerabilities well contained; sector resilient to equity price falls, low interest rates, and natural catastrophes.
  - Conservative investment portfolios: fixed-income instruments largest share; life segment shifted investment risk to policyholders via lower guarantees, shorter durations, and unit-linked products.
  - Sector soundness indicators and stress tests satisfactory; stress tests show no immediate loss to insurers because risk is largely borne by policyholders.
- Medium-term challenges:
  - Possibility of a sharp and sustained increase in interest rates.
  - Adoption of new IFRS standards (EU adoption "as of January 2005"); concerns about IAS 39 and fair value volatility.
  - Relatively weak regulation and supervision of the reinsurance sector.
- Key recommendations for insurance supervision:
  - Upgrade regulations on corporate governance, internal controls, and risk management; require risk management systems covering all material risks.
  - Increase supervisory staff; empower CCAMIP to issue and enforce regulations and a Code of Conduct of Corporate Governance and internal control requirements.
  - Strengthen supervision of reinsurers and plan for transposition/implementation of relevant EU directives.
  - Anticipate and prepare for IFRS implementation impacts.

### Securities markets — structure, risks, and recommendations
- Market characteristics and statistics:
  - Securities markets large and sophisticated; Euronext Paris market capitalization: 73 percent of GDP or EUR 877.7 billion as of end-2003.
  - Annual transaction value in equities (one side): EUR 877.7 billion in 2003; average daily turnover EUR 3.442 billion; number of trades: 101 million.
  - Mutual funds assets to GDP in 2003: France 64 percent; United States 68 percent.
  - Household savings flows (2002): 48 percent into securities and mutual funds; 38 percent into life insurance; 15 percent into savings accounts.
- Regulatory structure:
  - Financial Security Law concentrated regulatory powers in AMF; AMF has a 16-member board and a separate 12-member Commission des Sanctions.
  - Modified "twin-peaks" structure retained: AMF (market conduct), CB (prudential oversight), CECEI (licensing).
- Main concerns and recommendations:
  - Strengthen AMF effectiveness by requiring (not merely authorizing) cooperation across authorities and removing government presence from the sanctioning commission to preserve perceived independence.
  - Enhance AMF powers/resources for oversight of CIS depositories, marketing conduct of collective investment schemes, on-site inspections, and audit oversight of public companies.
  - Improve timeliness of public disclosure of insider transactions; consider materiality standard for immediate disclosure.
  - Increase monitoring frequency of broker-to-client deferred settlement positions (SRDs) and oversee broker capital adequacy given SRD exposures.
  - Ensure cross-border cooperation given Euronext/LCH/Euroclear integration.

### Payment and securities settlement systems — findings and corrective actions
- Infrastructure assessment:
  - Clearing and settlement infrastructure generally sound and modern; Euroclear France operates two settlement systems: Relit+ (model 2 DvP) and RGV2-TFT (model 1 DvP).
  - Almost all securities in France (99.7 percent) are dematerialized in Euroclear France.
  - Total value of trades settled in Euroclear France’s systems: EUR 52,996 billion in 2002 and EUR 52,528 billion in 2003.
- Major vulnerabilities and planned corrective actions:
  - Relit+ multilateral netting lacked adequate safeguards to ensure timely settlement in case of default by the largest net debtor; planned corrective action: implement a mutual guarantee fund plus limits on net cash positions expected before the end of 2004.
  - SIT (retail multilateral netting system) operates without protection against default of the largest net debtor; authorities and operators urged to implement protection urgently (BdF indicated compliance planned no later than 2008).
  - Concentration/tiering risk: in Relit+, more than 50 percent of payments in 2003 concentrated in three settlement banks; analysis of concentration risk and measures to reduce tiering without efficiency loss recommended.
  - Operational resilience: business continuity improvements needed (second site not at adequate distance; recent fallback test required seven hours vs. target four hours); Euroclear France planned projects in 2005 including redesign of operation sites with two synchronized sites and one cold backup site in another country.
- Payment systems statistics:
  - Total turnover in the secondary market for securities: EUR 905 billion in 2003; EUR 1,045 billion in 2002; average daily turnover in 2003 EUR 3.5 billion.
  - Euroclear France instructions (millions): 1997 18; 1998 22; 1999 28; 2000 41; 2001 31; 2002 29; 2003 28.
  - Euroclear France value (Euro billions): 1997 22,660; 1998 32,046; 1999 38,892; 2000 36,835; 2001 43,635; 2002 52,996; 2003 52,528.

### AML/CFT — overall assessment, gaps, and recommended actions
- Overall:
  - France maintains a high level of compliance with the FATF 40+8 Recommendations and has gone beyond the standard in areas such as sectoral coverage and reporting requirements for import and export of monetary instruments.
- Key gaps and recommendations:
  - UNSCR 1373 (terrorist financing) implementation incomplete for EU-internal targets; draft law on freezing property for European community nationals under preparation, no timeframe specified.
  - Improve overall quality and quantity of Suspicious Transaction Reports (STRs); STRs increased since 2000 but remain low relative to activity; TRACFIN forwarded 291 files in 2002 (about 8–10 percent of STRs received).
  - Align scope of suspicious transaction reporting with predicate offences for money laundering; currently reporting narrower than predicate offence scope.
  - Strengthen AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms (insurance intermediaries, portfolio managers, direct marketers, currency exchangers, la Poste).
  - Enhance guidance to reporting entities (including Overseas Departments and Territories) and increase TRACFIN outreach and staffing; improve statistical compilation on mutual legal assistance and asset freezes/seizures/confiscations.
  - Review and monitor enforcement vis-à-vis unlicensed informal funds transfer businesses.
  - Require financial entities to ensure application of AML/CFT requirements to branches and majority-owned subsidiaries located abroad.
  - Recommended Action Plan (selected items):
    - Introduce detailed customer acceptance policies and beneficial owner identification guidance (FATF 10–13).
    - Establish enforceable internal control requirements for non-bank sectors; consider integrity screening in hiring for sensitive positions.
    - Increase judiciary involvement in Liaison Committee; increase TRACFIN dissemination ratio and feedback loop with judicial authorities.
    - Proceed with adoption of domestic act to comply fully with UNSCR 1373.

### Stress testing — methodology, coverage, and outcomes
- Coverage and methodology:
  - Stress tests covered banks and insurance companies comprising "more than three quarters of each sector’s assets."
  - Banks: six large banking groups and one medium-sized bank representing 80 percent of banking assets; tests included immediate shocks calibrated on largest one-month movements over last 25 years and macroeconomic scenarios over two years.
  - Insurance: 13 life groups and 11 non-life groups covering more than 75 percent of sector liabilities; stress tests considered regulatory constraints and policyholder behavior.
- Selected stress test results — banks (Table 6a highlights):
  - No test showed any bank’s capital adequacy ratio falling below the required "8 percent" level.
  - Significant scenarios and impacts (After-Tax Profits relative to 2003; Relative to End-2003 CAR):
    - F3a Sustained rise in all interest rates: After-Tax Profits: -35.7 (Average); -54.7 (Largest). Relative to End-2003 CAR: -0.34 (Average); -0.98 (Largest).
    - F4 Deterioration in domestic loan quality: After-Tax Profits: -44.5 (Average); -71.8 (Largest). Relative to End-2003 CAR: -0.56 (Average); -1.06 (Largest).
    - F5 Fall in equity prices: After-Tax Profits: -21.4 (Average); -84.8 (Largest). Relative to End-2003 CAR: -0.30 (Average); -1.62 (Largest).
    - M1 Fall in world demand (macroeconomic): After-Tax Profits: -23.6 (Average); -46.9 (Largest). Relative to End-2003 CAR: -1.06 (Average); -1.42 (Largest).
  - Liquidity test (1999–2003 average): share of banks with liquidity ratio below 100 percent = 1.4 (number of banks); share of total bank assets = 1.0.
- Selected stress test results — insurance (Table 6b highlights):
  - Life insurers: a sustained rise in all interest rates of 300 basis points (F3a) produced average yield on policies change: -10.8; companies with solvency ratio <100: 83.
  - Non-life insurers: a large natural disaster before reinsurance (F12) — Available/required solvency margin average impact: -23.1; after reinsurance: -7.5.
  - Overall: stress tests indicate moderate effects; main vulnerability for life insurers is sharp sustained interest rate increases prompting policyholder redemptions and forcing asset sales.

### Structural issues, administered savings schemes, and policy recommendations
- Structural distortions from government schemes:
  - Administered schemes (livret A, PEL/CEL, etc.) centralize about a quarter of bank deposits; interventions distort competition, centralize deposits (CDC centralizes about a quarter of bank deposits), and affect monetary transmission.
  - Example static annual transfers (selected):
    - Ni-ni rule transfer to banks: about EUR1 billion at current interest rates.
    - Centralization under CDC implies lost gross intermediation margin for banks of about EUR3-4 billion; government earned about EUR500 million on centralized funds in 2002.
    - Tax breaks and PEL/CEL interest subsidy constitute a transfer of about EUR4 billion from the government to households able to use tax advantages.
    - Compression of banks’ interest rate spreads implies net transfer from banks to households and companies in the order of EUR2–5 billion.
- Reform objectives and proposals:
  - Phase out administered schemes and replace with market-friendly or budgetary mechanisms; refocus retained schemes on priorities.
  - Promote pension savings vehicles such as PERPs.
  - Short-term unwinding measures (gradual approach):
    - Abolish ni-ni rule and relax usury rate.
    - End oligopoly on distribution of livret A/bleu; consider merging livret schemes into a single product with uniform tax treatment.
    - Align livret A and PEL rates more closely to market rates; adjust when ECB changes policy rates.
    - Define guaranteed mortgage interest rates in new PEL contracts relative to a benchmark market rate.
    - Allow La Poste financial section to manage its own balance sheet and reconsider centralization at CDC.
    - Terminate availability of new PEL accounts or remove tax advantages to favor PERPs; facilitate moving funds from PEL to PERPs.
  - Consider CDC issuing bonds to finance social housing instead of centralized livrets.

### La Poste restructuring and mutual groups
- La Poste:
  - Holds 8 percent of total deposits, 10 million checking accounts, and 17,000 postal outlets; not under CB supervision; falls outside bank statute.
  - Reform plan: separate La Poste’s financial services into a separate public bank subject to CECEI licensing and CB supervision; phase out blanket state guarantee within two years; charge postal bank for use of postal network on a fully commercial basis.
  - Recommendations: ensure level playing field (tax status, distribution oligopoly), subject postal bank to prudential regulation, consider eventual privatization.
- Mutual banking groups:
  - Structure: regional member banks owned by millions of members and a central unit; governance combines top-down and bottom-up features.
  - Issues: limited ability to raise fresh capital, legal restrictions on member remuneration, low payout ratios (~10 percent) leading to rapid capital accumulation and potential risky expansion.
  - Recommendations:
    - Encourage exposure to market incentives (e.g., listing subsidiaries).
    - Remove legal obstacles to higher remuneration of members (dividends, share buybacks).
    - Reconsider legal impediments to demutualization with protection of reserves.
    - CB to closely monitor mutual group governance and expansion.

### Bankruptcy, creditor rights, and contract costs
- Bankruptcy and creditor issues:
  - Draft law on corporate insolvency welcomed; expected to facilitate "Chapter 11"-style restructuring and clarify liability of creditors.
  - Banks face liability risks from notions such as "rupture de crédit" or "crédit abusif."
- Notarization and charges:
  - Tax and notary fees for some financial contracts "typically amount to about 1.5 to 5.0 percent of the loan value."
  - Additional charge of "0.5 to 2.0 percent" to release a mortgaged asset ahead of schedule.
  - Consequence: residential loans often backed by a "caution" rather than mortgage lien; home equity loans underdeveloped.
  - Recommendation: consider reducing notary costs for retail clients and legal steps to facilitate home equity loans.

### Observance of international standards, transparency, and supervisory assessments
- Standards assessed during mission (January 28–February 10, 2004; AML/CFT April 7–20, 2004):
  - Basel Core Principles (BCP), IAIS Insurance Core Principles (ICP), IOSCO Objectives and Principles, CPSS/IOSCO Recommendations for Securities Settlement Systems, CPSS Core Principles for Payment Systems, IMF Code of Good Practices on Transparency in Monetary and Financial Policies, FATF 40+8.
- Main assessment outcomes:
  - Banking supervision: meets high standards; compliance with BCP strong. Suggested action: require prior CECEI approval for bank acquisitions of equity in non-financial enterprises (measures developed but not enacted).
  - Insurance supervision: high observance of IAIS criteria; reforms (Financial Security Law) merged CCA and CCMIP into CCAMIP; recommended powers for CCAMIP to issue enforceable regulations and Codes of Conduct; staffing increases needed (CCAMIP had only 50 commissaires-controleurs at assessment).
  - Securities regulation: AMF modernized by Financial Security Law; overall standards very high; recommended enhancements on AMF independence (ministry representative in Commission des Sanctions), resources for inspections, and timeliness of enforcement.
  - Payment systems oversight: Banque de France achieves high transparency; recommended clearer disclosure of operating procedures and formal information-sharing procedures.
  - Deposit insurance (FGD): legal/institutional framework defined; recommendations include publishing audited annual reports and balance sheet, clarifying legal protection of officials, and greater public communication.
  - AML/CFT: overall comprehensive framework; high compliance though several targeted improvements recommended (see AML/CFT section above).

### Key sectoral statistics and indicators (selected)
- Financial system composition and size:
  - Banking sector: 64 percent of total financial assets in 2003.
  - Number of commercial banks (December 2003): 331; commercial banks assets: 2,431.2 (EUR billions); percent of total assets 46.2.
  - Insurance companies (December 2003): 444; total insurance assets: 1,090.8 (EUR billions); 20.7 percent of financial assets.
- Market and macro indicators:
  - Euronext Paris market capitalization: 73 percent of GDP or EUR 877.7 billion as of end-2003.
  - Total turnover in secondary market for securities: EUR 905 billion in 2003; EUR 1,045 billion in 2002.
  - Key macro series (selected, percent change or levels):
    - Real GDP growth (2004): 2.6.
    - CPI (year average) 2004: 2.3.
    - Unemployment rate 2004: 9.4.
    - General government gross debt 2004: 64.4 percent of GDP.
    - Money market rate 2004: 2.1 percent.
    - Euro per U.S. dollar (August 24, 2004): 1.21.
- Banking FSIs (selected, exact values preserved):
  - Regulatory capital to risk-weighted assets: 2003: 12.6.
  - Regulatory Tier I capital to risk-weighted assets: 2003: 9.7.
  - Capital (net worth) to assets: 2003: 4.5.
  - ROA (Aggregated data on a parent basis company) 2003: 0.44.
  - ROE (Aggregated data on a parent basis company) 2003: 8.62.
  - Cost-to-income (cost-to-revenue) ratios: "about 65 percent now."
  - Gross notional outstanding financial derivatives/capital: 2003: 16,851.
- Insurance FSIs (selected):
  - Life capital/total assets 2002: 4.0.
  - Equities/total assets for life insurers 2002: 10.3.
  - Non-life combined ratio 2002: 104.4.
  - Life investment income/investment assets 2002: 1.2.

### Summary of prioritized corrective actions (selected, consolidated)
- Banking:
  - Improve creditor legal rights; allow write-off of NPLs without jeopardizing legal claims.
  - Maintain vigilance on mergers to avoid excessive systemic concentration; require CECEI prior approval for bank acquisitions in non-financials.
  - Enhance competition and transparency in retail banking; introduce positive credit registry.
  - Ensure La Poste banking separation, supervision, and level playing field.
- Insurance:
  - Empower CCAMIP to issue enforceable regulations and Codes of Conduct; increase CCAMIP staffing; strengthen supervision of reinsurers; prepare for IFRS adoption.
- Securities markets:
  - Strengthen AMF independence and enforcement; require cooperation across authorities; enhance oversight of CIS depositories and audit oversight.
- Payment and settlement systems:
  - Implement safeguards for multilateral netting systems (Relit+, SIT) to ensure timely settlement in participant default scenarios; implement mutual guarantee fund and net position limits in Relit+ before end-2004; address SIT protection urgently.
  - Analyze and mitigate concentration/tiering risk; upgrade business continuity and operational resilience.
- AML/CFT:
  - Fully implement UNSCR 1373 domestically for EU nationals; align STR scope with predicate offences; strengthen STR quality and outreach; expand AML/CFT supervision and resources for non-bank sectors; improve TRACFIN dissemination, statistics, and staffing.

*Source: Executive Summary and selected sections, Financial Sector Assessment — France (IMF staff report content unit _cr04344).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overall assessment
- France’s financial sector is strong and well supervised. On present analysis, no weaknesses that could cause systemic risks were identified.
- Strength supported by financial soundness indicators and strong conformity to supervisory and regulatory standards approved by the Basel Committee, IAIS, IOSCO, FATF, and CPSS.
- Degree of observance of the transparency code is high in all relevant areas.

### Financial sector structure and recent evolution
- The French banking system has been modernized and restructured over the past two decades.
- Consolidation among financial institutions has resulted in six large universal, vertically integrated banking groups having a strong position in the domestic market.
- Mutual groups have been a key driving force in the consolidation.
- The system has been almost entirely privatized and relieved of most of its public policy roles, although strong government influence (mainly through the administered savings schemes and tax provisions) remains.
- Wholesale banking is more open to international competition than retail banking; emphasis on “national champions” in banking may have limited scope for cross-border cooperation and consolidation.

### Banking sector soundness and risks
- The banking sector is well capitalized.
- The reported level of NPLs was stable through the recent economic downturn.
- Bank profitability has improved markedly over the past decade and is in line with average euro area levels.
- Stress test results corroborated the sector’s resilience.
- Identified concerns and vulnerabilities:
  - Concentration in banking may have reached a point where further consolidation could intensify concerns over the scope for collusion and long-term stability where many banks could be considered “too big to fail.”
  - Banks’ large and growing portfolios of fixed-rate residential housing loans could represent a longer-term risk in the event of large increases in funding costs and/or a significant fall in real estate prices. However, short-term vulnerabilities and household debt remain low.
  - Rapid accumulation of capital strengthens banks’ resilience but is harder to control for mutual banks (legal restrictions on remuneration of members) and could encourage expansion through expensive takeovers and risky new ventures.
  - Corporate governance and risk taking of banks need careful monitoring, particularly when expanding into unfamiliar activities.
  - Improving creditor legal rights would facilitate the provision of credit; ongoing reform of corporate bankruptcy legislation should help clarify and limit the liability of creditors and facilitate restructuring of troubled companies.
  - Banks should be allowed to write off nonperforming loans without jeopardizing their legal claim on the debtor.

### Insurance sector soundness and challenges
- Systemic vulnerabilities in the important insurance sector are well contained.
- Sector showed resilience to recent shocks (significant fall in equity prices, historically low interest rates, and natural catastrophes); available sector soundness indicators and stress test results are satisfactory.
- Additional sources of stability: conservative investment portfolios, success of the life sector in shifting investment risks to policyholders, and limited domestic provision of reinsurance.
- Key medium-term challenges:
  - Possibility of a sharp and sustained increase in interest rates.
  - Adoption of new IFRS standards.
  - Relatively weak regulation of the reinsurance sector.
- Recommendations for insurance:
  - Regulations on corporate governance, internal controls, and risk management should be upgraded and improved.
  - Adding supervisory staff may help speed up harmonization of the supervisory and regulatory framework across the industry.
  - The Ministry of Finance should delegate to the supervisory agency the authority to issue regulations, as it is already the case in other supervisory agencies.
  - Supervision of the reinsurance sector should be strengthened and France should anticipate the main elements of recent EU initiatives in this area.

### Securities markets
- Securities markets are large and sophisticated.
- Exchange-traded equities and derivatives markets have been restructured.
- Government debt market is large; corporate debt market has been growing rapidly since the introduction of the euro.
- Consolidation of the French stock and futures markets with others in Europe increases the importance of effective cooperation across national jurisdictions.
- Authorities face challenge of adjusting to and effectively implementing the significant regulatory overhaul that took place in late 2003.
- Recommendations for securities market regulation:
  - Effectiveness of the securities regulator could be strengthened by requiring (rather than just authorizing) cooperation across authorities and removing the government’s presence from the sanctioning commission.
  - Minimum standards of conduct for marketing collective investment schemes (mutual funds); regulator’s resources to inspect investment service providers, especially CIS depositories; and its powers to oversee audits of public companies should be enhanced.
  - Timeliness of public disclosure of insider transactions should be strengthened.

### Payment and securities settlement systems
- Infrastructure for clearing and settlement of payments and securities is generally sound and modern.
- Some room for improvement in clearing and settlement of retail payments and securities: multilateral netting systems lack fully adequate safeguards to ensure timely settlement in case of default.
- Recommendations:
  - Implement as soon as possible appropriate safeguards to comply with international standards and protect the financial system against potential disruptions in multilateral netting systems.
  - Undertake an analysis of concentration risk given prevalence of tiering in some systems; analysis may suggest institutional changes to reduce tiering without loss of efficiency.

### AML / CFT
- Overall legal and institutional framework for AML/CFT is comprehensive.
- France maintains a high level of compliance with the FATF 40+8 Recommendations and has gone beyond the standard in areas such as sectoral coverage and reporting requirements for import and export of monetary instruments.
- Areas for further improvement:
  - Implementation of UN Security Council Special Resolution on terrorism financing (an issue common to other EU countries).
  - Overall quality of suspicious transactions reporting (STR).
  - AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms.
  - Criteria for when financial institutions should exercise increased diligence.
- Recommendations:
  - Strengthen legal and regulatory framework to complete implementation of UN Security Council Special Resolution 1373 on terrorist financing and align the suspicious transaction reporting requirement with predicate offenses for money laundering.
  - Provide further guidance to reporting entities, including those in the Overseas Departments and Territories, to improve detection of suspicious transactions and the rate and quality of their reporting.
  - Strengthen regulation and supervision of AML/CFT provisions for sectors other than credit institutions and certain investment firms and increase corresponding resources of relevant agencies.
  - Review and more closely monitor enforcement efforts vis-à-vis unlicensed informal funds transfer businesses.
  - Enhance provisions regarding increased diligence and application of AML/CFT requirements to branches and subsidiaries located abroad.

### Key recommendations (Box 1 summary)
- Banking issues:
  - Accelerate reform of government influence over savings allocation through various schemes and fiscal incentives with medium-term objective of orderly phase-out; short-term focus on reducing distortions and realigning schemes with current priorities (for example, reducing incentives to save for housing to make personal pension schemes more attractive).
  - Eliminate the “ni-ni” rule (which prohibits the payment of interest on demand deposits and charging for checkbooks) and relax the limit on “usurious” lending rates.
  - Preserve a healthy level of competition given current degree of concentration; continue efforts to improve disclosure and pricing transparency for banking services.
  - Separate La Poste’s banking activities and subject them to standard prudential requirements; ensure La Poste competes on a “level playing field” in terms of tax status and costing its use of postal facilities; consider eventual privatization.
  - Enhance retail competition and availability of financial services by moving away from “national champions” and introducing a positive credit registry.
  - Monitor corporate governance and risk taking when banks expand into unfamiliar activities; ease potential pressure to over-expand by reducing barriers to return of profits to owners, reducing legal impediments to changes in ownership structure, and encouraging financial institutions to increase share of equity held in negotiable form.
  - Improve creditor legal rights; allow banks to write off nonperforming loans without jeopardizing legal claim on debtor.
- Insurance (see Insurance sector recommendations above).
- Securities market (see Securities markets recommendations above).
- Payment and securities settlement systems (see Payment and securities settlement recommendations above).
- AML / CFT (see AML / CFT recommendations above).

*Source: Executive Summary, Financial Sector Assessment — France*

### 2.      Despite slow growth up to mid-2003, the financial situation of the corporate sector

### 2.      Despite slow growth up to mid-2003, the financial situation of the corporate sector

### Macro-financial overview and sectoral balances
- Since 2000 the financial situation of the corporate sector "has deteriorated only slightly," and "except for a few large companies, corporate leverage is generally low."
- Household indicators:
  - Debt levels relative to incomes and assets are "comparatively low (albeit rising)."
  - Savings rates are "high (albeit decreasing)."
  - "Housing prices have been increasing at an annual rate of 10 percent since 1997." (Note: "in nominal terms they are not far above the peak reached in 1989.")
- Equity markets:
  - "Equity prices remain below their 2000 highs, despite the recent recovery."
  - Some investors experience offsetting gains on bonds.
- Commercial real estate prices: "have remained stable following the early-1990s boom-bust cycle."

### Financial sector structure
- The financial system is "large, sophisticated, and of international importance."
- Rapid consolidation: dominated by six vertically integrated universal banks and their nonbank subsidiaries.
  - Four of the six are organized on a mutual basis; some mutuals have created or acquired joint-stock affiliates.
  - Two large financial institutions, La Poste and the CDC, remain in government ownership.
- Government influence on savings allocation through:
  - Differentiated tax provisions,
  - Some controls on interest rates and fees,
  - Administration of several savings schemes.
- Other important financial sectors: insurance (especially life insurance), equity markets, and public debt markets.

### Institutional and regulatory framework — supervision and transparency
- Supervision and oversight are "of a high standard" and supervisory staff is "highly qualified."
- 2003 Financial Security Law: streamlined supervisory agencies and strengthened insurance and securities regulation.
- Sector-based supervisory approach: separate structures for banking, securities and insurance supervision with distinct institutional layers for regulation, licensing, and supervision.
- Coordination and crisis management:
  - Close coordination across regulators and with foreign authorities is required, especially for large complex financial institutions.
  - Formal crisis management protocols would be helpful because foreign supervisors may be involved.
- Governance of supervisory bodies:
  - Industry and government representatives on boards bring practical knowledge and consensus benefits, but raise potential conflict-of-interest and supervisory independence concerns.
  - Suggested mitigation: use industry representatives who would not quickly return to commercial institutions.
- Transparency and observance:
  - Updates of assessments of the Code of Good Practices in Transparency show "a high overall degree of observance."
  - Disclosure of the annual report of the deposit insurance fund (FGD), including its financing, "would be desirable."
  - Some unresolved issues remain from the institutional transition in securities oversight; "No stability issues arose in the transparency assessments."

### Accounting and international standards
- EU adoption of International Financial Reporting Standards will take effect "as of January 2005."
- No full agreement within the EU about adoption of IAS 39 (financial instruments); concerns that greater reliance on fair value "could introduce undue volatility in the reported earnings of insurance companies and banks."

### Banking sector — supervision and prudential framework
- Banking supervision: "meets high standards."
- Reinforced surveillance program applies to major financial groups; close cooperation with supervisors in other major financial centers.
- Preparations for implementing the Basel II capital accord "are well advanced."
- Compliance with the BCP is strong; suggested enhancement:
  - "The obligation to obtain prior approval from the CECEI for bank acquisitions of equity in non-financial enterprises should be introduced (measures have been developed but not yet enacted)."

### Insurance sector — observance and recommended enhancements
- Review of IAIS Core Principles shows "a high level of observance."
- Main recommended enhancements:
  - Give the insurance supervisory agency (CCAMIP) "more responsibility for the drafting and issuing of rules and regulations (in consultation with relevant ministries)."
  - Increase CCAMIP staff "mainly because the complexity and scope of its activities has expanded significantly in recent years."
  - Empower CCAMIP "to issue and enforce a code of conduct of corporate governance, as well as requirements for efficient internal controls beyond those applied in the context of investment policy and risk management systems that cover all material risks."
  - Strengthen supervision of reinsurers and introduce "a comprehensive prudential framework adapted to the reinsurance business"; anticipate main elements of EU directives and plan for speedy implementation.

### Securities markets — new regulator and outstanding issues
- Establishment in 2003 of the new securities regulator, the AMF, with extended powers over investment advisors, rating agencies, corporate governance and audit standards.
- IOSCO Objectives and Principles assessment shows "strong implementation," with the following areas for action:
  - Explicit legal requirement (not merely authorization) for cooperation between AMF and the CB.
  - Concern: "The presence of a government representative in the AMF’s sanctioning body ... has the appearance and the potential to undermine its independence in enforcement." AMF should be free to use monitoring/inspection information in enforcement actions.
  - Increase monitoring frequency of broker-to-client equity positions related to deferred settlement positions (SRDs), essentially margined positions and open exposures.
  - Enhance oversight of depositories and marketing standards for Collective Investment Schemes (CIS); extend CIS-related on-site inspections to depositories and assign additional staff.
  - Strengthen controls to prevent inappropriate related party transactions and reduce conflicts of interest at CIS.
  - Improve protection of minority interests—e.g., promptly publicize changes in beneficial ownership of voting shares below control thresholds (an EU directive to be implemented shortly).
  - Augment powers to oversee audit standards and audits of public companies so AMF has a greater role.

### Payments and securities settlement infrastructure
- Infrastructure is "highly developed and seems efficient for its users"; observance of CPSIPS and RSSS generally high.
- Important remaining issues:
  - Both SIT and Relit+ operate as multilateral netting systems "without protection against the default of the largest net debtor." Authorities and system operators have taken steps to address this.
  - Business continuity measures of some systems "could be upgraded."
  - Some systems are tiered (a limited number of direct participants serve as settlement banks for others), which can concentrate risk; authorities should evaluate concentration risk and, if warranted, introduce measures to reduce tiering and broaden access.

### AML/CFT framework
- France has "a comprehensive legal and institutional framework" achieving a "high level of compliance with the FATF 40+8 Recommendations," going beyond the standard in areas such as sectoral coverage and reporting for import/export of monetary instruments.
- High standard regulation and supervision for credit institutions and investment firms (other than portfolio management firms).
- Areas requiring additional measures:
  - "UNSCR 1373 should be more fully implemented."
  - Align the scope of suspicious transaction reporting requirement with the predicate offences for money laundering.
  - Improve number and quality of STRs and the number transmitted to judicial authorities; need additional outreach to reporting parties including those in Overseas Departments and Territories.
  - Strengthen regulation and supervision of sectors other than credit institutions and investment firms; increase resources of relevant agencies.
  - Shift responsibility for AML/CFT supervision and enforcement of la Poste to the CB, or at minimum increase supervisory efforts/resources of the Inspection Générale des Finances (IGF).
  - Review and monitor enforcement vis-à-vis unlicensed informal funds transfer systems.
  - Refine requirements regarding ongoing monitoring of accounts and transactions; application of AML/CFT requirements to branches and majority-owned subsidiaries located abroad; and internal controls for entities other than credit institutions and certain investment firms.
  - Devote additional efforts to compile statistics on mutual legal assistance requests and outcomes, and on amounts of property frozen, seized and confiscated related to money laundering, predicate offenses, and financing of terrorism.

### Bankruptcy procedures, property rights, and contract costs
- Banks’ exposure to potentially bankrupt companies is difficult because banks may be held liable for "rupture de crédit" or "crédit abusif."
- Draft law on corporate insolvency is "welcome" and expected to:
  - Facilitate distressed corporations entering "Chapter 11"-style restructuring procedures rather than being forced directly into insolvency.
  - Address courts' tendency to interpret the writing off of a loan as the bank foregoing repayment.
- Notarization and charges:
  - Writing certain financial contracts often involves expensive notarization; tax and notary fees "typically amount to about 1.5 to 5.0 percent of the loan value."
  - An additional charge of "0.5 to 2.0 percent is made to release a mortgaged asset ahead of schedule."
  - Consequence: residential loans often backed by a "caution" (third-party guarantee) rather than mortgage lien, potentially excluding lower-income households from homeownership financing.
  - Authorities may wish to consider reducing notary costs for retail clients and investigate legal steps to facilitate home equity loans, which are "currently underdeveloped."

### Financial sector soundness — market support and liquidity
- ECB has primary responsibility for liquidity management in the euro currency area; national central banks (including BdF) monitor domestic liquidity, operate standing facilities, and provide emergency liquidity assistance.
- Liquidity abundance in French systems due to:
  - (i) "the Eurosystem’s policy of allowing banks to use required cash reserves for intraday payments;"
  - (ii) "the liquidity optimization facilities in PNS;"
  - (iii) "the easy access to intraday liquidity facilities of the BdF and the broad range of eligible collateral."
- Fungibility across banks’ accounts for different settlement systems facilitates liquidity management.
- Deposit guarantee fund (FGD): covers deposits up to "EUR 70,000 per account holder" in all credit institutions licensed in France; funded through contributions from banks that pay differentiated risk-based premiums.
- The CB has effective sanctions and primary responsibility for bank intervention; when resolving a bank it mandates the FGD to execute the decision. The FGD can also take preemptive action in consultation with the CB.
- General administrative law permits relatively easy court injunctions to stay interventions; while not used to block action by French banks to date, this is noted as a weakness to be corrected.

### Recent banking performance and risks
- Tier I risk-weighted capital "at about 10 percent" — capitalization considered strong and enabled banks to finance consolidation without large borrowing.
- Reported bank asset quality stable during the downturn due to:
  - Sound household finances,
  - Low interest rates,
  - Moderate credit expansion.
- Vulnerabilities:
  - Some large French nonfinancial corporations are "financially vulnerable, owing to debt-financed expansion," which could pose risks for individual banks.
  - Banks hold large and mostly fixed-rate mortgage portfolios; guarantees, collateral and unemployment insurance have historically limited direct credit risk, but profitability could be squeezed if funding costs rise.
- Market and off-balance risks:
  - French banks have some exposure to market risks as important international market players.
  - Counterparty risk of banks’ off-balance sheet items estimated at "a modest 3 percent of total weighted risks."
- Profitability and costs:
  - Bank profitability "not particularly strong" but "has improved markedly over the past decade."
  - Average ROA and ROE remain below those in the United States, the United Kingdom, and Spain but "are equal or superior to those in some other major countries."
  - Net fees and commissions increasingly important.
  - Cost-to-revenue ratios have fallen to "about 65 percent now," in line with European averages, though fixed-and labor-costs remain high.

### Stress testing results
- Stress tests estimate effects of short-term shocks to market variables and credit quality, and several longer-term macroeconomic scenarios; shocks calibrated on largest shocks in last 25 years; results cover banks and insurance companies comprising "more than three quarters of each sector’s assets."
- Findings:
  - No test showed any bank’s capital adequacy ratio falling below the required "8 percent" level.
  - Any loss could be made up out of profits at 2003 levels.
  - The largest and most widespread effect would stem from a general deterioration in credit quality, possibly linked to prolonged fall in world demand.
  - A few individual banks might be hard-hit by a stock market crash.
  - A rise in oil prices with ensuing slowdown would affect banks negatively but impact would be moderate.
  - Banks would not have to provide large sums to recapitalize their insurance subsidiaries.

*IMF staff report excerpt, Financial Sector Assessment (section provided).*

### 25.      Available sector soundness indicators show adequate average levels of solvency and

### _cr04344 - 25.      Available sector soundness indicators show adequate average levels of solvency and

### Sector soundness and resilience
- Available sector soundness indicators show adequate average levels of solvency and profitability (Tables 4 and 5).
- Features limiting vulnerability to typical insurance-sector macroeconomic risks:
  - Conservative investment portfolios, with fixed-income instruments consistently representing the largest share; the sector has not been greatly affected by equity price declines since 2001.
  - The life segment has shifted much investment risk to policyholders by lowering guaranteed interest rates, reducing the duration of contracts, and introducing unit-linked products.
  - Limited exposure to other financial sector components, particularly banks; a large share of life insurers are subsidiaries of bancassurance groups led by banks.
  - Acquisition of credit risk through use of derivatives is still extremely limited.
- Labor cost dynamics:
  - Large numbers of employees are expected to retire starting in 2005, which should help reduce the cost base.
- Reinsurance and disaster risk:
  - The domestic reinsurance sector is relatively small; insurers transfer significant risk to reinsurers abroad.
  - For high cost–low probability risks (such as major natural disasters), companies have access to state-guaranteed (and sometimes state-managed) reinsurance schemes.

### Box 2 — Credit Risk Transfer (CRT) activities (findings)
- CRT activities have grown in France; study by French authorities (Banque de France’s June 2004 Financial Stability Review) reports as of June 2003:
  - The French financial system was a net seller of credit protection: EUR35 billion.
  - French banks are net buyers of credit protection: EUR60 billion, roughly 6.5 percent of their total loan exposure; primarily single name credit default swaps used to diversify corporate concentration risks and reduce regulatory capital requirements.
  - Use of credit derivatives by French insurance companies is insignificant.
  - Insurers are significant net protection sellers in the form of:
    - Structured debt instruments such as mortgage-backed securities and collateralized debt obligations: EUR13 billion or 2 percent of their total assets.
    - Financial guarantees offered by specialized insurers: EUR40 billion, or 7 percent of their total assets.
- Accounting and measurement issues:
  - Insurers’ limited use of credit derivatives seems partially influenced by new international accounting standards that induce structuring transactions as financial guarantees (recorded as a liability), avoiding the need to value the risk exposure at market prices.
  - The study reports almost exclusively the notional amounts of CRT activity, which—especially for tranched credit instruments—provides a very inaccurate measure of the actual level of credit risk being transferred; the study acknowledges this shortcoming.
- Systemic implications:
  - Greater use of CRT instruments can improve dispersion of credit risk across the financial system.
  - However, the actual amount of credit risk transferred out of the banking system remains relatively small compared to total bank assets.
  - CRT activities have raised counterparty risks: French banks active in the credit derivatives market are exposed to the solvency risk of a few large U.S. banks that play a central role in this market.
  - For insurance companies, CRT activities have introduced a new risk transfer channel and increased interlinkages with the French banking sector, since most of their financial guarantees are sold to French banks.

### Stress tests (findings)
- Stress tests similar to those performed for banks showed that no insurance company would suffer an immediate loss, largely because most of the risk is borne by policyholders (Appendix II and Table 6b).
- Exposure to claims from natural catastrophes is limited by reinsurance coverage.
- Long-term vulnerability:
  - Life insurers could be affected by a sharp and sustained rise in interest rates that could prompt policyholders to shift funds to other assets, forcing insurers to sell assets before maturity and realize losses.
  - The effect appears manageable.
  - The authorities are well aware of the issue; it constitutes one main theme of the mandatory stress tests introduced in 2001.

### Structural issues and mandated savings schemes (analysis and recommendations)
- Numerous government schemes and provisions affect the composition and allocation of savings; objectives include protecting small savers and financing social housing and local facilities.
- Concerns:
  - Schemes are often inadequately targeted and generate externalities.
  - They have not been fully adapted to changing needs such as reinforcing the pension system amid demographic pressures.
- Objectives for reform:
  - (i) eliminate price distortions;
  - (ii) eliminate distortions to competition;
  - (iii) reduce centralization of deposits;
  - (iv) reduce constraints and risks imposed on the banking system;
  - (v) refocus retained schemes on future priorities;
  - (vi) enhance the monetary transmission mechanism.
- Steps already taken:
  - December-2002 reform of the PEL;
  - Introduction of a new mechanism to adjust the remuneration of the livret A last year.
- Rationale for phasing out administered savings schemes:
  - Increased international financial integration may raise the economic cost of schemes.
  - Administered schemes should be phased out and other government involvement curtailed; consider market-friendly or budgetary mechanisms to finance public policy objectives.
  - Efforts to further develop pension savings vehicles (such as PERPs) should continue to be a priority.
- Quantitative evidence (from accompanying Selected Issues document):
  - Over the last three years, up to 3 ¼ percentage point of potential consumption growth could have been forgone because of the slow adjustment of consumption credit rates, of which half is attributable to the sluggish adjustment of administered saving rates to monetary policy changes.
- Example alternative financing mechanism:
  - The CDC could issue bonds to finance social housing construction as a replacement for savings collected through the livrets.

### Short-term measures proposed to unwind large administered schemes
- Adopt a gradual approach to unwinding large schemes (livret A and PEL) to limit risks, honor existing contracts, and forestall potential fiscal costs of preemptive withdrawals.
- Short-term measures recommended:
  - Abolish the ni-ni rule prohibiting the payment of interest on current accounts and charging for checkbooks.
  - Abolish or significantly relax the usury rate.
  - End the oligopoly on distribution of the livret A/bleu, preferably by merging all or most existing livret schemes into a single product with uniform tax treatment.
  - Align the rates on the livret A and PEL deposits even closer to market rates, for example, by adjusting them every time the ECB changes its policy rates.
  - Define the guaranteed mortgage interest rate in new PEL contracts relative to the level of a benchmark market rate at the time the loan is taken up.
  - Allow the financial section of La Poste to manage its own balance sheet, as planned, and reconsider the need for other funds to be centralized at the CDC.
  - Either terminate availability of new PEL accounts, or at least remove their tax advantages to enhance the relative attractiveness of PERPs; investigate scope for reducing costs of moving funds from existing PEL accounts into PERPs.
- Note: The current low interest rate environment would facilitate implementation.

### Banking sector concentration, competition, and governance (findings and recommendations)
- Recent bank consolidation does not suggest a significant negative impact on overall market competition, except possibly in some localities.
- Retail-level competition appears focused on a limited set of products and parameters:
  - Banks price mortgage loans aggressively to attract customers for cross-selling high-margin products.
  - Customer retention is strengthened by refinancing costs, limited transparency, information availability, and cultural factors.
  - Strategies may be motivated by requirement to invest all PEL/CEL deposits in specified uses (mainly mortgage loans) and downward pressure on mortgage spreads from administered savings schemes.
- Bundling and transparency:
  - Selling several products to each client has allowed banks to remain profitable despite low interest margins.
  - Bundling may reflect economies of scope but, without price transparency, could be used to restrain competition.
  - Recommendations:
    - Require banks to make publicly available their schedule of interest rates and fees.
    - Competition authorities should be prepared to act forcefully against anti-competitive practices.
    - Introduce the proposed positive credit register to promote availability of financial services and competition among providers.
- Merger and systemic risk concerns:
  - Further merger activity among big domestic bank groups could reinforce perceptions of "too big to fail" and moral hazard.
  - The CB and the CECEI need to remain vigilant in analyzing merger proposals and ready to oppose those that increase systemic risks.
  - Expansion of La Poste’s banking activities and subjecting it to normal prudential regulation will be demanding of CB resources.

### La Poste restructuring (Box 3 — findings and recommendations)
- La Poste characteristics:
  - Public entity with postal/courier services and basic financial services.
  - Holds 8 percent of total deposits, 10 million checking accounts, and 17,000 postal outlets.
  - Does not have bank statute and falls outside CB supervision.
- Reform plan:
  - Separate La Poste’s financial services into a separate public bank, provided it receives a bank license from CECEI.
  - Authorities have agreed in a first stage to La Poste offering mortgage loans without prior savings.
- Competitive and supervisory considerations:
  - Impact on competition depends on clarification of financial relationships with postal branch.
  - Measures moving toward a level playing field:
    - Postal bank falls under CB supervision.
    - Phasing out its current blanket state guarantee in the next two years.
  - To avoid undue competitive advantage, the network and human resources provided by the postal branch must be charged to the postal bank on a fully commercial basis; sharing non-assigned costs in proportion to revenue may be far from first-best.
  - Leveling the playing field requires phasing out La Poste’s preferential tax status and eliminating oligopoly on distribution of certain savings products.
  - Reinforced regulatory scrutiny should apply during early years of the postal bank’s activities; supervision may entail a large burden on the CB.
  - The postal bank’s regulatory obligation to channel large amounts of PEL deposits into mortgage loans may push it into risky lending.
- Longer-term view:
  - La Poste should be able to demonstrate sound credit risk assessment and prospects for achieving a market return on capital to remain in business if scope expands.
  - From a banking perspective, creating a new, full-fledged public bank is difficult to justify; eventual privatization should be considered.
- Operational note:
  - So far, La Poste can only grant market mortgage loans as a supplement to PEL loans.

### Mutual banking groups — issues and recommendations
- Recent developments:
  - Growth of mutual groups has raised governance and recapitalization issues in some countries when mutuals cannot readily raise fresh capital from members.
  - Riskiness of operations likely increases as mutuals undertake business lines removed from local retail banking.
- Structure and supervision:
  - Mutual groups typically comprise regional member banks owned by millions of members and a central unit.
  - French mutuals have checks and balances allowing regional banks to scrutinize central unit activities; central unit has countervailing supervisory powers and directs strategy.
  - The CB supervises groups on both consolidated and disaggregated bases.
- Governance concerns:
  - Decision-making relies on top-down and bottom-up approaches, which could raise governance issues.
  - Outside scrutiny of mutuals has increased as they finance themselves in markets through bond issuance and sale of shares in subsidiaries.
- Capital and payout dynamics:
  - Combination of increased focus on profitability and mechanisms that keep disbursement of profits low (compared to commercial banks) has led mutual groups to accumulate capital at an accelerated pace.
  - Legal restrictions on payouts differ across mutuals; examples include legislation restricting dividend rates and effective impossibility of share buybacks at management initiative.
  - Payout ratio of mutual banking groups has been around 10 percent, as against 30–35 percent at large commercial banks.
  - Ex post capital ratios have not increased strongly because of equity-financed acquisitions.
- Future risks and recommendations:
  - Lower capital requirements under Basel II, robust profitability, low nominal credit growth, and securitization may generate more “excess” capital, which could prompt hasty expansion into unfamiliar-risk activities.
  - To reduce risks and monitor governance:
    - Encourage further exposure to market incentives (for instance, by listing subsidiaries).
    - Remove legal obstacles to higher remuneration of members (e.g., through dividends or share buybacks) to reduce excess capitalization and pressure to expand.
    - Reconsider legal impediments to demutualization, offering mutuals a way to demutualize without surrendering all reserves.
  - The CB exerts strong surveillance and is fully aware of issues related to mutual groups.

### Observance of financial sector standards — mission and assessments (summary)
- Summary assessments of international financial standards were undertaken during a mission to France from January 28 to February 10, 2004 (AML/CFT assessment: April 7 to 20, 2004).
- Standards assessed included:
  - The Basel Core Principles for Effective Banking Supervision (BCP).
  - IAIS Insurance Core Principles (ICP).
  - IOSCO Objectives and Principles of Securities Regulation.
  - CPSS/IOSCO Recommendations for Securities Settlement Systems.
  - CPSS Core Principles for Systemically Important Payment Systems.
  - IMF Code of Good Practices on Transparency in Monetary and Financial Policies.
  - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).
- Assessments were based on laws, regulations, policies, and practices in place at the time and drew on self-assessments, legal and regulatory reviews, detailed interviews with supervisory authorities, and meetings with other authorities and independent bodies.

*Source: IMF mission material (France), sections on insurance sector soundness, credit risk transfer, stress tests, structural issues, banking sector concentration, La Poste reform, mutual groups, and standards assessments.*

### 38.      This review covers the activities of the key banking regulatory and supervisory bodies

### This review covers the activities of the key banking regulatory and supervisory bodies in France

### Scope and methodology
- Review covers Banque de France (BdF), Commission Bancaire (CB), Comité des Établissements de Crédit et des Entreprises d’Investissement (CECEI), and Comité de la Réglementation Bancaire et Financière (CRBF).
- Prepared on the basis of:
  - Basel Core Principles Methodology;
  - April 2000 self-assessment by the French authorities;
  - August 2001 MAE assessment;
  - information on how 2001 recommendations were addressed;
  - response to the pre-FSAP questionnaire.
- Mission studied laws and regulations, engaged with regulatory and supervisory agencies, major banks, rating agencies, accounting and auditing professions; consulted annual reports, bank websites, and other sources.

### Institutional and macroprudential setting — overview
- France uses a specialized, sector-based approach with separate structures for banking, securities and insurance supervision; each has distinct layers for regulation, licensing, and supervision.
- Steps taken to streamline supervisory structure; additional steps may be considered as cross-sectoral financial groups become more prevalent.
- Industry and government representatives sit on supervisory boards, which:
  - bring practical sectoral knowledge and promote consensus;
  - may raise concerns about potential conflicts of interest and limited supervisory independence (reportedly not problematic in recent past; safeguards in place).
- French banking system characteristics:
  - modernized and restructured over past two decades;
  - large, sophisticated, internationally important;
  - dominated by six vertically integrated universal banks and their subsidiaries;
  - four of the six are organized on a mutual basis;
  - further consolidation could raise “too big to fail” stability concerns;
  - two large financial institutions, La Poste and Caisse des Dépôts et Consignations (CDC), remain in government ownership.
- Banking sector is well capitalized; reported level of nonperforming loans was stable through recent downturn; bank profitability has improved markedly over past decade and aligns with average euro-area levels.

### General preconditions for effective banking supervision
- Macroeconomic soundness and stability:
  - After a slowdown in economic activity during 2002-2003, a cyclical recovery has been gathering pace.
  - Inflation has only moderately picked up and ex-post real interest rates have sunk to unusually low levels.
  - Corporate sector financial situation deteriorated only slightly since 2000; corporate leverage generally low except for a few large companies.
  - Households’ debt levels relative to incomes and assets are comparatively low (albeit rising); savings rates are high.
  - Low interest rates and rising prices may induce households to take out larger mortgage loans, affecting future financial position.
  - Equity prices remain below their 2000 highs despite recent recovery; some investors enjoy offsetting gains on bonds.
  - Commercial real estate prices have remained stable following the early-1990s boom-bust cycle.
  - Housing prices have been increasing at an annual rate of 10 percent since 1997; in nominal terms they are not far above the peak reached in 1989.

- Public infrastructure and institutional arrangements:
  - Legal and regulatory framework for banking supervision is clear, easily accessible and updated periodically.
  - Legal framework for conducting banking business is well developed; legal procedures are lengthy.
  - Legal profession and judiciary understand financial and banking issues; accounting and auditing professions are well regulated with rigorous training and entry requirements.
  - Banking supervision exercised by CB, CRBF and CECEI; the Minister in charge of the Economy will replace the CRBF as regulatory authority later in 2004.
  - Independence: generally adequate with autonomous boards; presence of Director of the Trésor on CB board and industry representatives on CECEI boards raise potential conflict of interest issues (authorities report mitigation measures). BdF controls resources of CB and CECEI but linkages do not appear to threaten independence. Legal protection of supervisors is well recognized under administrative law.

### Market discipline and governance
- Accounting rules and regulations generally appropriate and aligned with European and international standards.
- Authorities have taken actions to enhance convergence between International Financial Reporting Standards (IFRS) and French accounting standards.
- More systematic approach and more disclosure of nonperforming loans introduced.
- Credit institutions required to communicate sooner with the CB when difficulties arise.

### Problem resolution
- CB enforcement capacity is adequate based on:
  - good coordination between on-site and off-site supervisors and with other financial sector supervisory bodies;
  - a flexible and comprehensive set of notification and corrective action procedures;
  - effective follow-up; and
  - sound legal and other enforcement powers.
- Bank intervention mechanisms improved with reform of deposit insurance system: CB can request Fonds de Garantie des Dépôts (FGD) to intervene.
- FGD details:
  - replaces previous separate guarantee funds;
  - guarantees deposits and other nominally repayable funds deposited in any registered credit institution in France, up to a ceiling of Euro 70,000 per customer, per bank.

### Main findings — banking supervision
- Overall assessment:
  - Banking supervision in France meets high standards.
  - Compliance with the BCP is strong.
  - Suggested improvement: introduce obligation to obtain prior approval from CECEI for acquisitions of equity in non-financial enterprises by banks (measures developed but not yet enacted).

- Objectives, autonomy, powers, and resources (CP 1):
  - CB and CECEI are independent administrative authorities with governance checks and balances supporting operational autonomy.
  - Legal framework primarily in Code Monétaire et Financier and related regulations; clearly authorizes CB, CECEI and Minister in charge of Economy to perform supervisory, administrative and regulatory functions.
  - CB authorized to apply sanctions including warnings, injunctions, appointment of official administrator or liquidator in case of license withdrawal.
  - Staffing levels adequate; supervisory staff training level high.

- Licensing and structure (CPs 2–5):
  - Bank licensing rules adequate and consistent with First and Second EU Banking Directives, consolidated in EU Directive 2000/12.
  - Licensing requirements include minimum capital, business plan, clarity and appropriateness of organizational structure, fit and proper requirements for managers, Board members and shareholders.
  - CECEI handles licensing applications and withdrawals; CECEI approval required to acquire shares in a bank exceeding a pre-determined level.
  - Corporate structure of groups must be transparent and not hinder supervision; non-compliance grounds for license refusal or revocation.

- Prudential regulations and requirements (CPs 6–15):
  - Capital adequacy requirements fully in line with the 1988 Basel Capital Accord and EU directives.
  - CB and CECEI may require higher capital ratios in individual cases based on risk profile.
  - Regulations set criteria for quality of lending practices and policies; lending monitored through off-site analysis and on-site inspections.
  - Group exposures monitoring requires banks to provide analysis by geographical region.
  - Connected lending: when connected lending exceeds 5 percent of own funds, reports must be filed to the CB.
  - Country risks, market risks, foreign exchange risks and operational risks fully covered by regulation and monitored monthly.
  - Measures taken to strengthen corporate governance in banks.

- Methods of ongoing supervision (CPs 16–20):
  - General Secretariat of CB performs off-site monitoring and on-site supervision through separate directorates for off-site, on-site and policy development.
  - Frequent contacts with banks occur via inspections and ad hoc meetings between bank top management and Secretary General of CB and deputy.
  - CB defines statistical and prudential information banks must submit regularly; large mutualist groups report on a consolidated basis.
  - Banks’ information verified through off-site analysis and on-site inspection; annual external audit required.
  - CB can order rectification if it has strong objections to a bank’s financial statements.

- Information requirements (CP 21):
  - IFRS to become norm for financial disclosure within EU in 2005; IAS 39 on fair value accounting remains contentious between IASB and EU, notably France.
  - Since 1998 Securities Commission report, a program established to improve French financial accounting; important implementation measures undertaken.
  - CB performed preliminary analysis of required changes in French financial accounting in its 2001 Annual Report and seeks to sensitize banks to internationally recognized standards.

- Formal powers of supervisors (CP 22):
  - CB enforcement and sanctioning powers include:
    - follow-up letters (lettres de suite) after on-site inspection relying on management and Board to correct situations;
    - pecuniary sanctions;
    - withdrawal of voting rights of certain or all shares;
    - prohibition to pay dividends or other remunerations to shareholders;
    - obligation for credit institution to disclose disciplinary sanctions at its own expense;
    - referral of infringements or criminal offenses to Public Prosecutor’s Office.
  - CB is an administrative judiciary authority; decisions and sanctions can only be challenged before the Conseil d’État.
  - CB annual report provides information—without naming banks—on sanctions imposed.

- Cross-border banking (CPs 23–25):
  - Banks and holding companies must comply with prudential standards on a consolidated basis, including controlling entity and subsidiaries.
  - CB and CECEI have extensive Memoranda of Understanding (MOU) with supervisors abroad.
  - Information on individual institutions regularly exchanged between CB and non-EEA supervisors.
  - Under EU single banking passport rules, branches in EEA covered by home-country supervision.
  - Branches of non-EEA banks subject to same rules and regulations as French banks.
  - Subsidiaries of foreign banks fully subject to French rules as they are incorporated under French law.

### Recommended Action Plan to Improve Compliance with the Basel Core Principles (selected)
- Investment criteria (BCP 5):
  - Introduce obligation to obtain prior approval of the CECEI for acquisitions of equity in non-financial enterprises by banks (measures developed but not yet enacted).
- Corporate Governance in Banks (BCP 13):
  - Continue to follow carefully any initiatives for expansion of the large banking organizations in a time of change, new activities and increased depositor mobility, notably for mutualist groups with recent experience in these new activities.
- Accounting Standards (BCP 21):
  - Continue to strive towards convergence between French accounting standards and IFRS.

### Authorities’ response
- Authorities are broadly in agreement with the assessment.

### Insurance sector — IAIS Insurance Core Principles (overview and findings)
- Assessment based on:
  - extensive 2000 self-assessment by former Commission de Contrôle des Assurances (CCA);
  - comparison with IAIS Core Principles and Methodology;
  - review of relevant insurance laws.
- Legal basis: Code des Assurances (as amended) and recent Loi de sécurité financière (Financial Security Law).
- Transition and institutional reform:
  - ICPs relatively new and revised in 2003.
  - Financial Security Law of August 1, 2003 created a single supervisory body by merging CCA and Commission de Contrôle des Mutuelles et des Institutions de Prévoyance (CCMIP) into Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance (CCAMIP).
  - Law gave CCAMIP financial independence, strengthened coordination with banking supervisors, and extended powers to request and receive information from supervised entities and auditors.
  - Implementation orders (décrets d'application) were under review by Conseil d'État at time of assessment; transition period ended as of July 2004.

- Institutional and macroprudential setting — insurance:
  - French insurance sector large and systemically important:
    - 5 percent market share of gross premiums in the OECD in 2001;
    - ranked fifth largest in the world and third largest in Europe.
  - Sector demonstrated resilience to shocks including fall in international equity prices in 2001-2003, historically low interest rates, and natural catastrophes.
  - Longer-term challenges:
    - demographic trend (longer life expectancy and decline in working population);
    - upcoming implementation of IFRS in 2005, with industry concerns about accounting risks;
    - possibility of a sharp and sustained increase in interest rates that could generate a wave of contract repurchases.
  - Authorities considering preemptive measures such as promotion of new generation private retirement products.

- Main findings — insurance supervision:
  - Legal, regulatory and supervisory framework observes a large majority of essential IAIS criteria.
  - Preconditions for effective insurance supervision are observed.
  - Areas for improvement grouped into five broad categories, including corporate governance, internal controls, risk management systems, and structure of supervisory agency.

- Corporate governance, internal controls, and risk management:
  - Many but not all corporate governance principles established in regulations.
  - Recommendation: CCAMIP should have authority to issue a Code of Conduct of Corporate Governance for all supervised insurance companies, including internal control requirements.
  - Current internal control regulations focus mainly on investment policy and limited reporting; supervisory authority cannot require and directly enforce some measures necessary for efficient internal control under ICPs.
  - Legislation should require all insurance companies to establish risk management systems covering all material risks; supervisor should have powers to require effective risk management systems proportionate to complexity, size and nature of business.

- Structure of supervisory agency:
  - New regulatory framework is segmented among four bodies:
    - Ministry of Economy, Finance, and Industry (MINEFI) for regulation;
    - Comité des Entreprises d’Assurance (CEA) for licensing and delicensing issues;
    - CCAMIP for sanctions;
    - Secretariat of CCAMIP for ongoing supervision.
  - Concern that segmentation may operate slowly and handicap efficient supervision.
  - Supervisory authority lacks powers to issue rules by administrative means; this power belongs exclusively to MINEFI and should be deferred to CCAMIP as in some other countries.

*IMF staff report excerpt (chapter/section summarized).*

### 69.      The insurance industry, itself, is involved in the supervisory functions of the CEA.

### _cr04344 - 69.      The insurance industry, itself, is involved in the supervisory functions of the CEA.

### Conflict of interest and supervisory structure
- The insurance industry is involved in the supervisory functions of the CEA. This can be a source of conflict of interest and may impair the functioning not only of this body but of the overall supervisory framework.
- The Financial Security Law:
  - Strengthens insurance supervision and provides more responsibility for the supervisor.
  - Provides financial autonomy to the CCAMIP, intended to ease staff recruitment.
  - Enables both the CCAMIP and the banking supervisory authority (Commission Bancaire) to participate in the law making process via the financial regulation advisory council.
- Internal organization measures:
  - People who participated in preliminary investigations do not participate in decision-making regarding the controlled company; decisions are taken by a college within the CCAMIP while controlling teams belong to the secretariat of the same CCAMIP.
  - Participation of retired professionals in Comité des Entreprises d'Assurance decisions is allowed; regulation requires secrecy of information discussed among CEA members.

### Means of supervisory agency and staffing
- Current staffing constraint:
  - CCAMIP has only 50 commissaires-controleurs, which is insufficient given the enlarged number of supervised companies following the merger of the CCA and the CCMIP.
- Supervisory objectives and actions:
  - CCAMIP aims to intensify on-site inspections so that "each company is inspected at least every three to five years."
  - Financial autonomy should enable CCAMIP to increase staff; CCAMIP has been inaugurated, authorized to levy a specific tax, adopted its budget and its code of conduct, and stands ready to take decisions.
- Insurance Code powers:
  - Requires boards to examine annually a comprehensive report on asset management; this report is also sent to the CCAMIP.
  - Companies must provide CCAMIP with a report on reinsurance policy.
  - Insurance Code provides CCAMIP several means of action in case of serious shortcomings.

### Awaiting transposition of EU directives
- Financial conglomerates:
  - Regulation on financial conglomerates is incomplete; the supervisory authority lacks power to intervene if necessary.
  - "The relevant EU Directive will be transposed into French law before January 1, 2005."
  - Financial conglomerates directive (in process of implementation) requires insurance groups to establish appropriate internal controls and risk management procedures and strategies to identify and measure all important risks.
- Intermediaries:
  - Supervisor lacks powers to supervise insurance intermediaries (e.g., brokers and independent agents); ongoing supervision is currently scant.
  - The EU Intermediary Directive transposition deadline: "start of 2005."
  - Financial Security Law authorized the supervisory authority to impose sanctions on brokers.
  - The directive on insurance intermediates (to be implemented very soon) will:
    - Create a national registry of all intermediates.
    - Compel intermediates to have a financial guarantee and a professional civil responsibility insurance police.
    - Centralize control on fit and proper conditions.
    - Enable the CCAMIP to withdraw a broker’s registration on grounds of regulation infringement.

### AML/CFT — gaps and planned measures
- Main issues identified:
  - (i) "the absence of consideration of AML/CFT internal controls when issuing business authorizations;"
  - (ii) "the generally low rate of on-site examinations of insurance companies and the urgent need for a substantial increase in supervisory personnel;"
  - (iii) "the absence of effective supervision of intermediaries, including appropriate sanctioning powers (although remedial measures will soon be introduced);"
  - (iv) "the absence of enforceable guidelines and of specific Customer Due Diligence (CDD) requirements for the handling of higher risk customers."
- Recommended and planned actions:
  - CEA is considering regulatory measures so that insurers’ AML/CFT internal controls be considered when licensing insurance companies.
  - Financial autonomy of CCAMIP should facilitate staff recruitment and increase the rate of on-site controls; to date the CCA has focused on life companies.
  - Directive under preparation to comply with the revised FATF 40 Recommendations; expected adoption by the EU before summer 2005.
  - CCAMIP to be empowered to regulate and supervise intermediaries with appropriate enforcement powers for AML/CFT.
  - Prompt enactment of draft legislative amendments to comply with FATF 40 Recommendations is recommended.

### IAIS Core Principles — Recommended Action Plan (Table 2, selected items)
- Supervisory authority (CP 3)
  - Give the supervisory authority power to issue regulations.
  - Increase staff of the supervisory authority.
  - Monitor the effectiveness and efficiency of the new organization, setting a date for reviewing the structure.
  - Eliminate the participation of the industry in the supervisory decision-making process.
- Suitability of persons (CP 7)
  - Introduce a requirement that an insurance company must inform the supervisory authority if it becomes aware of circumstances that may lead to doubts about the fitness and propriety of owners, senior management, and others in positions of responsibility.
- Corporate governance (CP 9)
  - Empower the CCAMIP to issue and enforce a Code of Conduct of Corporate Governance for all supervised insurance companies.
- Internal control (CP 10)
  - Empower the CCAMIP to issue and enforce a Code of Conduct containing the requirements for effective internal control for all supervised insurance companies.
- Group-wide supervision (CP 17)
  - Issue a regulation regarding group-wide supervision of financial conglomerates headed by insurance companies (transposition of the EU Directive on financial conglomerates).
- Risk assessment and management (CP 18)
  - Require by law that all insurance companies establish risk management systems which cover all material risks of an insurance company.
- Intermediaries (CP 24)
  - Empower the CCAMIP to supervise intermediaries. Require that all agents and brokers be registered.
- Anti-money laundering (CP 28)
  - Increase supervisory staff and raise AML/CFT on-site inspections of insurance companies.
  - Regulate and supervise, with appropriate enforcement powers, intermediaries for AML/CFT activities.
  - Consider adequacy of internal AML/CFT controls when issuing business authorizations.
  - Issue enforceable guidelines for insurance companies and extend these to intermediaries.
  - Promptly enact draft legislative amendments to comply with FATF 40 Recommendations.

### Authorities’ response and implementation status (selected points)
- The French Ministry of Finances:
  - "Appreciates the IMF overall assessment that the French insurance sector is financially sound" as verified by IMF–supervisory authority stress tests.
- CCAMIP implementation:
  - Transitional period ended after several decrees in July; CCAMIP inaugurated, authorized to levy a specific tax, has adopted its budget and code of conduct, and has begun following up on CCA and CCMIP supervision issues.
  - CCAMIP and banking supervisor participate in law-making via the financial regulation advisory council.
  - CCAMIP internal procedures seek to respect European Court on Human Rights rules regarding impartiality in decision-making.
- Internal controls and risk management:
  - Insurance Code already requires annual board review of comprehensive asset management reports and reinsurance policy reports to CCAMIP.
  - Insurance Code gives CCAMIP means of action in case of serious shortcomings.
- AML/CFT and intermediaries:
  - CEA considering regulatory measures to factor insurers’ AML/CFT internal controls into licensing.
  - Financial Security Law authorizes supervisory authority to impose sanctions on brokers.
  - CCA issued recommendations in June 2001; document under review to be updated.

### IOSCO assessment and capital market overview (selected facts and figures)
- Assessment context:
  - Assessment of implementation of IOSCO Objectives and Principles of Securities Regulation conducted during first half of 2004 using 2003 version of IOSCO Principles and October 2003 Assessment Methodology.
  - Assessment covered securities regulatory framework modernized by Loi de Sécurité financière Nº. 2003-706 of August 1, 2003 and Decree Nº 2003-1109 of November 21, 2003, relating to the AMF.
- Capital market structure and investor allocations (household savings flows, 2002)
  - 48 percent went into investments in securities and mutual funds.
  - 38 percent into life insurance products.
  - 15 percent into savings accounts.
- Mutual funds and asset management
  - Mutual fund assets to GDP ratio in 2003: France 64 percent; United States 68 percent.
  - A large proportion of mutual fund products are created and sold for the account of life insurance firms due to substantial tax benefits for life insurance savings products.
- Financial sector composition and market shares
  - 90 French-licensed investment/broker firms.
  - 346 commercial banks (1,011 credit institutions).
  - Approximately 500 asset management firms.
  - 41.5 percent of assets under management is managed by asset management companies of the six largest banks.
- Stock exchange and market capitalization
  - Euronext Paris market capitalization: 73 percent of GDP or EUR 877.7 billion as of end-2003.
- Trading and clearing statistics (2003)
  - Annual transaction value in equities (counted on one side): EUR 877.7 billion in 2003.
  - Average daily turnover: EUR 3.442 billion.
  - Number of trades: 101 million.
  - Average daily turnover (trades): 396,287.
  - The five most actively traded shares in 2003 accounted for 30 percent of turnover.
  - In 2002, the nine most actively traded shares accounted for 30 percent of the total number of trades.
- Derivatives, exchanges, clearing, settlement
  - Paris derivatives markets (MATIF and MONEP) are part of Euronext; integrated into Euronext-liffe trading structure and cleared by LCH-Clearnet, Ltd.
  - Single clearing system for Euronext markets: LCH-Clearnet SA.
  - Single settlement system for equity securities: Euroclear France.
  - Cross-jurisdictional activities have led to cooperative cross-border arrangements with other jurisdictions.
  - Powernext: commercial energy exchange owned by Euronext with non-intermediated trading.
  - Marché Libre: unregulated (OTC) equity market with 258 issues.
- Government bond market composition
  - OATs comprise 65 percent of the marketable government debt outstanding.
  - BTANs comprise 20 percent.
  - BTFs comprise the remainder.
  - Inflation-linked OAT issuances comprise about 10 percent (€44.5 billion) of the outstanding stock of OATs (or 8 percent of total outstanding government debt instruments).
  - Main investors in government bonds: insurance companies, international pension funds, asset managers and alternative traders.

*Source: _cr04344 - 69.      The insurance industry, itself, is involved in the supervisory functions of the CEA.*

### 102.     The nonfinancial corporate bond market in France has grown substantially with the

### _cr04344 - 102.     The nonfinancial corporate bond market in France has grown substantially with the

### Market developments
- At the end of 1998, the corporate bond market comprised 12 percent of outstanding French bonds, while it currently stands at 22 percent.
- Interdealer trading for the French government bond market, and to a lesser extent the nongovernment bond market, has almost completely migrated to the MTS electronic trading platform.

### Regulatory structure and practices
- The Financial Security Law concentrates all regulatory powers in an independent regulator, creating AMF as the principal securities regulator and reflecting devolution of market oversight from Conseil des Marchés Financiers (CMF) and the COB to the AMF.
- The AMF is an independent public authority with a separate legal identity and “taxing” authority, comprised of a 16-member board (college), chaired by a full-time chairman and a separate 12-member Commission des Sanctions.
- The AMF has five consultative commissions, each with its own chairman and vice chairman, relating to:
  - implementation of the new investment services and market abuse directives,
  - clearing and settlement,
  - collective investments,
  - application of the transparency directive,
  - minority shareholders and savings.
- Board members may engage in other professional activities; there is no cross membership between the Commission des Sanctions and the board other than the representative of the ministry.
- The AMF is accountable to the government through oversight of its budget, the role of the minister with respect to the adoption of regulations, and the review process with respect to the regulatory actions or sanctions it takes.
- The AMF has broad sanctioning powers which must be exercised through its separately constituted Commission des Sanctions.
- The CB also has the power to take prompt corrective action and certain sanctioning powers to enforce prudential oversight of investment services providers not subject to the sole competence of the AMF.
- The AMF licenses and prudentially supervises operators of publicly offered collective investment schemes, and portfolio (asset) managers for third parties; regulates the public offer and reporting of financial information with respect to issues, and marketing generally, and the flow of information relative to takeover bids.
- The AMF has responsibility for market undertakings, depositories for securities and assets of collective investment schemes, and clearing and settlement systems and their related custodians, without prejudice to the functions of the BdF and its specific role with respect to payments.
- Licensing (except for insurance companies engaging in insurance activities) is committed to the CECEI:
  - (i) in consultation with the AMF in the case of credit institutions and investment services providers engaged in investment services, pure custodians and clearing members; and
  - (ii) with approval of the program of operation, if authorization for asset management activities is sought by such firms.
- Prudential oversight, including oversight over members of markets, clearing organizations and custodians, but not including insurance companies acting in the capacity of insurance companies, is the responsibility of the CB. The Financial Security Law therefore retains a modified “twin-peaks” structure for financial regulation.
- The BdF commits staff to licensing and prudential supervision, and provides leadership through its Governor’s participation as Chair of both the CB and the CECEI (articles 613-3 and 612-3 of the Monetary and Financial Code).
- The BdF has competence over payment system functions and, as a consequence, certain aspects of securities settlement.
- The CB is expected to oversee any Automated Trading Systems (ATS), which are viewed as intermediaries, and has other powers related to Euronext being a credit institution.
- Coordination mechanisms:
  - Day-to-day operations: interstaff contacts, information sharing, certain combined databases, regular monthly meetings.
  - General policy and cross-market matters: an inter-institutional, statutorily-prescribed board (Collège des autorités de contrôle des entreprises du secteur financier) composed of the heads of the financial services agencies, which must meet at least three times a year, presided over by the Minister in charge of the Economy, Finance and Industry or his representative.
  - Cross membership fosters cooperation, e.g., AMF Chair participates on the Board of the CECEI and the Governor of the BdF participates on the AMF Board.
- Exchanges and clearing/settlement organizations control/monitor operations through rules adopted subject to review of the competent authority; those rules are regarded as founded in contract, not public law.
- The AMF may delegate (license specified individuals to perform) certain compliance activities as to their members, including with respect to the transmission of orders by financial services providers.
- Protocols exist among national regulators and markets within the Euronext, NV group, and related clearing and settlement institutions (Euroclear and LCH-Clearnet) for operation and supervision. Euronext France and LCH-Clearnet, Ltd., and LCH-Clearnet SA are each credit institutions with consequent implications for supervision by the CB and the BdF as well as the AMF.

### General preconditions for effective securities regulation
- Effective regulatory framework preconditions assume:
  - (i) the existence of a legal framework that supports the integrity of contract and property rights and recognizes the instruments traded in the market as well as the rules that facilitate their trading;
  - (ii) a commercial and insolvency regime that facilitates the taking of collateral, the use of clearing services, and the enforcement of guarantees;
  - (iii) sound company law that protects direct investors;
  - (iv) laws which support the ability to identify and protect client assets;
  - (v) reliable and consistent accounting standards;
  - (vi) the confidence of the marketplace that the rules will be consistently and equitably enforced and that the rules of the marketplace can be applied notwithstanding the bankruptcy of particular market participants.
- These conditions presuppose judicial, administrative, and regulatory authorities will reliably honor and equitably apply the rule of law. The assessment finds no evidence that these preconditions are not met in France.
- French market regulators have been open to cross-border arrangements within the European Union and beyond, supporting the Lamfalussy process and the Committee of European Securities Regulators (CESR).

### Main findings and recommendations
- Overall assessment:
  - The standard of securities regulation in France is very high. However, some refinements are recommended.
- Principles Relating to the Regulator (1–5):
  - Predecessors to the AMF have made great strides in implementing effective financial regulation and have been leaders within Europe over the last 20 years.
  - The Financial Security Law expanded, modernized, and simplified powers of competent authorities to meet international standards and European requirements and to assure efficient allocation of resources among the AMF, the CB and the CECEI.
  - Provisions for an internal audit facility and for all guidance to be accomplished through General Regulations enhance AMF accountability.
  - The AMF is combining and streamlining existing guidance and assuring it has sufficient human resources to exercise new powers, especially with respect to inspections and oversight of miss-selling through the banking network.
- Modified twin peaks structure:
  - Intended to permit competent authorities to focus on customer protection and prudential issues contemporaneously.
  - Effective response to general and specific market problems depends on effective and consistent cooperation among authorities; cooperation is explicitly required only for licensing and high-level policy matters.
- Independence concerns:
  - There is concern that enforcement effectiveness of the Commission des Sanctions might be adversely affected by the presence of the Ministry’s representative, which could be perceived to have a chilling effect on deliberations or outcomes; transparent procedures regarding the ministry’s representation may mitigate perceptions.
- Principles Relating to Self Regulation (6–7):
  - Inapplicable because the French system does not make use of self-regulatory authorities.
- Principles Relating to Enforcement (8–10):
  - The AMF has comprehensive enforcement powers, including investigative, administrative and criminal referral powers, and the right to make submissions in writing with respect to matters heard within the judicial system.
  - In the first few months of operations, the AMF, through its Commission des Sanctions, has heard four substantial administrative cases and imposed penalties for violations of various portions of the law.
  - Recommendations: keep execution of AMF’s enforcement powers under review with respect to treatment and timeliness of cases potentially subject to both civil and criminal penalties, functioning of the Commission des Sanctions, and AMF’s ability to present evidence in administrative proceedings generated by monitoring and on-site inspection activity. Explore capacity to settle cases and to obtain restitution administratively.
  - The CB also has powers to achieve compliance with prudential requirements and to sanction noncompliance; the AMF cooperates with the CB in inspection of regulated entities that provide investment services.
- Principles for Cooperation in Regulation (11–13):
  - The AMF has a state-of-the-art capacity to cooperate domestically and with foreign counterparts and is a signatory of the IOSCO Multilateral Memorandum of Understanding.
  - Ideally, the AMF should be able to obtain information requested by foreign counterparts that pertains to competences within the remit of other domestic authorities with securities-related functions; the Financial Security Law permits other regulatory authorities involved in securities oversight also to provide cooperative assistance to foreign authorities directly.
- Principles for Issuers (14–16):
  - Law affecting issuers is a complex combination of financial services legislation and company law; disclosure required of public companies meets international standards.
  - Prospectuses of public companies must receive approval (a visa or agreement in the case of Collective Investment Schemes–CIS) from the AMF. Prospectuses and related continuing information are readily available on the AMF website through DIF (Décisions et informations financières) or GECO (Gestion collective) for CIS.
  - The AMF is improving timely availability to the investing public of information on insider transactions and enhancing protections for minority shareholders.
  - The AMF has played a leadership role toward adoption of international financial reporting standards and development of robust auditor oversight arrangements; securities regulator should continue active input into audit standard setting and oversight.
- Principles for Collective Investment Schemes (17–20):
  - France has a large, vibrant and sophisticated market for CIS of several types.
  - AMF’s new powers regarding oversight of depositories and financial advisers are being implemented; resource requirements are being assessed.
  - Licensing of schemes and asset managers meets international standards; level of information to participants on an ongoing basis meets standards.
  - Further oversight of marketing requirements and capacity to address miss-selling (currently based essentially upon complaints) would enhance oversight of the bank distribution network.
  - AMF is enhancing its CIS program, plans to review redemption practices and on-site inspection capabilities.
  - AMF has proactively addressed potential improper late trading and/or market timing practices by scheduling on-site investigations of at-risk entities and providing guidance on valuation of products without reliable market prices; required third party valuation of mark-to-model systems of valuation has been required.
- Principles for Market Intermediaries (21–24):
  - Licensing, fitness and capital requirements for intermediaries are conservative and overseen, except for asset management companies, by the relevant banking authorities.
  - Licensing requirements expanded to include employees and agents who solicit new customers directly under the auspices but outside the premises of licensed intermediaries.
  - Provisions exist for addressing large exposures and for winding down firms that experience financial deterioration.
  - Internal controls are specified and firms must have mechanisms to comply with applicable law, although internal audit requirements have not been extended to asset managers.
  - Conduct of business requirements (know your customer, suitability, avoid conflicts of interest) are contained in the Financial Security Law and may be implemented by the AMF in General Regulations.
  - Recommendation: assure continued cooperation between competent authorities in executing responsibilities for intermediaries.
- Retail deferred settlement contracts:
  - Permission for retail customers to trade, without settling except on a net basis, deferred settlement contracts raises concerns.
  - Permission for a 30-day settlement against the broker for transactions undertaken in the market in highly liquid securities puts a premium on adequacy of margin collected by the broker and adequate management of exposure.
  - Supervisory need for timely and accurate information on broker exposures vis-à-vis their customers and on customer exposures across multiple brokers; current reporting and monitoring frequency by the CB may not be sufficient to identify a firm experiencing difficulties prior to more serious financial exposures.
  - There may be conduct of business issues to address given retail activity.
- Principles for Secondary Markets (25–29):
  - Securities markets in France are subject to a well-developed regime for authorization and oversight by both the AMF and other authorities with competence over exchanges in Euronext.
  - For ATS there is no very defined approach; such systems, to the extent they exist, are subject to supervision by the CB.
  - The AMF, in cooperation with supervisors of other integrated markets, has regulatory authority over Euronext within the French system, permitting intensified oversight of this demutualized and self-listed market.
  - AMF can license certain personnel on site at the exchange to perform compliance and/or investigative work; the exchange remains responsible to enforce its rules under private law.
  - Euronext is a credit institution and subject to relevant oversight as such.

*Source: IMF staff report content unit _cr04344 - 102.*

### 128.     The markets are subject to stringent transparency requirements. There is the authority

### _cr04344 - 128.     The markets are subject to stringent transparency requirements. There is the authority

### Market transparency, market abuse authority, and crisis arrangements
- The markets are subject to stringent transparency requirements; there is authority to relax certain of these in the future, consistent with an EU-wide trend (paragraph 128).
- The AMF should keep under review whether any new regime maintains appropriate transparency levels for investors participating on the markets (paragraph 128).
- The COB and CMF have long had authority with respect to market abuses; the Financial Security Law expanded AMF authority to address insider dealing, manipulation, and dissemination of false information by any person at the administrative level (paragraph 129).
- The AMF should keep under review how the interplay between criminal and civil authority affects the prosecution of market abuse cases (paragraph 129).
- The AMF and related authorities can address concentrations at firms and in the markets and can transfer positions, wind down firms or halt trading as necessary to contain systemic risks (paragraph 130).
- Authorities should assure adequate communication between the market and separate clearing agencies and ensure the innovative arrangements overseeing the linked markets of Euronext operate well on a day-to-day basis and in crisis circumstances (paragraph 130).

### Assessment scope and clearing/settlement arrangements
- Principle 30: Clearing and settlement arrangements were assessed in accordance with the CPSS/IOSCO Recommendations for Securities Settlement Systems and the consultative draft of the Recommendations for Central Counterparties; as a consequence, Principle 30 was not assessed and such arrangements were only considered in connection with the securities sector assessment insofar as clearing and settlement support effective operation of France’s secondary markets (paragraph 131).
- As part of the Financial Sector Assessment Program, CPSS/IOSCO Recommendation for Securities Settlement Systems observance was assessed (paragraph 136).
- The assessment covers Euroclear France as Central Securities Depository (CSD) for treasury bills, negotiable short-term instruments, public sector and corporate bonds and equities; "Almost all securities in France (99.7 percent) are dematerialized in Euroclear France. The residual securities are immobilized in this CSD" (paragraph 138).

### Euroclear France systems and liquidity arrangements
- Euroclear France operates two settlement systems (paragraph 139):
  - Relit+ ensures delivery versus payments on a gross-net basis (model 2 DvP). Multilateral net positions at the cash side are settled three times a day in Transferts Banque de France (TBF), the Real-Time Gross Settlement (RTGS) payment system operated by the BdF. LCH-Clearnet SA settles via Relit+ its positions vis-à-vis its counterparties stemming from stock exchange transactions (paragraph 139(i)).
  - RGV2 irrevocable channel (RGV2-TFT) clears all transactions on a trade-for-trade basis with intraday finality (model 1 DvP). The cash leg is settled on dedicated cash accounts opened with the BdF and directly operated by Euroclear France. A liquidity bridge enables participants to transfer cash between these dedicated cash accounts in RGV2 and their cash account held in TBF and vice versa (paragraph 139(ii)).
- RGV2-TFT is used for executions of monetary transactions and collateralization of intraday credit operations (paragraph 139(ii)).

### Institutional and market structure—key statistics
- France ranks fourth in the world in stock market capitalization (in dollar value terms) and debt securities market capitalization; the value of all listed securities amounted slightly above 200 percent of GDP at end-2003 (paragraph 140).
- Euronext-Paris manages the Paris stock exchange; since September 2000 it is a wholly owned subsidiary of Euronext NV (paragraph 141).
- Total turnover in the secondary market for securities:
  - EUR 905 billion in 2003
  - EUR 1,045 billion in 2002
  - Average daily turnover in 2003 amounted to EUR 3.5 billion (paragraph 142).
- All stock exchange transactions are cleared via Clearnet (LCH-Clearnet SA) which clears transactions in Belgium, France, the Netherlands and Portugal and OTC transactions (paragraph 143).
- Euroclear France is fully owned by the Belgian Euroclear Bank (paragraph 144).
- Total value of trades settled in Euroclear France’s systems amounted to EUR 52,996 billion in 2002 (paragraph 145).

- Instructions (millions) by year:
  - 1997: 18
  - 1998: 22
  - 1999: 28
  - 2000: 41
  - 2001: 31
  - 2002: 29
  - 2003: 28

- Value (Euro billions) by year:
  - 1997: 22,660
  - 1998: 32,046
  - 1999: 38,892
  - 2000: 36,835
  - 2001: 43,635
  - 2002: 52,996
  - 2003: 52,528

### Regulatory structure, cooperation, and oversight
- Competent authorities for regulation and oversight of Securities Clearing and Settlement Systems (SCSS) are the Autorité des Marchés Financiers (AMF) and the Banque de France (BdF) (paragraph 146).
- Article 621-7 of the Monetary and Financial Code: AMF specifies general organizations and operational principles of securities settlement systems and must approve operating rules; AMF also regulates custodians. The BdF is charged with oversight of SCSS; close cooperation exists with consultative BdF roles on the AMF Board and committees (paragraph 146).
- LCH-Clearnet SA, being a credit institution, is supervised/overseen by AMF, BdF and also by the Commission Bancaire (CB) (paragraph 147).
- Cross-jurisdictional activity of Euronext, LCH-Clearnet and the Euroclear group has led to cooperative cross-border arrangements codified in Memoranda of Understanding signed by relevant authorities in different countries (paragraph 148).

### Assessment methodology and scope limitations
- The assessment used the BdF self-assessment based on the CPSS/IOSCO methodology, discussions with BdF, AMF, Euroclear France and market participants, and review of rules, regulations, audit reports, MOUs, business plans and discussion papers on cross-border clearing and settlement (paragraph 149).
- The assessment of LCH-Clearnet SA was postponed to await the new CPSS/IOSCO recommendation for central counterparties and will be conducted in the framework of an Article IV Consultation based on a self-assessment by French authorities (paragraph 150).

### Main findings — legal, pre-settlement, and settlement risk
- Legal risk (recommendation 1) (paragraphs 151–153):
  - There is a consistent set of laws, regulations, and contracts forming the legal foundation for custody, clearing and settlement of securities; all relevant laws and regulations are publicly available (paragraph 151).
  - Customer assets are protected by law against the bankruptcy of a custodian and clear restitution procedures exist (paragraph 151).
  - Dematerialization, netting, securities lending arrangements and establishment of collateral interest are well regulated; all laws, regulations and contractual arrangements are fully enforceable (paragraph 151).
  - Finality regulation in the Monetary and Financial Code deems securities transactions final when executed; cancellations under the zero hour rule in bankruptcy law cannot be raised retroactively (paragraph 152).
  - The finality regulation combined with Euroclear France rules define moment of irrevocability and finality and endorse legal validity of delivery versus payment (paragraph 152).
  - A conflict of laws could arise from Euroclear France’s open access policy; procedures to avoid such conflict could be strengthened by requiring a legal opinion in case of admission of a foreign participant, especially for remote access (paragraph 153).

- Pre-settlement risk (recommendations 2–5) (paragraph 154–155):
  - Matching and confirmation are well established on the stock exchange and in OTC markets (paragraph 154).
  - At least 95 percent of settlement of stock exchange transactions is achieved through rolling settlement on t+3 or through a shorter cycle in Relit+; incentives ensure timely settlement and settlement failures are closely monitored (paragraph 154).
  - In the OTC market, settlement can be executed the same day in RGV2-TFT for about 30 percent of all transactions in the secondary markets; majority of OTC transactions in this system settle within three days (paragraph 154).
  - All transactions on the stock exchange are cleared and settled via LCH-Clearnet SA, which acts as a central counterparty (paragraph 155).

- Settlement risk (recommendations 6–10) (paragraphs 156–158):
  - Securities lending can be conducted through securities loans or repurchase agreements (repos); the law recognizes both and the validity of collateral transfers within securities lending (paragraph 156).
  - Securities issued in France are almost all dematerialized (99.7 percent); remaining securities (warrants, Eurobonds, foreign securities) are immobilized with adequate safekeeping procedures in Euroclear France (paragraph 157).
  - Euroclear France realizes delivery versus payment in both systems it operates:
    - RGV2-TFT is a model 1 DvP system settling securities and cash simultaneously online real time (paragraph 158).
    - Relit+ is a model 2 DvP system that settles securities on a gross basis and nets the cash obligations; securities available in seller’s account are transferred and blocked until final settlement of the cash obligation (paragraph 158).

### Table 3 and recommended actions (summary of regulator-related recommendations)
- Principle 1: CB and AMF should explore additional arrangements to enhance timeliness and certainty of information sharing on prudential matters relevant to conduct of business oversight; AMF’s limitation to conduct of business issues should not prevent receiving prudential information when relevant (Table 3, Principles 1–5).
- Principle 2: Keep under review effectiveness of arrangements protecting AMF independence, particularly the Commission des Sanctions, to ensure Ministry presence does not permit political considerations to affect decisions or perceptions thereof (Table 3, Principles 1–5).
- Principle 3: AMF should continue assessing resource deployment between off-site and on-site oversight; assure human resources are sufficient to address prospectus review and expanded monitoring powers (Table 3, Principles 1–5).
- Principle 8–10 (Enforcement): Evaluate timeliness of proceedings after new organizational structure operates; AMF should aggressively pursue overturning judiciary interpretations of the doctrine of impartiality that could undermine monitoring and enforcement; continue transparency on sanctions and develop public statistics on enforcement and investigatory performance (Table 3, Principles 8–10).
- Principle 13 (Cooperation): Ideal channel for exchange of information and assistance to foreign securities regulators is through the securities regulatory authority (AMF), though direct arrangements should not be prohibited; information on intra-group relationships should be available to requesting securities regulators through the AMF (Table 3, Principles 11–13).
- Principle 15–16 (Issuers, auditors): Consider a materiality standard for immediate disclosure of transactions by large shareholders and management insiders; encourage further work on minority shareholder rights; AMF should assist in developing robust oversight of auditors and auditing standards and ensure Haut Conseil du Commissariat aux Comptes takes AMF views into account (Table 3, Principles 14–16).
- Principle 17 & 20 (Collective Investment Schemes): Consider more robust guidance on related party transactions in CIS; strengthen guidance on redemptions specifying appropriate circumstances to suspend redemptions (Table 3, Principles 17–20).
- Principle 21–24 (Market Intermediaries): AMF and CECEI should promptly use existing powers to ensure licensing information is readily available to the public; CB and AMF should assure adequate provisions at brokers using deferred settlement positions (SRDs) and oversight of broker capital in such cases (Table 3, Principles 21–24).
- Principles for the Secondary Market (25–30): Authorities should assure innovative arrangements for oversight of cross-border clearing arrangements could be effective in the case of a firm or market disruption (Table 3, Principles 25–30).

### Authorities’ response (summary)
- AMF asserts its structure has been designed explicitly to be as independent as possible and disputes susceptibility to political interference; nonetheless, AMF understands these structural issues may be of relevance to outside observers and expects to continue assuring no improper interference in individual cases occurs (paragraph 132).
- AMF notes its enforcement system has appropriate powers and authorities and has produced significant cases; processes for working with the Public Prosecutor on offenses that are both criminal and civil (e.g., insider trading and market abuse) have proved effective to date (paragraph 133).
- AMF lacks history of settlement procedures or an administrative restitution process (not required by international standards) which may constitute enhancements; AMF may consider further enhancing enforcement powers over time and has acted aggressively to contest adverse judicial interpretations where judiciary has put certain powers into question (paragraph 133).
- AMF essentially does not disagree with the specific recommendations and indicates most recommended areas of enhancement are currently underway or under consideration (paragraph 134).
- AMF supports assuring human resources are sufficient to execute expanded powers with respect to depositories and having sufficient authority to effect outcomes with respect to audit oversight of the Haut Conseil (paragraph 135).

*IMF staff report text as provided in the source content unit.*

### 159.     Final settlement occurs before the end of the day in both systems. If necessary, real-

### _cr04344 - 159.     Final settlement occurs before the end of the day in both systems. If necessary, real-

### Settlement finality and intraday settlement
- Final settlement occurs before the end of the day in both systems.
- Real-time, online intraday finality can be achieved in RGV2-TFT that allows for online, real-time settlement.

### Settlement risk (Relit+ / Euroclear)
- At present, no adequate safeguards ensure timely settlement in case of a participant default in Relit+; Euroclear must unwind the clearing in such a situation.
- Consultation among overseers and parties has produced an agreement to implement on short notice adequate measures to ensure timely settlement if the participant with the largest obligation to pay cannot fulfill its obligations.
- Both Euroclear systems settle in central bank money.
- Cash settlement flows in Relit+ are concentrated because smaller participants use a settlement agent and are exposed to settlement bank risk.
- In 2003, more than 50 percent of all payments in Relit+ were concentrated in three settlement banks.
- Planned corrective action (Table 4): A mutual guarantee fund supplemented by a set of limits applied to the net cash positions in the system is expected to be implemented before the end of 2004.

### Operational risk (Recommendation 11)
- Systems function well; backup facilities and contingency measures exist, but improvements are possible for operational reliability and scalability.
- The second site is not located at an adequate distance from the main site.
- Business continuity objective: Euroclear France targets a maximum recovery time of four hours for a full fallback on the second site.
- Recent full fallback test required seven hours for operations to be processed normally.
- No major failure necessitating migration to the second site occurred in the period July 2002–July 2003, although numerous medium and minor incidents occurred.
- Recommended actions (Table 4): conduct thorough analysis of threats and organization; reduce incidents; ensure enough (peak) capacity so recovery objectives can be met in a serious technical breakdown; design backup facilities to cope with wide-area disasters.
- Euroclear France planned projects to improve operational reliability and production capacity in 2005, and a redesign of operation sites with two synchronized sites and one cold backup site located in another country.

### Custody risk (Recommendation 12)
- Customers’ assets are legally protected against insolvency of Euroclear France, a custodian or an intermediary.
- If a loss of securities might occur, investors can be compensated for loss of securities or for loss of cash in unfinished settlement procedures under the securities guarantees scheme.
- Segregation of securities is an obligation in France; the AMF has issued general regulations on custodians’ services, duties, handling of customer assets, internal organization, accounting procedures and internal control.
- Table 4 notes: Custody risk — None (no additional corrective action listed).

### Governance, access, and oversight
- Euroclear France is a fully owned subsidiary of Euroclear Bank; governance structure substantially improved after takeover.
- Effective governance structure currently exists, but may change with planned integration/centralization of local CSDs and Euroclear Bank activities.
- Key governance questions: (i) whether current governance will effectively handle potential conflicts of interest between owner/operator and user-competitors; (ii) how to define and serve the public interest of the new infrastructure.
- Custodians fear future developments might harm their interests and competitive position.
- Access rules are disclosed, objective, open to financial institutions and investment firms established in France or abroad; some French public law entities can participate.
- Rules for termination of the business relationship between Euroclear France and a customer are clearly defined.
- Supervision and oversight are well organized and clearly regulated; cooperation with relevant authorities abroad is established via MOUs; regular meetings and exchanges of information take place.

### Summary of Main Findings and Recommended Corrective Action Plan (Table 4)
- Legal Risk (Recommendation 1)
  - Strengthen procedures to avoid potential conflict of law issues by requiring adequate legal opinions in case of foreign applicants.
  - Euroclear France is expected to require legal opinions to ascertain absence of conflict of law issues.
- Pre-settlement risk (Recommendations 2–5)
  - None.
- Settlement risk (Recommendations 6–10)
  - Implement adequate measures in Relit+ ASAP to ensure timely settlement if the participant with the largest obligation to pay cannot settle.
  - Mutual guarantee fund plus limits on net cash positions expected to be implemented before the end of 2004.
- Operational risk (Recommendation 11)
  - Upgrade resilience: threat analysis, reduce incidents, ensure peak capacity, design backup for wide-area disaster.
  - Projects planned for 2005; redesign of operation sites with two synchronized sites and one cold backup site in another country.
- Custody risk (Recommendation 12)
  - None.
- Other issues (Recommendations 13–19)
  - None.

### Authorities’ response
- The IMF recommendations align with findings of Banque de France and the AMF, the relevant overseers/regulators of Euroclear France.

### Core Principles Assessment — Systemically Important Payment Systems (CPSIPS) — Overview
- Assessments conducted in February and May 2004 covered three systems: Transferts Banque de France (TBF), Paris Net Settlement (PNS), and Système Interbancaire de Télécompensation (SIT).
- Assessments involved Banque de France and private sector operators (CRI and GSIT), the Bankers’ Association and commercial banks.
- Assessors had access to abundant material; officials were competent, open and co-operative.

### Institutional and market structure highlights
- Roughly 1,000 credit institutions conduct business in France (compared to 1,608 in 1994).
- The Post Office’s financial arm holds a significant number of demand and time accounts.
- Check use remains significant but has declined since 1993.
- Direct debits introduced in 1967 are widely used for recurrent payments.
- TIP (Titre Interbancaire de Paiement) usage has grown; TIP requires payer consent for each payment.
- Credit transfers widely used in retail; ordinary transfers settled on day of presentation; transfers with future due date are presented two or three days in advance.
- Card infrastructure at end of 2001: 32,500 ATMs and 750,000 POS terminals installed nationwide.
- Electronic money circulation is limited; three consortiums provide e-money schemes.
- Interbank payments dominated by three systemically important systems: TBF (RTGS, BdF), PNS (hybrid, CRI), and SIT (deferred net settlement, GSIT).
- TBF and PNS are technologically modern but approaching end of life cycles due to TARGET 2 introduction in 2007.
- SIT’s systemic importance has been recognized; compliance with Core Principles required. SEPA effects on retail clearing/settlement landscape remain unclear.

### Prerequisites and oversight
- France fulfills prerequisites for effective payment systems oversight.
- Oversight is three-tiered: principle definition, monitoring implementation, overseeing conditions of operation and use; embedded in Eurosystem framework.
- Legal framework is sound; fraud and delays are minimal; dispute resolution mechanisms exist and are respected.

### Main findings from CPSS Core Principles assessments
- Infrastructure for clearing and settlement is generally well developed and modern.
- TBF functionality is more advanced than in most countries; PNS relies on complex settlement algorithms.
- BdF oversight quality is sound and effective.
- Identified improvements: ensure timely settlement in SIT, which currently operates without protection against default of largest net debtor — authorities and operators have identified remedial steps and are urged to implement them urgently, not postponed until 2008.
- PNS and SIT restrict direct access to a small number of participants who act as settlement banks for others; tiered structures can concentrate risk — broader direct access would not reduce safety or efficiency.

### Transferts Banque de France (TBF) assessment
- Legal foundation (CP 1)
  - French law and contractual arrangements provide a well-established legal foundation for TBF RTGS.
  - Irrevocability and finality clearly defined and ensured even if insolvency proceedings open against participants.
  - Zero-hour rule and suspect period under French Bankruptcy law are superseded for payment or financial instrument deliveries in a payment or securities settlement system (Art. L330 I-II of the Monetary and Financial Code).
  - TBF falls within scope of finality regulation and is notified to the European Commission pursuant to the Settlement Finality Directive (directive 98/26 EC).
  - Collateral arrangements in payment and securities settlement systems are fully enforceable.
  - BdF requires foreign participants applying to become participants to provide a legal opinion compliant with ECB Governing Council terms of reference.
- Understanding and management of risks (CPs 2–3)
  - User specifications comprehensively describe system design, functionalities, timetables and risk management procedures.
  - Relevant rules extend over documents from BdF and CRI; multiplicity may impair accessibility.
  - Improvements suggested: readability (e.g., adding an index) and accessibility (e.g., Internet distribution); emergency procedures lack some important details.
  - As an RTGS with queuing facilities settling in central bank money, TBF offers protection against credit risk.
  - Liquidity risk addressed through unlimited intraday credit provided against collateral.
  - Intraday liquidity ample due to generous Eurosystem collateral eligibility; optimization routines lead to very short queuing times.
- Settlement (CP 4–6)
  - Payments processed in real-time on a transaction-by-transaction basis.
  - Payments are final (irrevocable and unconditional) from the moment credited to receiving bank’s account.
  - Settlement asset is central bank money.
- Security and operational reliability (CP 7)
  - Availability of TBF very high in recent years: 99.94 percent after technical improvements following a serious disruption in 2001.
  - Structural complexity due to multiple interfaces and links creates residual operational vulnerability.
  - BdF and CRI have backup systems and secondary processing sites at adequate distance; all production and data communication backup facilities and disaster recovery procedures are tested regularly.
  - A crisis team includes BdF, CRI, main ancillary system managers and several users.
- Efficiency and practicability (CP 8)
  - TBF includes RTGS features for sending, queuing and inquiring; optimization procedures facilitate clearing positions and throughput; algorithm available to solve imminent gridlocks.
  - Deficiency: low-cost recovery — TBF is heavily subsidized by BdF.
  - Accounting: only 15 percent of all costs incurred (operating and investment) are covered by revenues.
  - Lack of cost recovery explained by two competing large-value systems in French wholesale payments market and separate settlement of cash leg of securities transactions in central bank money in RGV2 (operated by Euroclear France) lowering TBF turnover relative to similar systems.

*IMF staff report content unit _cr04344 - pages 159–192 (excerpts).*

### 194.     Access to TBF is fair and open since all credit institutions and investment firms

### _cr04344 - 194.     Access to TBF is fair and open since all credit institutions and investment firms

### Access to TBF and general governance
- Access to TBF is fair and open: all credit institutions and investment firms established in France or other parts of the European Economic Area (EEA) are free to participate as long as they are authorized to carry on activities in France under the European passport.
- Governance (CP 10): Within the BdF there is an appropriate framework for operating, auditing and overseeing the system. In all important matters the BdF consults regularly with well-established user groups and forums.

### PNS — legal foundation and finality (CP 1)
- French law and contractual relations within the framework of PNS provide a well-established legal foundation for funds transfers in PNS.
- PNS falls within the scope of the finality regulation in the Monetary and Financial Code (Art L330 I-II of the Monetary and Financial Code) and is recognized as a payment system falling under the EU Settlement Finality Directive (directive 98/26 EC).
- A receiving bank or its customer are not exposed to retroactive actions for payments settled in PNS; however, the relationship between a customer bank and its settlement agent does not fall under finality protection, exposing the settlement bank to risk in case of an insolvency of its clients.

### PNS — risk management, settlement, security, efficiency, access, governance (CPs 2–10)
- Understanding and management of risks (CP 2–3):
  - Settlement algorithms are fully described and documented.
  - Rules for rejection of payments, handling of errors and other abnormal situations are outlined.
  - Participants can understand risks under normal and exceptional circumstances.
- Settlement (CP 4–6):
  - PNS is a real-time gross settlement system; settlement asset is central bank money.
  - Banks using a settlement agent in PNS remain exposed to settlement bank risk.
- Security and operational reliability (CP 7):
  - Availability of PNS has been very high: 99.98 percent.
  - The Audit department of the BdF carried out audits of the CRI platform in 1998 and 2000.
- Contingency measures:
  - CRI has duplicated/clustered computers, secondary production site, separate secondary site for monitoring and supervision, and regular testing of production, data communication backup, and disaster recovery procedures.
  - In extreme situations, a specific disaster procedure can be activated by physical exchange of floppy disks.
  - A crisis team includes the BdF, the CRI, main ancillary systems managers and several users.
- Efficiency and practicability (CP 8):
  - Complex offsetting algorithms lead to very small queues, enabling swift and efficient settlement.
  - Inquiry options and queue transparency are in line with international best practices.
  - Operators report PNS fully recovers its costs; unknown whether cost accounting equitably allocates shared platform costs between CRI and BdF or whether cross-system subsidies exist.
- Fair and open access (CP 9):
  - PNS is open to all banks and investment firms with a capital above EUR 250 million established in the EEA.
  - The capital requirement means smaller banks must use a direct participant/settlement agent (around 10 banks offer this service broadly).
  - Some doubts exist whether the access limitation is justified given immediate finality; broader participation could reduce concentration risk without increasing credit/liquidity risk.
- Governance (CP 10):
  - Effective, accountable and transparent governance: decisions by Assemblée Générale of CRI shareholders.
  - CRI has working groups where participants express needs and participate in formulation of changes; conclusions reported to Assemblée Générale.

### SIT — legal foundation and rule framework (CP 1)
- SIT is operated on a contractual law basis: French civil code (agency and setoff rules), French commercial code (Economic Interests Group rules), and French Monetary and Financial Code.
- Settlement Finality Directive (98/26/EC) transposed into French law and supplemented by a decree published on March 7, 2003.
- Charte Interbancaire Régissant les Conditions d’Échange (CIRCE) applies to SIT participants and provides system rules; Monetary and Financial Code protects finality and enforceability of irrevocable payment orders in SIT.

### SIT — risk management, settlement vulnerabilities, operational resilience (CPs 2–7)
- Understanding and management of risks (CP 2–3):
  - CIRCE and technical annexes are binding; direct participants must sign CIRCE.
  - CIRCE comprises 14 chapters, supplemented by technical annexes and operational documentation; in total CIRCE consists of more than ten binders.
  - Documents describe system design, operating timetables, rights/obligations, financial risks, and contingency measures; currently available only in paper-based format and repeatedly updated.
  - SIT provides position and account statement information twice a day; no financial access criteria but a payment value upper limit of EUR 800,000.
  - Settlement of SIT positions structured in two periods (control period and settlement period) to limit risk of inability of a participant to settle its debit position in TBF.
- Settlement (CP 4–6):
  - SIT is a deferred net settlement system with one settlement cycle per day.
  - No safeguards (pre-pledged collateral or guarantees) exist to protect against default of the largest net debtor; this major vulnerability should be eliminated urgently.
  - Default risk could cause liquidity risk and serious operational turmoil due to unwinding needs and participants processing payment orders before final settlement in TBF.
- Security and operational reliability (CP 7):
  - GSIT pays attention to operational reliability; availability has been perfect in recent years.
  - No ready backup in place; potential down-time could be as long as 48 hours—considered far too long for a systemically important payment system.

### SIT — efficiency, access, governance (CPs 8–10)
- Efficiency and practicability (CP 8):
  - SIT is the only retail payment system in France with capacity large enough to process increasing volumes.
  - Provides reliable service to direct participants; cost recovery achieved and transaction fees internationally competitive.
- Fair and open access (CP 9):
  - Access criteria are fairly restrictive: out of some 1,000 participants only 14 are allowed direct participation (volume-based criterion).
  - Core Principle 9 requires access restrictions be justified by safety or efficiency; safety does not appear sufficient given relatively low settlement values and plentiful inexpensive intraday credit in TBF.
  - If safety concerns existed, they could be addressed with financial soundness criteria rather than current volume-based criteria.
  - System could cope with a few additional members without jeopardizing service quality; netting ratio is already fairly low.
- Governance (CP 10):
  - Governance structure appropriate and aligned with private sector systems elsewhere.
  - Management Committee (comité de direction) composed of founding members and other financial sector representatives including BdF.
  - Executive Committee (le bureau) composed of Chairman of GSIT, a BdF representative, five Management Committee representatives, and the General Manager; consultative body meeting every other month.
  - General Meeting composed of all GSIT members with rights to approve accounts, validate budget, elect/revoke key managers, admit/exclude members, and modify statutes.

### Central bank responsibilities: disclosure, oversight, cooperation (Responsibility A–D)
- Disclosure of objectives (A):
  - BdF has a sound legal framework underpinning oversight activities for systemically important payment systems and informs the public in-depth about developments and BdF role/objectives in payments.
- Oversight of own systems (B):
  - Organizational separation between operations and oversight allows effective oversight of TBF.
  - Assessment of TBF is thorough and of good quality; oversight team skills appropriate.
  - Cooperation with other internal and external entities (in particular auditors) could be strengthened for issues like operational reliability.
- Oversight of private sector systems (C):
  - BdF has a sound legal basis to oversee private sector-operated payment systems; same unit oversees TBF and private systems.
  - Oversight activities are performed thoroughly and professionally; BdF has identified shortcomings and taken mitigation steps.
  - Overseers could press for more frequent and regular information security audits.
- Cooperation with other authorities (D):
  - BdF cooperates closely with foreign peers, in particular central banks of the Eurosystem.
  - Several MOUs signed and a well-established cooperation network exists; appropriate attention to cooperative oversight matters.

### Table 5 — Main findings and recommended corrective actions (summary)
- Well-founded legal basis (CP 1): No recommendation.
- Understanding of risks and management (CPs 2–3): In TBF and PNS, procedures should give clearer guidance on participant behavior in various emergency situations.
- Final settlement; inability to settle by largest single settlement obligations (CPs 4–5): In SIT, protection against default of the largest net debtor should be put in place urgently.
- Assets for settlement (CP 6): Authorities should analyze concentration risk in PNS and SIT created by small number of direct participants.
- Security and operational reliability; contingency (CP 7):
  - For TBF, determine whether the currently complex structure can be simplified.
  - Resilience of SIT should be enhanced by introducing a hot-standby back-up site.
- Market practicality and efficiency (CP 8): For PNS and TBF, investigate whether shared platform costs can be allocated more appropriately.
- Objective and publicly disclosed participation criteria (CP 9):
  - Removal of capital requirements to access PNS would not harm efficiency or safety.
  - Under current SIT design, volume-based access criteria could be lowered or replaced by soundness-based conditions.
- Governance (CP 10): No recommendation.
- Responsibility B: BdF should consider strengthening cooperation of its oversight unit with other internal and external entities (in particular auditors).
- Responsibility C: Overseer should press operators to have systems audited more systematically and regularly.
- Responsibility D: No recommendation.

### Authorities’ response
- Banque de France takes note that the IMF largely endorses its findings regarding the French payment infrastructure and assessments of TBF, PNS and SIT against the Core Principles.
- BdF states it has already taken steps to urge payment systems to achieve full observance with the Core Principles where improvements are needed.
  - Compliance of SIT with CP V is planned to be achieved no later than 2008, in line with the policy stance endorsed by the Eurosystem.

### FATF — introduction
- Assessment provides a summary of compliance with the FATF 40+8 Recommendations and recommendations to strengthen compliance.
- Views in the document are those of the assessment team and do not necessarily reflect the views of the government of France or the Board of the IMF.
- FATF background: Founded in 1989; comprised of 31 countries, the European Commission, and the Gulf Cooperation Council; Recommendations are the key set of anti-money laundering standards; in October 2001 FATF issued eight special Recommendations to combat terrorism financing, yielding the shorthand “FATF 40+8”.

*Source: Excerpt from the IMF assessment chapter contained in the provided content unit.*

### 224.     To conduct the assessment, the team reviewed the relevant Anti-Money Laundering

### _cr04344 - 224.     To conduct the assessment, the team reviewed the relevant Anti-Money Laundering

### Main findings
- Assessment based on information available at the time the assessment mission concluded on April 22, 2004; additional information provided by the French authorities following the conclusion of the mission has been taken into account in finalizing the assessment.
- Review covered: AML/CFT laws and regulations; supervisory and regulatory systems for prudentially regulated financial institutions and other financial intermediaries; capacity and implementation of criminal law enforcement systems.

### Criminal justice measures and international cooperation
- France has ratified:
  - United Nations Convention on Illicit Drugs and Psychotropic Substances (Vienna Convention)
  - UN International Convention for the Suppression of the Financing of Terrorism
  - UN Convention Against Transnational Organized Crime 2000 (Palermo Convention)
  - Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg Convention)
- Legal provisions:
  - Criminalization of money laundering (ML) and terrorist financing (FT) are in place.
  - Scope of predicate offences for ML covers all crimes and misdemeanors, including FT and fiscal fraud.
  - FT is criminalized comprehensively.
- Confiscation and freezing:
  - French legislation provides broad possibilities to seize any assets in the course of investigations, by officers of judicial police or on instruction of the judiciary.
  - Special mechanism enables temporary measures on assets from persons under suspicion to safeguard eventual confiscation.
  - In theory, all assets of a convicted person can be confiscated; in practice, confiscation measures generally apply to assets seized in the course of the judicial procedure.
  - As an alternative, fines can be increased to half the level of the laundered funds.
- UNSCR implementation and limitations:
  - France implements UNSCRs 1267, 1269, 1333, 1373, and 1390 through directly applicable EU legislation.
  - France is currently unable to comply fully with UNSCR 1373 with regard to terrorists or terrorist groups from within the European Union as they are not covered by EU Council Regulations.
  - Authorities are preparing a draft law on the freezing of property to permit freezing funds and financial assets of European community nationals; no timeframe set for adoption.
- Statistics:
  - France does not currently keep statistics on the amounts of property frozen, seized, and confiscated relating to ML, the predicate offences, and FT.
  - Recommendation: authorities should consider compilation of relevant statistical data in this area.

### The Financial Intelligence Unit (FIU) and processes for receiving, analyzing, and disseminating intelligence
- TRACFIN (Treatment of Information and Action against Clandestine Financial Circuits):
  - Operational since 1991 and an Egmont member.
  - Can issue blocking or freezing instructions valid for 12 hours where suspicious transactions are reported prior to execution; procedure used on seven occasions since TRACFIN became operational and has produced minimal results.
- Domestic cooperation and Liaison Committee:
  - Interaction between TRACFIN, supervisory authorities and law enforcement has improved markedly and appears reasonably efficient.
  - Liaison Committee created in 2001 comprises representatives of reporting parties, supervisory authorities and a number of administrations; TRACFIN co-chairs the Liaison Committee.
  - Observation: there appears to be room for more active involvement of members of the judiciary in this forum.
- International cooperation:
  - TRACFIN can cooperate with foreign counterpart units consistent with Egmont Group principles.
  - TRACFIN has concluded cooperation agreements with 24 counterpart units.
  - At EU level, TRACFIN frequently uses FIU.Net to query close partners; sends requests to foreign FIUs on cases with an international dimension, though not yet systematically.
- Suspicious Transaction Reports (STRs) and case forwarding:
  - Number of STRs increased rapidly since 2000 but still seems rather low compared to financial and economic activity on the French market.
  - Recent increase in reporting has not been accompanied by a significant increase in overall quality of reports.
  - Number of files forwarded by TRACFIN to judicial authorities limited: 291 files in 2002, representing between 8–10 percent of all STRs received.
  - TRACFIN indicates limited forwarding mainly due to poor quality of a large number of STRs.
  - Statistics maintained by TRACFIN are not sufficiently detailed.
- Improvement initiatives:
  - Liaison Committee working group developing an electronic reporting form to enhance analytical capabilities of reporting parties and TRACFIN, improve quality of STRs and transmissions, and assist compilation of more detailed statistics.
- Overseas departments and territories:
  - Difficulties in some overseas departments and territories; example: Guyana produced not a single STR since 2000.
- TRACFIN staffing and training:
  - Staff originate from public administration and representatives of other authorities (Police judiciaire, Office Central de Répression de la Grande Délinquance Financière, Gendarmerie).
  - Training system is internal and somewhat ad hoc.

### Law enforcement and prosecution authorities, powers, and duties
- Investigative responsibilities:
  - ML and FT investigations carried out by law enforcement under supervision of the judiciary.
  - Police judiciaire, Préfecture de Police, Gendarmerie and Douane have divisions specialized in economic and financial crime, including ML; these benefit from specific training programs.
  - Wide range of investigative techniques available depending on stage of enquiries.
  - Large number of cases not pursued due to insufficient financial and human resources.
- Judicial reforms and capacity:
  - Recent reform by Law of March 9, 2004 entering into force on October 1, 2004 introducing specialized jurisdictions expected to enhance judicial capacity to combat financial crime.
  - Law 75-701 of August 6, 1975 established courts specializing in economic and financial matters.
  - New law on adapting administration of justice creates interregional courts specializing in highly complex cases involving organized crime and economic and financial crime.
- Convictions and prosecutorial practice:
  - Number of convictions for ML is on the increase.
  - ML offence is not used as frequently as it might be due mainly to difficulty in establishing illegal origin of funds.
  - Courts often qualify facts differently and pursue cases under other offences (abus de biens sociaux, association de malfaiteurs, etc.).
  - A recent case indicates a conviction for (general) ML can be pronounced without the predicate offence being specifically identified.
  - Observation: additional reflection needed on obstacles that requiring proof of the predicate offence constitutes for effective fight against ML.
- Terrorist financing prosecutions:
  - Despite efforts, no significant results in terms of convictions for FT to date, mainly due to recent incrimination of FT and complicated, time-consuming enquiries, particularly difficulty linking suspicious financial movements with terrorist activities.
  - Pragmatic solution used: qualify facts under investigation as association de malfaiteurs.
- Resource allocation:
  - France allocates significant resources to implementation of ML and FT laws.

### International cooperation
- France pursues active international cooperation with an impressive set of bilateral and multilateral treaties for MLA and extradition in ML and FT cases.
- Mechanisms for information exchange:
  - Arrangements for law enforcement authorities to exchange information with international counterparts based on agreements in force and other cooperation mechanisms including liaison magistrates.
  - At European level, participation in the European Judicial Network and Eurojust.
- Recording and statistics:
  - To date, there have been no efforts to record the number, source, and purpose of requests for information exchange and their resolution.
  - France provides timely and effective follow-up to mutual legal assistance (MLA) requests and maintains statistics on all MLA and other requests made or received relating to ML, predicate offences, and FT, as well as whether requests were accepted or rejected.
  - Nature and ultimate result of requests are not reflected in the statistics.
- Asset confiscation in international cooperation:
  - French law provides that confiscation of assets on French territory operates a transfer of property to the state unless otherwise agreed with the requesting state.
  - Sharing of assets may be provided in a bilateral treaty.
  - France has one bilateral treaty providing for transfer or sharing of assets with another country when confiscation is a result of coordinated law enforcement actions.

### Preventive measures for financial institutions
- Institutional and licensing framework:
  - Institutional framework for financial sector regulation, supervision and licensing is organized sectorally.
  - Regulation-making authority rests largely with the Minister of the Economy as a result of the Law on Financial Security of 2003.
  - Licensing authorities:
    - Comité des établissements de Crédit et des Entreprises d’Investissement (CECEI) licenses credit institutions and investment firms other than portfolio management firms.
    - Comité des Entreprises d’Assurance (CEA) licenses insurance companies.
    - Autorité des Marchés Financiers (AMF) licenses, inter alia, portfolio management firms, direct marketers of financial products (démarcheurs) and investment advisers.
  - Informal funds transfer businesses are subject to licensing requirement for credit institutions.
  - Licensing requirements include “fit and proper” testing of managers and significant shareholders.
  - Other financial entities subject to registration requirements: insurance brokers, currency exchangers, direct marketers and investment advisors, with varying degrees of “fit and proper” testing.
  - In general, AML/CFT internal controls, policies and procedures are not taken into account for licensing purposes.
- Supervisory responsibilities:
  - Commission Bancaire (CB) supervises credit institutions and investment firms for AML/CFT compliance.
  - Commission de Contrôle des Assurances (CCA) supervises insurance companies and brokers for AML/CFT compliance.
  - AMF supervises portfolio management firms, direct marketers and investment advisers for AML/CFT compliance.
  - Inspection Générale des Finances (IGF) responsible for AML/CFT supervision of la Poste’s financial services.
- Enforcement and resources:
  - Enforcement and sanction powers of supervisory authorities are generally appropriate.
  - IGF does not have authority to impose sanctions on la Poste.
  - Authorities have taken strong enforcement action when unlicensed informal funds transfer businesses discovered, though experience limited.
  - AML/CFT supervisory efforts and corresponding resources are relatively low with respect to life insurance companies and brokers, individual and collective portfolio management firms, direct marketers and la Poste.
  - Number of on-site inspections and corresponding staff resources for these sectors is relatively low and few sanctions imposed for failure to comply with AML/CFT requirements.
  - Given historically relatively low rate of reporting of suspicious transactions from these sectors, difficult to assess whether AML/CFT requirements being effectively implemented overall.
- Regulatory framework and guidance:
  - Legal framework for AML/CFT preventive measures is comprehensive; regulation and supervision of credit institutions and investment firms other than portfolio management firms is of a high standard.
  - Scope of sectoral application extends well beyond the standard.
  - Regulatory framework remains a work in progress, notably for insurance companies and brokers, individual and collective portfolio management firms, direct marketers and currency exchangers.
  - For insurance companies and portfolio management firms, reliance on non-enforceable supervisory or industry recommendations rather than regulations and enforceable guidelines.
  - For currency exchangers, direct marketers and la Poste, little or no additional guidance at this stage.
  - Regulatory initiatives underway in connection with implementation of the revised FATF standards.
- Customer identification and transaction monitoring:
  - Monetary and Financial Code and Decree 91-160 of February 13, 1991 provide adequate framework for customer identification.
  - Generally insufficient guidance as to what constitutes adequate customer acceptance policies and procedures and reasonable steps to identify beneficial owners of accounts and transactions.
  - Customer identification requirements apply at subscription and redemption stages; capitalization bonds/contracts may present certain ML/FT risks.
  - Monetary and Financial Code requires financial entities to closely examine any large transaction that exceeds 150,000 euros (when this is normally not customary for the customer) and which is unusually complex and does not appear to have any economic or lawful purpose, and to retain such findings in writing.
    - Observation: formulation suggests if customer's transactions typically exceed this threshold there may be no obligation to exercise enhanced vigilance even though such transactions may be complex or display unusual patterns.
    - Observation: threshold for “unusual large transactions” may be appropriate but is somewhat limiting with respect to “complex” transactions or “unusual patterns of transactions.”
- Country risk and overseas operations:
  - Minister of the Economy, Finance and Industry regularly informs financial entities of countries that do not have adequate AML/CFT systems, but there is no specific legal requirement for financial entities to give special attention to business relations and transactions with persons in such countries.
  - Monetary and Financial Code requires financial entities ensure branches and subsidiaries located abroad comply with requirement to pay special attention to certain transactions.
  - Other than for credit institutions and currency exchangers, no specific requirements for financial entities to ensure comprehensive application of AML/CFT requirements to branches and majority owned subsidiaries located abroad.
- Personnel and training:
  - Financial entities required to have screening procedures for hiring employees; requirements focus largely on competency and are silent on issue of integrity.
  - Employee training appears effectively implemented with respect to credit institutions, investment firms, insurance companies and la Poste.
- Suspicious transaction reporting:
  - Requirement to report suspicious transactions has evolved/expanded over the past decade.
  - Scope of reporting requirement is not aligned with and is narrower than scope of predicate offences for money laundering, which covers all crimes and misdemeanors, including fiscal fraud.
  - A suspicion of a fiscal misdemeanor, for example, is not required to be reported.
  - Observation: reporting regime falls short of requiring that funds suspected of stemming from any criminal activity be reported; this may cause confusion for reporting entities and reduce effectiveness of regime.
  - Additional reporting requirements introduced in recent years (e.g., certain transactions involving residents of countries that do not apply FATF AML/CFT requirements or trusts where identities of settlor, trustee or beneficiaries are not known).
    - Observation: benefits of these additional reporting requirements (notably the one in relation to trusts) are unclear and could potentially draw away resources of financial entities and TRACFIN that might otherwise be used in detection of suspicious transactions.
- Internal controls:
  - Legal framework for AML/CFT internal controls supplemented by comprehensive regulations for credit institutions and investment firms.
  - For insurance companies and portfolio management firms, reliance on supervisory and professional recommendations that are not as comprehensive.

### Summary assessment against the FATF recommendations
- (Content unit ends at a heading for summary assessment; no detailed summary text included in the provided content.)

*Source: _cr04344 - 224.     To conduct the assessment, the team reviewed the relevant Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) laws and regulations and supervisory and regulatory systems (assessment mission concluded on April 22, 2004).*

### 259.     The overall legal and institutional framework currently in place is comprehensive,

### _cr04344 - 259.     The overall legal and institutional framework currently in place is comprehensive,

### AML/CFT overall assessment
- France maintains a high level of compliance with the FATF 40+8 Recommendations.
- France has gone beyond the standard in a number of areas, including:
  - sectoral coverage of its regime;
  - reporting requirements for imports and exports of monetary instruments.
- Areas identified for further improvement:
  - implementation of UN Security Council Special Resolution on terrorism financing (as in other European countries operating within the European Union regulatory framework);
  - overall quality of STRs;
  - AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms;
  - requirements for increased diligence and internal controls.

### Table 6 — Recommended Action Plan to Improve Compliance with the FATF Recommendations (selected items)
- Scope of the criminal offence of money laundering (FATF 4–6)
  - Additional reflection is needed on the obstacles that requiring proof of the predicate offence constitutes for an effective fight against ML.
- Customer identification and record-keeping rules (FATF 10–13)
  - Introduce more detailed requirements as to what constitutes adequate customer acceptance policies and procedures and, in particular, what are the reasonable steps to be taken to identify beneficial owners of accounts and transactions.
  - Review the ML/FT risks associated with capitalization bonds/contracts and take corrective measures, as appropriate.
- Increased diligence of financial institutions (FATF 14–19)
  - Review and broaden requirement to pay special attention to certain transactions.
  - Align the scope of the reporting requirement with that of the predicate offences for money laundering.
  - Review the usefulness of reporting requirements other than the reporting of suspicious transactions.
  - Introduce more detailed internal control requirements via regulations, guidelines or other enforceable means for financial entities other than credit institutions and investment firms.
  - Establish legal requirement that financial entities also take integrity into account when hiring employees, notably for sensitive positions.
  - Further assist sectors other than credit institutions, investment firms and insurance companies in developing employee training programs.
- Measures to cope with countries with insufficient AML measures (FATF 20–21)
  - Establish requirement for financial entities to ensure the comprehensive application of AML/CFT requirements to branches and majority owned subsidiaries located abroad.
  - Introduce requirements for financial institutions to pay special attention to business relations and transactions with persons and legal entities in jurisdictions that do not have adequate systems in place to prevent and deter ML or FT.
- Implementation & role of regulatory and other administrative authorities (FATF 26–29)
  - Increase reporting parties’ awareness of the existence of TRACFIN’s opposition powers and extend the period of 12 hours to at least 24 hours.
  - Increase the Judiciary’s involvement in the Liaison Committee.
  - Improve TRACFIN’s dissemination ratio and ensure that it is systematically informed of the outcome of transmissions made to the judicial authorities.
  - TRACFIN and supervisory authorities to provide further guidance and ML typologies to reporting entities to improve detection and reporting of suspicious transactions, the quality of STRs and overall implementation of AML/CFT requirements.
  - Reach out to the DOM-TOM and monitor their compliance with AML/CFT obligations.
  - Monitor adequacy of TRACFIN’s current staffing levels in view of the increasing number of STRs and the perceived need for outreach efforts vis-à-vis certain sectors.
  - Consider pooling expertise in financial and terrorist-related aspects in one service.
  - Increase supervisory resources of the CCA and the AMF and formalize training of supervisory staff.
  - Shift responsibility for AML/CFT supervision and enforcement of la Poste to the CB or at a minimum increase supervisory efforts and resources of the IGF.
  - Require that AML/CFT internal controls be taken into account in the licensing of financial entities.
  - Where possible, supervisors should issue enforceable guidelines in support of the legal and regulatory framework.
- Administrative Cooperation – Exchange of information relating to suspicious transactions (FATF 32)
  - TRACFIN should continue and enhance its efforts in systematically querying foreign FIUs in cases with an international dimension.
- Other forms of cooperation – Basis & means of cooperation in confiscation, mutual assistance, and extradition (FATF 33–35)
  - Consider entering into additional arrangements providing for the transfer or the sharing of assets with another country when confiscation is a result of coordinated law enforcement actions.
- Other forms of cooperation – Focus of improved mutual assistance on money laundering issues (FATF 36–40)
  - Efforts should be made to record the number, source, and purpose of requests for information exchange and their resolution by law enforcement authorities.
  - Further develop statistics maintained with regard to mutual legal assistance by including purpose/nature and results of requests.
- Special recommendations on terrorist financing
  - III. Freezing and confiscating terrorist assets: Proceed with the adoption of a domestic act to enable France to comply fully with UNSCR 1373.
  - VI. Alternative Remittance: Review and monitor the adequacy of enforcement efforts with respect to unlicensed informal funds transfer businesses and develop complementary public outreach /awareness raising activities.

### Table 7 — Other Recommended Actions
- Statistics
  - Maintain comprehensive statistics on the amounts of property frozen, seized, and confiscated relating to predicate offences, ML and FT.
  - Consider the establishment of a centralized body responsible for managing seized and confiscated assets.
  - TRACFIN should consider maintaining more detailed/refined statistics that would give a better insight on the performance and characteristics of all the components of the AML/CFT efforts.
- Designated non-financial businesses and professions (DNFBP)
  - Review options for the regulation and supervision of non-financial businesses and professions and designate competent supervisory authorities.
- Overall Capacity of Judicial System in Combating Financial Crime
  - Monitor the implementation of the recent reform (Law of March 9, 2004 entering into force on October 1, 2004) introducing specialized jurisdictions that is expected to enhance the overall capacity of the judicial system to combat financial crime.
- VII. Wire transfers
  - Requirements for Special Recommendation VII should be put in place in early 2005, in accordance with FATF Interpretative Note.

### Authorities’ responses — general
- The French authorities thank the IMF assessment team and provide comments.
- France emphasizes long-standing proactive measures to deter money laundering, including:
  - restrictions on the use of cash as a mean of payment for sums higher than a certain threshold;
  - dematerialization of bearer shares completed in the mid-1980s contributing to transparency of beneficial ownership;
  - general provision prohibiting the endorsement of checks to prevent their use for money laundering.
- France can endorse most recommendations and has engaged in efforts to implement them.
- Extension of the liaison committee to non-financial professions expected to facilitate outreach and guidance.
- Reforms of supervisory organization for nonbank financial institutions explicitly aimed at strengthening their contribution to the fight against money laundering.
- Findings will be factored into preparatory work to implement the revised FATF recommendations.

### Authorities’ responses — specific
- TRACFIN
  - Has taken steps to improve quality of STRs and strengthen impact of the fight against money laundering in French overseas departments and territories.
  - TRACFIN staffing has recently been increased.
  - Tools to improve statistical data on STRs are under development.
- AMF
  - AML/CFT related powers were significantly extended by the Financial Security Act implemented on November 24, 2003.
  - Priority is enhancement of regulatory framework to exercise full extent of powers.
  - An action plan including strengthening human resources and additional training is being finalized.
  - The AMF plans, in early October 2004, to put forward for public consultation a revision of its general regulation with a view to complete them in the following months.
  - As a matter of accuracy, the AMF already takes into account the existence of internal control policies and procedures in its licensing process.
- Ministry of Justice
  - Will roll out in the coming months new software which will provide precise statistical data on amounts of property frozen, seized and confiscated related to money laundering and terrorist financing and will cover all the courts.

### Transparency in Monetary and Financial Policies — Banking regulation and supervision (Annex A)
- Assessment scope and methodology
  - Based on discussions with regulatory and supervisory agencies, major banks, rating agencies, accounting and auditing profession; pre-mission self-assessment by authorities; study of laws and regulations; review of annual reports, publications and websites of Banque de France (BdF), Commission Bancaire (CB) and Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI); and earlier IMF assessment in 2000 Article IV consultation.
- Legal/institutional framework
  - Defined by the Code Monétaire et Financier.
  - Responsibilities allocated to: CB for supervision, CECEI for licensing, and the Minister in charge of the economy (MINEFI) for regulation.
  - CRBF transformed into advisory body Comité Consultatif de la Législation et de la Réglementation Financières (CCLRF) advising MINEFI.
  - CB, CECEI, and CCLRF set up as specialized agencies within the BdF group; draw on BdF for staff and resources; Governor of BdF is also president of CB and CECEI.
- Main findings on transparency
  - France reaches a high level of transparency in bank regulation and supervision policies and practices.
  - Transparency supported by clear legal framework, a culture of extensive disclosure and consultation, and a range of informative publications.
  - Roles, responsibilities and objectives of agencies are clearly defined, explained and disclosed via the Monetary and Financial Code, Journal Officiel de la République Française (JORF), Bulletins of the CB and BdF, and annual reports and websites.
  - High degree of openness in formulation and reporting due to comprehensive consultation process; compulsory membership of licensed banks and investment firms in a professional organization facilitates distribution of drafts (but distribution is not always consistent).
  - Information is publicly available and easily accessible: CB and CECEI annual reports; CB semiannual Bulletin and annual comparative analysis; BdF quarterly and annual reports and Financial Stability Review; publications available online on BdF and CB websites.
  - Governor of BdF and senior officials provide explanations via parliamentary hearings and public speeches.
  - Texts of regulations available through agencies’ websites and government information services.
  - None of the three agencies engaged in banking supervision and regulation provide emergency financial support to supervised institutions, although support operations can be undertaken by the BdF.
  - Mechanisms for accountability and assurances of integrity exist:
    - Governor of BdF required to issue an annual report to the President of the Republic and to Parliament and may appear before Finance Commissions.
    - Assurance of integrity rests with l’Inspection Générale of the BdF.
    - Internal standards set out in BdF’s Code de déontologie financière published in the Official Bulletin of the BdF.
    - A published internal rule focuses specifically on good practices when officials and staff are offered gifts.
  - A more accessible form of disclosure and clarification of staff protection and rules to the general public would be helpful.
- Table 8 — Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—Banking Supervision
  - Reference: None.

### Authorities’ response to banking supervision assessment
- The authorities are in broad agreement with the assessment.

### Transparency of Deposit Insurance (FGD)
- Assessment scope and methodology
  - Based on discussions with the director of the FGD, representatives of regulatory and supervisory agencies, representatives of major banks; pre-mission self-assessment by authorities; study of laws and regulations; review of FGD’s website; and earlier IMF assessment in 2000 Article IV consultation.
- Legal and institutional framework
  - FGD established by the Savings and Financial Security Act of June 25, 1999, transposed into the Monetary and Financial Code.
  - Framework complemented by two decrees and regulations issued by the CRBF.
  - FGD established as a special purpose legal entity under private law; all credit institutions licensed in France must be members.
  - Overseen by a supervisory council composed of representatives of member credit institutions.
  - Day-to-day managed by a board of three directors, one designated President; directors and President nominated by supervisory council, President nomination subject to MINEFI approval.
- Coverage and limits
  - FGD covers bank deposits, certain securities, and a specific type of bank guarantees (cautions) that some professions must obtain.
  - Coverage limit set at EUR 70,000 per individual per bank.
  - FGD can preventatively intervene in a financial institution at the request of the CB.

*Source: _cr04344 - 259.     The overall legal and institutional framework currently in place is comprehensive, (IMF PDF).*

### 277.     Although many aspects of the deposit insurance system in France are very

### _cr04344 - 277.     Although many aspects of the deposit insurance system in France are very

### Deposit insurance transparency (FGD)
- Assessment summary:
  - Several areas show significant scope for improvement in observance of the IMF’s MFP Transparency Code.
  - Specific areas for improvement: (i) publication of an annual report by the FGD, including audited financial statements; (ii) more proactive use of the FGD’s authority to explain its functioning to the public; (iii) clarification of the legal protection of officials of the FGD.
- Legal and institutional framework:
  - Main objectives of the FGD specified in the Monetary and Financial Code: reimburse clients when (i) deposits become unavailable, (ii) certain securities become unavailable, or (iii) a financial institution cannot honor cautions it has granted.
  - Framework defined by the Monetary and Financial Code, appurtenant decrees and regulations, and the FGD’s publicly disclosed internal rules; further explained on the FGD website.
- Transparency gaps and practices:
  - Regulatory framework, operating procedures, and funding arrangements are publicly disclosed in law and on the FGD website, but:
    - The Code does not prescribe whether information-sharing agreements with foreign counterparts must be publicly disclosed.
    - Insufficient transparency toward depositors that branches and subsidiaries of foreign banks in France may not have the same level of coverage as domestic institutions.
    - Absence of an annual report published by the FGD; the website is informative but not a substitute for a periodic report.
  - The FGD prepares audited annual financial statements, audited by two different auditors and presented to the Minister in charge of economic affairs, but these statements are not publicly disclosed.
  - No public information services beyond the website; senior officials have not explained policy objectives and performance publicly other than via the website.
  - Legal texts and regulations are publicly available through the Monetary and Financial Code, the Recueil de Textes Reglementaires of the CRBF, the JORF, the websites of the FGD and the BdF, and www.legifrance.gouv.fr.
- Accountability and integrity issues:
  - No rules prohibiting or providing for appearance of FGD officials before designated authorities to publicly report on activities, objectives and performance; no track record of such appearances.
  - No specific rules of conduct on separation of private financial matters of officials and staff of the FGD from those of the FGD itself, nor on avoidance of conflict of interest, abuse of insider information, and similar rules.
  - No specific legal protection for FGD officials personally; under French administrative law suits must be brought against the legal entity, not individual managers or officials.
- Authorities’ response:
  - The authorities are broadly in agreement with the assessment.

### Recommended actions — Deposit Insurance (extracted from Table 9)
- VI. Open Process for Formulating and Reporting of Financial Policies
  - 6.1.1: Increase transparency that deposits in branches and subsidiaries of foreign banks in France may not have the same level of coverage as domestic institutions.
  - 6.1.5: Disclose the formal procedures for information sharing between the FGD and domestic and international financial agencies in greater detail.
  - 6.3: The FGD should issue a periodic public report that provides an update on how its policy objectives are being pursued.
- VII. Public Availability of Information on Financial Policies
  - 7.2: Periodically publish aggregate data on the FGD’s operations.
  - 7.3 and 7.3.1: Publicly disclose the FGD’s balance sheet on a pre-announced schedule, as well as a report on its market operations and, after an appropriate delay, aggregate information on any emergency financial support by the FGD to financial institutions.
  - 7.4, 7.4.1 and 7.4.2: The FGD should establish a publications program and a more proactive policy for public communication by its senior officials.
- VIII. Accountability and Assurance of Integrity by Financial Agencies
  - 8.1: Establish a policy or practice on the appearance of FGD officials before a designated public authority to report on the conduct of the FGD’s policies, explain its policy objectives and describe its performance.
  - 8.2 and 8.3: Publicly disclose the FGD’s audited accounts, including its operating expenses and revenues, on a pre-announced schedule and at least annually.
  - 8.4.1: Clarify and publicly disclose the existing legal arrangements governing the protection of officials and staff of the FGD.

---

### Transparency of insurance regulation and supervision (CCAMIP)
- Context and legal framework:
  - Assessment based on FSAP missions to Paris in January-February and May 2004, review of CCAMIP/CCA materials, relevant laws and regulations, and earlier IMF assessment in 2000.
  - August 2003 Financial Security Law reformed insurance supervision: merged CCA and CCMIP into single autonomous supervisor CCAMIP; insurance regulation remains the responsibility of the Ministry of Finance.
  - Insurance regulation governed by the Insurance Code, the Mutuality Code (Code de la Mutualité) and the Social Security Code (Code de la Sécurité Sociale), as amended by the Financial Security Law.
- Main findings:
  - Insurance supervision has achieved a high level of transparency; 2003 reforms improved transparency for mutual and provident institutions by harmonizing prudential frameworks.
  - Identified areas for improvement largely related to institutional transition and insufficient resources, which CCAMIP expects to address.
  - CCAMIP’s role, responsibilities and objectives clearly specified in the Insurance Code; relationships with other agencies disclosed in CCAMIP annual report and website.
  - Open processes exist for formulation and reporting of CCAMIP policies: regulatory framework, operating procedures, regulations and fee structure disclosed in law; policies explained and reported in an annual report; two-round consultation process for proposed substantive technical changes.
  - Information on formal procedures for information sharing and consultation with other financial agencies is publicly available on CCAMIP’s website.
  - CCAMIP intends to publish its financial accounts, but practical modalities not yet established; CCAMIP has not yet published an annual report.
  - Predecessor CCA published only two reports covering 2000–2001 and 2002–2003 due to lack of resources and institutional reform.
  - Accountability and integrity: officials are ready to appear before a designated public body to report on supervision; financial accounts will be audited by the Cour des Comptes, at its discretion and not necessarily annually.
  - CCAMIP’s internal governance procedures not publicly disclosed at present.
  - General civil service standards apply to personal financial affairs; a specific Code of Conduct (Code de Déontologie) for CCAMIP staff was approved in July 2004 and is publicly disclosed on the CCAMIP’s website.
  - Legal protections for CCAMIP officials and staff are clearly specified in the law.
- Authorities’ response:
  - 291: The CCA’s report for the years 2002 and 2003 has been endorsed by the board, and is to be published.
  - 292: 8.2.2 — The respective roles of the board and the Secretary General are defined by the law (L.310-12-1). More detailed rules will be specified in the decrees establishing the CCAMIP, to be published soon.
  - 293: CCAMIP’s financial accounts will be established according to general accounting rules by an accounting agent who will not have hierarchical link with CCAMIP staff; accounts will be verified by the Cour des Comptes according to rules applicable to all administrative institutions.

### Recommended actions — Insurance Supervision (extracted from Table 10)
- VI. Open Process for Formulating and Reporting of Financial Policies
  - 6.3: The annual report should be published every year, on schedule.
- VII. Public Availability of Information on Financial Policies
  - 7.1 and 7.4.1: The publications program, in particular the schedule for the publication of the annual report, should be strictly implemented.
  - 7.3: The publication of the CCAMIP’s accounts should happen on a pre-announced schedule.
- VIII. Accountability and Assurance of Integrity by Financial Agencies
  - 8.2: Publication of the CCAMIP’s financial statements will need to occur on a pre-announced schedule and the statements will need to be audited on a regular basis by an auditor independent from the accountant.
  - 8.2.1: The financial statements to be published by the CCAMIP should be audited on a regular basis, and should include information on accounting policies as well as any qualification of the statements.
  - 8.2.2: The CCAMIP’s internal governance procedures and its internal audit arrangements should be publicly disclosed.
  - 8.3: The operating expenses and revenues of the CCAMIP should be published on an annual basis, preferably as part of the financial statements.

---

### Transparency of securities regulation and supervision (AMF)
- Context and legal framework:
  - Assessment based on FSAP missions to Paris in January-February 2004 and May 2004, review of relevant legislation and AMF publications and website, and earlier IMF assessment in 2000.
  - August 2003 Loi de Sécurité Financière (Financial Security Law) reformed securities regulation: merged COB, CMF and CDGF into the Autorité des Marchés Financiers (AMF); implementation ongoing at time of missions.
  - Securities regulation governed by the Monetary and Financial Code as modified by the Financial Security Law; AMF responsible for protection of public savings invested in financial instruments and has authority to issue regulations and supervise issuers and markets. CB, CECEI and BdF also involved.
- Main findings:
  - AMF achieves a high degree of transparency; remaining improvements relate to transitional/start-up challenges.
  - Roles, responsibilities and objectives clearly defined and publicized in the Monetary and Financial Code as amended by the Financial Security Law; responsibilities of other agencies also clearly set out.
  - Open process for formulation and reporting of regulatory and supervisory policies: governed by publicly disclosed laws, regulations and operating procedures; recommendation to bring documents together in a single reference text.
  - AMF issues an annual report discussing pursuit of policy objectives.
  - Consultations are routinely held with market participants and expert working groups for substantive technical changes, though AMF is not publicly committed to consultations.
  - Comprehensive information available via annual report, quarterly statistics, public information services and AMF website; information on asset protection and consumer protection available in laws and on BdF and AMF websites.
  - Accountability and integrity: AMF officials are available to appear before the Commissions of Finance of both chambers of parliament.
  - AMF accounts produced by an independent accountant and audited by the Cour des Comptes; however audits occur at the discretion of the Cour des Comptes rather than regularly, and audit results are not published with the financial statements.
  - Some modalities for publication of AMF’s annual report remain to be determined.
  - AMF’s internal governance procedures and internal audit division not yet fully in place or fully disclosed, though foreseen in law.
- Recommended actions — Securities Regulation and Supervision (extracted from Table 11)
  - VIII. Accountability and Assurance of Integrity by Financial Agencies
    - Public disclosure of audited financial statements (8.2 and 8.2.1):
      - Have the AMF’s financial statements audited at least annually, rather than on an occasional basis.
      - Publish the audited financial statements fully, on a pre-announced schedule.
      - Include the accounting policies and any qualifications to the statements as an integral part of these publicly disclosed financial statements.
    - Disclosure of internal governance procedures (8.2.2):
      - Elaborate and publicly disclose the AMF’s internal governance procedures, and make them operational.

_Italicized source: Excerpt from IMF staff report content unit _cr04344 (annex sections 277–301) provided in the prompt._

### 302.     The AMF notes that its financial statements are subject to several statutory

### _cr04344 - 302.     The AMF notes that its financial statements are subject to several statutory

### AMF governance, accountability, and internal control (paras 302–303)
- The AMF’s financial statements are subject to statutory accountability mechanisms to:
  - the President of the Republic,
  - the Parliament and its commissions of finance,
  - a special investigative committee that can be convened by the Parliament,
  - routine accountability to the Cour des Comptes.
- Transmission and audit provisions:
  - Financial statements are transmitted yearly to the Cour des Comptes.
  - Justifying documents are kept at the Cour des Comptes’ disposal for ten years.
  - The Cour des Comptes may audit these documents at any time.
  - Any practice not compliant with the principle of good governance shall be made public in the Cour des Comptes’ annual report.
- Comparison with IOSCO:
  - The IOSCO principles and methodology define clear accountability and transparency criteria but do not require an external auditor to audit the regulator’s account annually and to publish the findings of this audit on a pre-announced schedule.
- Internal governance issues and reforms:
  - Governance considerations include conflict-of-interest provisions for staff and Board members, the integrity of decision-making processes, and the integrity of internal procedures in operational areas.
  - The AMF is hiring an internal control officer and his deputy; this internal control division will add an independent level of control on procedures already set up by AMF management accountable to the Secretary General.

### Transparency of Payment Systems Oversight — Overview (paras 304–305)
- Scope and basis of assessment:
  - Assessment examines France’s observance of the IMF’s MFP Transparency Code in payment systems oversight exercised by the BdF, including oversight of Securities Clearing and Settlement Systems (SCSS).
  - Based on discussions during FSAP missions that visited Paris in January-February and May 2004, review of the BdF website, BdF annual reports, relevant laws and regulations, and other publications; also based on an earlier IMF assessment performed in 2000.
- Legal and regulatory framework:
  - Oversight is based on European-level framework (ECB and the ESCB) and the French Monetary and Financial Code.
  - Oversight covers pan-European systems (TARGET, Clearnet, Euroclear group) and purely domestic systems (Paris Net Settlement System (PNS) and Système Interbancaire de Télécommunications (SIT)), for which the BdF bears sole responsibility.

### Main findings on BdF transparency in payment systems oversight (paras 306–310)
- Overall assessment:
  - The BdF achieves a high level of transparency in its payment systems oversight function, although further improvements are possible, especially on openness of processes for formulation and reporting of policies.
- Clarity of role and disclosure:
  - Role, responsibilities and objectives of the BdF in oversight are clearly specified in the Monetary and Financial Code and in European treaties, protocols, and legal texts.
  - These are disclosed and explained in the BdF’s annual report, other publications, on its website, and during BdF officials’ presentations.
  - Broad modalities of accountability and main governance provisions are specified in the Monetary and Financial Code.
  - Relationships with other domestic and foreign agencies are disclosed in legislation, treaties and publications.
  - The BdF encourages timely public disclosure of general policy principles by payment systems operators via promotion of applicable international standards.
- Open processes and areas for improvement:
  - Open processes exist for formulation and reporting of BdF policies, but significant improvements are possible.
  - No publicly disclosed overall set of operating procedures currently governs the conduct of payment systems oversight.
  - Financial reporting by payment systems operators is governed by undisclosed bilateral agreements.
  - The framework for information sharing and consultation is publicly disclosed, but detailed formal procedures are only partially disclosed.
  - Significant changes in oversight policy are publicly announced and explained; public consultations are systematically organized for substantive technical changes to the structure of financial regulations.
- Information dissemination:
  - BdF reports major developments in payment and settlement systems in its annual reports, on its website and in its bulletin.
  - BdF maintains extensive public information services and a publications program covering payment systems oversight issues.
  - A specific section of the BdF website deals with payment systems issues; regulations and directives are available through official websites and publications.
  - Senior BdF officials explain payment systems policies in public fora and other channels.
- Accountability and integrity:
  - BdF’s accountability and integrity are assured through provisions covering the BdF as a whole; the payment systems department is not an independent entity and is covered by these provisions with no additional specific mechanisms.
  - The Governor of the BdF can be asked, or ask, to appear before parliament.
  - Internal governance procedures, standards for the conduct of personal financial affairs of BdF officials and staff, and information on legal protections are publicly disclosed through laws and/or other published documents.

### Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code — Payment systems oversight (Table 12)
- VI. Open Process for Formulating and Reporting of Financial Policies
  - 6.1.1: Clearly specify, publicly disclose and explain the operating procedures governing the conduct of the BdF’s payment systems oversight function.
  - Improve efforts to explain and clarify international standards and the way they should be implemented in the French context by the different payment systems operators.
  - 6.1.5: Disclose the formal procedures for information sharing and consultation in greater detail.

### Authorities’ response (para 311)
- The Banque de France welcomes the IMF’s assessment that it reaches a very high level of transparency in its payment systems oversight function.
- The Banque de France takes good note of the recommendations to further improve its observance of the IMF’s MFP Transparency Code Practices.

### Structure and evolution of the French financial system — Key statistics and features (paras 312–323, Box 4, banking, insurance, securities)
- Size and composition:
  - Banking sector: 64 percent of total financial assets in 2003.
- Banking sector evolution and structure:
  - Three waves of privatizations occurred in 1986–87, 1993–94, and 1997–99.
  - Six major banking groups control three quarters of the market; the largest group constitutes about one third of the sector.
  - Mutual groups: four of the six dominant banking groups (including the largest group) are organized on a mutual basis.
  - La Poste collects about 8 percent of bank deposits in France through its numerous branches.
  - The CDC centralizes about a quarter of bank deposits in a fund it manages.
- Government influence on savings and consequences:
  - Government schemes centralize about a quarter of bank deposits and about 80 percent of bank deposits (including checking accounts) are subject to significant product and/or price prescriptions.
  - The PEL has provided banks with abundant resources invested only in specific uses (mortgage loans, mortgage-backed securities, and loans for investments in energy-saving projects).
  - Mortgage rates example: In January 2004, the average mortgage rate in France was 21 basis points lower than the euro area average.
- Interbank market:
  - Interbank lending and borrowing, including repo operations, constitute about a third of banks’ balance sheets.
  - Repo operations have increased to about a third of the total interbank market; market is integrated across the euro area though French banks still predominantly deal with each other.
- Insurance sector:
  - Total insurance companies: 454.
  - Life insurance companies: 126; they account for 83 percent of total insurance assets.
  - Over 60 percent of total life insurance premiums are collected through bank offices.
  - Reinsurance sector: 33 companies accounting for 3 percent of sectoral assets.
- Securities markets:
  - French stock market capitalization: roughly $1 trillion, or 70 percent of GDP.
  - Trading concentration: the five (ten) most actively traded shares constitute 30 (47) percent of the annual trading volume.
  - Non-residents hold about 36 percent by market value of listed French shares.
- Taxation and allocation of savings (Box 4) — selected features:
  - Interest income: subject to a 10 percent social charge, as well as to the regular income tax; taxpayers can often opt to pay a 15 percent tax that allows them to keep interest income out of general taxable income, effectively capping maximum taxation of interest income at 25 percent.
  - Dividend income: subject to social charges and regular income tax, with a general EUR1,220 exemption; “avoir fiscal” set at 50 percent of the net dividend will be phased out in 2005; thereafter dividends will be taxed at half the regular income tax rate, subject to a EUR1,220 exemption and a EUR75 tax credit.
  - Administered savings schemes: interest income from livret A, bleu, and jeune, as well as Codevi and LEP, are totally exempt from taxes; interest on the PEL and CEL are only subject to the 10 percent social charge.
  - PEA: favorable tax treatment for up to EUR132,000 invested in shares.
  - Life insurance tax treatment: initially totally exempt after eight years and 25 percent of premiums; since 1995 tax advantages progressively scaled back but regime remains attractive; not subject to VAT or insurance tax; certain policies exempt from inheritance duty.
  - April 2004: French authorities launched the first private retirement savings plan (the PERP) with tax-deductible regular premium payments up to 10 percent of net activity income with a maximum threshold; provides taxable annuity payouts at retirement.

*Source: _cr04344 - 302.*

### 324.     French exchange-traded equities and derivatives markets have undergone a major

### _cr04344 - 324.     French exchange-traded equities and derivatives markets have undergone a major

### Market restructuring and international linkages
- Since 2000 the Paris Bourse and Matif and Monep united with Dutch, Belgian, and later Portuguese exchanges to form Euronext; in 2002 the London-based derivatives exchange LIFFE was acquired.
- Local markets (Euronext Paris in the case of France) remain legally distinct and are regulated by their respective local authorities.
- Consolidation produced some trading efficiencies, but payment and settlement systems across jurisdictions have seen little harmonization, so trading costs (including back-office related costs) have not meaningfully declined, preserving some market separation.
- Dedicated pension funds are new and are as yet small.
- International linkages:
  - French banks’ interbank lending and borrowing with other European banks: stock is currently about EUR400 billion; counterparties have high credit ratings and much is done on a repo basis.
  - Direct foreign lending by French banks and other claims on the foreign nonfinancial sector constitute about one tenth of their loan portfolio; most claims are on industrialized countries.
  - Operations by foreign subsidiaries are less extensive than banks from some other European countries and have a relatively strong retail orientation; claims abroad and foreign operations are concentrated in a few institutions, notably the large commercial banks.
  - International exposure of insurance companies is moderate; large French subsidiaries operate abroad and earn about 30 percent of the sector’s premium income.
  - Financial market prices are strongly correlated internationally; integration of the Bourse into Euronext has not greatly affected correlations between market movements.
- Conclusion: Linkages are important and complex, but do not give rise to particular stability concerns.

### Government and corporate debt markets
- Government debt market is large.
- France has recently issued inflation-linked (IL) bonds, which has helped trigger issuance of other IL debt instruments and the creation of an inflation-linked swap market.
- Corporate bond market has grown substantially with the introduction of the Euro but is still only a small fraction of the government securities market and is dominated by financial sector issuers.
- Covered bond market (Obligations Foncières):
  - Grew to about EUR41 billion in bonds outstanding as of mid-2003.
  - Since early 2003, their spreads have narrowed and fallen just below those of comparable German Pfandbriefe.
  - Market size remains small relative to the stock of government securities.
  - Growth expected to slow due to limited supply of eligible mortgages and number of issuers; effects of the PEL; and (currently), high bank capitalization.
  - Authorities announced intention to study reforms to the regulation of the mortgage market with a view to promoting “Obligations Foncières.”

### Payment and securities settlement systems
- Two systems for settling large value payments:
  - Transferts Banque de France (TBF): real-time gross settlement system, part of TARGET, main channel for execution of monetary operations and settlement of ancillary systems for retail payments (SIT) and securities (Relit+).
  - Paris Net Settlement (PNS): real-time system for domestic large value payments; allows participants to set sending limits on counterparts and saves liquidity via optimization procedures that settle queued transactions simultaneously.
- Retail payments:
  - All retail payment instruments are cleared on one clearing platform (SIT) and settled in TBF.
  - Retail payments—including checks—which are truncated, are fully dematerialized.
  - Checks still extensively used, although their share in retail payments is declining.
- Securities settlement infrastructure:
  - Central Securities Depository (Euroclear France): operates a trade-for-trade real-time gross settlement system and a deferred netting scheme.
  - Central counterparty (Clearnet LCH): settles all securities and derivatives transactions conducted on the Euronext platform, and transactions in the over-the-counter market in France and abroad.

### Stress testing procedures and assumptions (France FSAP)
- Purpose: provide insight into relative strength of the financial system under severe but plausible shocks; partial equilibrium exercise.
- Innovations and procedures:
  - Use of sophisticated stress testing capacity of French financial institutions and supervisory authorities.
  - Consolidation across financial groups containing both banks and insurance companies.
  - Effects estimated by institutions and cross-checked against aggregate results obtained by authorities.
  - Authorities generated macroeconomic scenarios using econometric models; estimates accounted for effects on banks’ risk-weighted assets and sensitivity of demand for life insurance products to yields.
- Sample coverage:
  - Banks: all six large banking groups and one medium-sized bank participated; these represent 80 percent of banking sector assets.
  - Insurance: 13 life groups (7 belong to banks) and 11 non-life groups; together hold more than 75 percent of total sector’s liabilities.
- Types of shocks:
  - Immediate shocks to one or more risk factors (changes in market prices not explicitly motivated).
  - Macroeconomic shocks: changes in exogenous variables generate deviations from a baseline projection over a two-year horizon.
  - Single factor shocks calibrated equivalent to the largest one-month movements in relevant variables over the past 25 years.
  - Changes in exogenous variables reflected historical experience with large macroeconomic shocks, with judgment as to plausibility.
- Notes on applicability:
  - Shocks F3a and F3b (large sustained interest rate movements) could not reasonably be applied to banks under the assumption they would not change their balance sheet.
  - Shocks F10 (real estate price fall) and F12 (natural disaster) would not have a significant direct effect on banks’ balance sheets.
  - Authorities also undertook three separate stress tests for deterioration in housing loan quality: (i) default of all NPLs related to floating rate mortgages; (ii) sharp increase in default probability of mortgage loan repayments; (iii) macroeconomic scenario with interest rates rise by 300 basis points over two years — results suggested moderate impact (maximum reduction of less than 2 percentage points of the average solvency ratio, which remains well above the minimum requirement).
- Metrics and measurement:
  - Banks: shocks related to (i) 2003 after-tax profits (impact reduced by marginal corporate income tax rate of 33 percent); (ii) banks’ end-2003 risk-weighted capital adequacy ratios, not adjusted for taxes; (iii) for relevant tests, risk-weighted capital adequacy calculated under Basel II-type rules, assuming after-tax profits during the projection period are added to capital.
  - Commission Bancaire used internal models of bank earnings, nonperforming loans, required capital, and sectoral credit quality.
  - Commission Bancaire receives quarterly reports on banks’ liquidity positions that reflect a stress test: banks required to maintain ratio of liquid assets to liquid liabilities of over 100 percent under impaired liquidity assumptions.
  - Insurance companies: estimated immediate and permanent effects based on end-2003 balance sheets; took into account insurance regulations and contracts, scope to pass fluctuations to policyholders, and possibility policyholders cash in life contracts early if yields fall.
  - Insurance stress test metrics: (i) immediate impact on solvency ratio; (ii) for life policies, change in payout rate on policies (impact passed on to policyholders allowing for policy provisions and regulations on required payouts). Shortfall presented as ratio of technical provisions where constraints binding.
- Additional calibration notes:
  - For interest rate movements, only changes since establishment of the EMU were considered.
  - Scenario M3 relies on an estimated policy reaction function which may not be fully applicable to a one-time oil price shock.
  - Risk weights affected both mean expected loss and variance of loss distribution; under stress both mean and variance affected, so risk-weighted assets and capital requirement tended to rise.
  - Implication that no dividends are paid is compatible with scenarios of difficult economic times.

### Summary of macroeconomic stress testing scenarios (annual percentage growth rates, averaged over 2004–2005)
- Baseline Scenario / Scenario M1 / Scenario M2 / Scenario M3 / Scenario M4 (Deviation from baseline)
  - Real GDP: 2.1 / -2.4 / -0.2 / -0.3 / -0.9
  - Real household consumption: 1.9 / -0.7 / -0.3 / -0.3
  - Short-term interest rate (level): 2.1 / -- / -- / 0.1 / --
  - Consumer prices: 1.2 / -1.4 / 0.5 / 0.4 / -0.9
  - Credit to the private sector: 5.8 / -3.5 / -0.4 / -- / -2.2
  - NPLs1/ (Cumulative growth through December 2005): 8.3 / 8.2 / 0.8 / -0.6 / 2.3
- Source: French authorities, and staff estimates.

### Effects of savings schemes and other government intervention
- Government policies strongly affect composition and allocation of a large part of financial savings through numerous schemes (e.g., livret A, PEL/CEL) to mobilize and direct savings and credit.
- Identified effects and concerns:
  - Less well-off sections may benefit relatively little from tax advantages of administered savings products such as livret A; schemes achieve a poor cost-benefit ratio.
  - Mobilized resources do not necessarily correspond to needs of sectors they are meant to finance; interventions limit resources available to finance other sectors.
  - Distort competition by restricting distribution of certain products to certain institutions.
  - Products like the PEL can generate risks for financial institutions that are difficult to hedge.
  - Schemes reduce scope and incentives for financial institutions to compete and discourage other forms of innovation (e.g., availability of dedicated PEL resources impedes development of a market for mortgage-backed securities).
  - Schemes interfere with transmission of monetary policy and give rise to asymmetries in the EMU.
  - Usury rate rule (caps potential interest rate at 4/3 of the average rate observed for a loan category) prevents certain higher-risk potential borrowers from obtaining credit.
- Static annual transfer estimates (all figures on an annual basis):
  - Ni-ni rule (prohibits payment of interest on demand deposits and charges for checkbooks) implies a transfer from depositors to banks of about EUR1 billion at current (low) levels of interest rates due to non-remuneration of demand deposits; also implies net loss to society related to overuse of checks.
  - Centralization of deposits under management of the CDC implies a lost (gross) intermediation margin for banks of about EUR3-4 billion, to the benefit mainly of the government and the three distributors of the livrets A and bleu; government earned about EUR500 million on centralized funds in 2002, with a corresponding potentially large contingent liability from guaranteeing the system; social housing entities pay a lower interest rate but assume significant interest rate risk.
  - Tax breaks on the livrets and on the PEL/CEL and the interest rate subsidy on the PEL/CEL constitute a transfer of about EUR4 billion from the government to those households able to use the tax advantages.
  - Compression of banks’ interest rate spreads resulting from interventions implies a net transfer from them to households and companies in the order of EUR2–5 billion, varying with the spread between the rate on the livret A and market rates.
- Overall: system generates significant gross and net transfers among institutions and sectors; banks, especially those not allowed to distribute livrets A or bleu, bear most costs. As European financial market integration progresses, these costs could increase (e.g., remunerated current accounts elsewhere could attract funds from French banks). Analysis does not quantify allocative inefficiency or potential reduction in growth of potential output.
- Note: Recent changes in determination of the livret A rate may reduce this effect.

### Key selected economic indicators (1999–2004)
- Real economy (change in percent):
  - Real GDP: 1999 3.2; 2000 4.2; 2001 2.1; 2002 1.1; 2003 0.5; 2004 2.6
  - CPI (year average): 1999 0.6; 2000 1.8; 2001 1.8; 2002 1.9; 2003 2.2; 2004 2.3
  - Unemployment rate (in percent): 1999 10.7; 2000 9.3; 2001 8.5; 2002 8.9; 2003 9.4; 2004 9.4
  - Gross national savings (percent of GDP): 1999 22.5; 2000 22.4; 2001 22.1; 2002 20.6; 2003 19.3; 2004 19.4
  - Gross domestic investment (percent of GDP): 1999 19.6; 2000 21.0; 2001 20.5; 2002 19.6; 2003 19.0; 2004 19.9
- Public finance (percent of GDP):
  - Central government balance: 1999 -2.6; 2000 -2.5; 2001 -2.3; 2002 -3.9; 2003 -4.0; 2004 -3.1
  - General government balance: 1999 -1.8; 2000 -1.4; 2001 -1.6; 2002 -3.3; 2003 -4.1; 2004 -3.4
  - General government gross debt: 1999 58.5; 2000 57.1; 2001 56.8; 2002 58.7; 2003 63.7; 2004 64.4
- Money and interest rates:
  - M3 (end of year, percent change)1/: 1999 5.3; 2000 4.3; 2001 10.9; 2002 6.6; 2003 6.4
  - Money market rate (in percent): 1999 3.0; 2000 4.4; 2001 4.3; 2002 3.3; 2003 2.3; 2004 2.1
  - Government bond yield (in percent): 1999 4.7; 2000 5.5; 2001 5.0; 2002 4.9; 2003 4.2; 2004 4.4
  - Deposit rate: 1999 2.7; 2000 2.6; 2001 3.0; 2002 3.0; 2003 2.7; 2004 2.2
  - Prime lending rate: 1999 6.3; 2000 7.1; 2001 6.6; 2002 6.6; 2003 6.6
- Balance of payments (percent of GDP):
  - Trade balance: 1999 1.2; 2000 -0.3; 2001 0.3; 2002 0.5; 2003 0.1; 2004 -0.9
  - Current account: 1999 2.9; 2000 1.4; 2001 1.6; 2002 1.0; 2003 0.3; 2004 -0.5
- Exchange rates:
  - Exchange rate regime: Participant in EMU
  - Euro per U.S. dollar (August 24, 2004): 1.21
  - Nominal effective rate (2000=100)7/: 1999 103.4; 2000 100.0; 2001 100.4; 2002 101.2; 2003 104.7; 2004 105.3
  - Real effective exchange rate (2000=100)7/: 1999 104.1; 2000 100.0; 2001 98.9; 2002 99.7; 2003 102.6; 2004 102.7

*Source: _cr04344 (France FSAP chapter content provided).*

### 0.1 percent of GDP.

### _cr04344 - 0.1 percent of GDP.

### Financial system structure, 1999–2003 (Table 2 — selected entries)
- Commercial Banks (Number; Assets in billions of euros; Percent of Total Assets)
  - December 1999: 365; 2,061.6; 48.8
  - December 2000: 362; 2,145.0; 47.7
  - December 2001: 357; 2,402.8; 49.1
  - December 2002: 345; 2,359.7; 47.6
  - December 2003: 331; 2,431.2; 46.2
- Commercial Banks — Private
  - December 1999: 359; 2,052.3; 48.6
  - December 2000: 354; 2,123.0; 47.2
  - December 2001: 352; 2,323.9; 47.5
  - December 2002: 341; 2,277.7; 46.0
  - December 2003: 327; 2,356.2; 44.8
- Commercial Banks — Domestic
  - December 1999: 159; 1,813.8; 42.9
  - December 2000: 140; 1,681.5; 37.4
  - December 2001: 143; 1,895.1; 38.7
  - December 2002: 141; 1,865.7; 37.6
  - December 2003: 127; 1,951.2; 37.1
- Commercial Banks — Foreign
  - December 1999: 200; 238.5; 5.6
  - December 2000: 214; 441.5; 9.8
  - December 2001: 209; 428.8; 8.8
  - December 2002: 200; 412.0; 8.3
  - December 2003: 200; 405.0; 7.7
- Credit unions and mutuals
  - December 1999: 156; 806.7; 19.1
  - December 2000: 154; 847.7; 18.9
  - December 2001: 148; 857.4; 17.5
  - December 2002: 136; 880.8; 17.8
  - December 2003: 129; 934.7; 17.8
- Finance companies (including mortgage institutions)
  - December 1999: 603; 381.1; 9.0
  - December 2000: 557; 411.2; 9.1
  - December 2001: 524; 473.9; 9.7
  - December 2002: 494; 507.9; 10.2
  - December 2003: 460; 536.1; 10.2
  - Mortgage institutions (of which)
    - 1999: 3; 33.0; 0.8
    - 2000: 3; 50.9; 1.1
    - 2001: 3; 62.3; 1.3
    - 2002: 4; 75.9; 1.5
    - 2003: 4; 91.9; 1.7
- Insurance companies
  - December 1999: 459; 832.4; 19.7
  - December 2000: 464; 907.9; 20.2
  - December 2001: 466; 970.6; 19.8
  - December 2002: 456; 1,006.9; 20.3
  - December 2003: 444; 1,090.8; 20.7
  - Life and retirement (selected)
    - 1999: 126; 675.6; 16.0
    - 2003: 125; 907.3; 17.3
  - Non-life (selected)
    - 1999: 300; 130.3; 3.1
    - 2003: 286; 152.2; 2.9

_Source: Banque de France. Note: 1/ Including development banks. Nonbank development finance corporations are included separately under “Other credit institutions.”_

### Banking sector: Financial soundness indicators, 1999–2003 (Table 3 — selected indicators)
- Capital adequacy
  - Regulatory capital to risk-weighted assets: 1999: 12.7; 2000: 11.9; 2001: 12.1; 2002: 12.3; 2003: 12.6
  - Regulatory Tier I capital to risk-weighted assets: 1999: 10.0; 2000: 9.9; 2001: 10.5; 2002: 9.9; 2003: 9.7
  - Capital (net worth) to assets: 2000: 4.6; 2001: 4.8; 2002: 4.6; 2003: 4.5
- Asset composition and quality (sectoral distribution of loans to total loans)
  - Deposit takers: 1999: 31.1; 2000: 30.2; 2001: 31.8; 2002: 31.7; 2003: 32.6
  - Non financial corporation: 1999: 19.6; 2000: 21.0; 2001: 19.7; 2002: 19.9; 2003: 19.1
  - Households (including individual firms): 1999: 22.9; 2000: 23.1; 2001: 21.9; 2002: 22.8; 2003: 24.6
  - Non residents (including financial sectors): 1999: 19.0; 2000: 18.5; 2001: 19.6; 2002: 18.3; 2003: 16.5
- International consolidated claims of French banks (BIS data, as percent of total international claims)
  - Advanced countries: 1999: 77.0; 2000: 79.0; 2001: 81.0; 2002: 84.0; 2003: 85.0
  - Developing Europe: 1999–2003: 2.0; 2.0; 2.0; 2.0; 2.7
  - Latin America and Caribbean: 1999: ...; 2000: 4.0; 2001: 3.0; 2002: 3.0; 2003: 2.0; 2003 also lists 1.4 in a separate row
  - Offshore Financial Centers: 1999: 8.0; 2000: 8.0; 2001: 7.0; 2002: 5.0; 2003: 4.5
- Foreign currency loans to total loans 1/: 1999: 14.9; 2000: 15.1; 2001: 15.3; 2002: 12.6; 2003: 11.2
- NPLs to gross loans: 1999: 5.7; 2000: 5.0; 2001: 5.0; 2002: 5.0; 2003: 4.8
- NPLs net of provisions to capital: 1999: 14.1; 2000: 12.8; 2001: 12.6; 2002: 12.6; 2003: 11.6
- Gross notional outstanding financial derivatives/capital: 1999: 12,056; 2000: 12,585; 2001: 13,751; 2002: 14,842; 2003: 16,851
- Earnings and profitability
  - ROA (Aggregated data on a parent basis company) 3/: 1999: 0.37; 2000: 0.46; 2001: 0.45; 2002: 0.46; 2003: 0.44
  - ROA (Main groups on a consolidated basis) 4/: 1999: 0.49; 2000: 0.53; 2001: 0.40; 2002: 0.39; 2003: 0.45
  - ROE (Aggregated data on a parent basis company) 3/: 1999: 9.08; 2000: 9.69; 2001: 9.64; 2002: 9.08; 2003: 8.62
  - ROE (Main groups on a consolidated basis) 4/: 1999: 11.82; 2000: 15.60; 2001: 10.92; 2002: 9.81; 2003: 10.33
  - Interest margin to gross income: 1999: 40.8; 2000: 36.6; 2001: 35.9; 2002: 40.2; 2003: 39.2
  - Trading and fee income to gross income: 1999: 40.0; 2000: 42.9; 2001: 41.2; 2002: 36.2; 2003: 34.9
- Liquidity
  - Liquid assets to total assets: 1999: 19.6; 2000: 19.5; 2001: 20.4; 2002: 20.7; 2003: 21.6
  - Liquid assets to total short-term liabilities: 1999: 147.9; 2000: 138.5; 2001: 152.5; 2002: 157.0; 2003: 153.6
  - Customer deposits to total (non-interbank) loans: 2000: 88.8; 2001: 89.9; 2002: 88.7; 2003: 89.3
  - FX liabilities to total liabilities: 1999: 15.7; 2000: 17.3; 2001: 18.4; 2002: 15.1; 2003: 14.1
- Sensitivity to market risk
  - Net open positions in foreign currency (euro millions) 6/: 1999: ...; 2000: 6,715; 2001: 6,738; 2002: 4,608; 2003: 5,870
  - Net open positions in equities to Tier I capital: 2000: 3.93; 2001: 2.94; 2002: 3.30; 2003: 2.27

_Sources: Banque de France, Commission Bancaire, BIS, and ECB. Notes as in original tables._

### Life insurance: Financial soundness indicators, 1998–2002 (Table 4 — selected indicators)
- Capital adequacy
  - Net premium/capital: 1998: 279.5; 1999: 293.2; 2000: 314.3; 2001: 275.0; 2002: 265.3
  - Capital/total assets: 1998: 4.1; 1999: 3.9; 2000: 4.0; 2001: 4.0; 2002: 4.0
  - Capital (excluding unrealized gains)/technical reserves: 1998: 4.5; 1999: 4.3; 2000: 4.4; 2001: 4.4; 2002: 4.5
  - Capital (including unrealized gains)/technical reserves: 1998: 17.1; 1999: 13.2; 2000: 12.1; 2001: 9.9; 2002: 9.3
- Asset quality
  - (Real estate+unquoted equities+receivables)/total assets: 1998: 7.0; 1999: 6.5; 2000: 5.8; 2001: 5.5; 2002: 5.3
  - Receivables/(gross premium+reinsurance recoveries): 1998: 22.6; 1999: 16.0; 2000: 14.9; 2001: 16.1; 2002: 14.4
  - Equities/total assets: 1998: 9.3; 1999: 9.2; 2000: 10.0; 2001: 10.1; 2002: 10.3
  - Noncollateralized loans/total gross loans 1/: 1998: 20.2; 1999: 15.5; 2000: 27.3; 2001: 36.2; 2002: 36.3
- Reinsurance
  - Risk retention ratio (net premium/gross premium): 1998: 99.6; 1999: 99.6; 2000: 99.5; 2001: 99.5; 2002: 99.3
- Management soundness
  - Gross premium per employee (in euro millions) 2/: 1998: 1.3; 1999: 1.4; 2000: 1.7; 2001: 1.6; 2002: 1.6
  - Total assets per employee (in euro millions) 2/: 1998: 11.3; 1999: 11.8; 2000: 13.9; 2001: 14.0; 2002: 14.7
- Earnings and profitability
  - Loss ratio (net claims/net premium): 1998: 58.5; 1999: 55.6; 2000: 51.6; 2001: 59.8; 2002: 64.2
  - Expense ratio (expenses/net premium): 1998: 8.6; 1999: 8.1; 2000: 7.6; 2001: 8.4; 2002: 8.5
  - Combined ratio (loss ratio+ expense ratio): 1998: 67.2; 1999: 63.7; 2000: 59.3; 2001: 68.2; 2002: 72.8
  - Investment income/net premium: 1998: 54.4; 1999: 63.1; 2000: 35.0; 2001: 21.7; 2002: 10.5
  - Investment income/investment assets: 1998: 6.7; 1999: 7.9; 2000: 4.7; 2001: 2.6; 2002: 1.2
- Liquidity
  - Minimum liquidity ratio 3/: 1998: 1.2; 1999: 1.2; 2000: 1.0; 2001: 1.0; 2002: 1.1
  - Maximum liquidity ratio 4/: 1998: 101.7; 1999: 102.2; 2000: 98.5; 2001: 95.7; 2002: 98.2

_Source: CCA. Notes and footnotes as in original table._

### Non-life insurance: Financial soundness indicators, 1998–2002 (Table 5 — selected indicators)
- Capital adequacy
  - Net premium/capital: 1998: 162.7; 1999: 165.1; 2000: 152.9; 2001: 151.7; 2002: 161.1
  - Capital/total assets: 1998: 18.6; 1999: 16.4; 2000: 18.1; 2001: 18.1; 2002: 17.8
  - Capital (including unrealized gains)/technical reserves: 1998: 52.0; 1999: 48.0; 2000: 52.5; 2001: 43.7; 2002: 38.7
- Asset quality
  - (Real estate+unquoted equities+receivables)/total assets: 1998: 24.9; 1999: 23.2; 2000: 24.1; 2001: 23.6; 2002: 20.4
  - Receivables/(gross premium+reinsurance recoveries): 1998: 21.8; 1999: 20.9; 2000: 23.8; 2001: 26.7; 2002: 25.8
  - Equities/total assets: 1998: 23.1; 1999: 22.3; 2000: 23.2; 2001: 21.9; 2002: 20.9
  - Noncollateralized loans/total gross loans 1/: 1998: 38.0; 1999: 25.2; 2000: 57.4; 2001: 67.7; 2002: 57.9
- Reinsurance
  - Risk retention ratio (net premium / gross premium): 1998: 83.7; 1999: 83.3; 2000: 82.2; 2001: 80.6; 2002: 79.8
  - Net technical reserves/average net paid: 1998: 247.3; 1999: 265.4; 2000: 256.8; 2001: 258.9; 2002: 261.6
  - Net technical reserves/average net premiums: 1998: 181.8; 1999: 195.3; 2000: 195.3; 2001: 197.2; 2002: 197.6
- Management soundness
  - Gross premium per employee (in euro thousands) 2/: 1998: 429.5; 1999: 440.5; 2000: 468.2; 2001: 477.3; 2002: 538.7
  - Total assets per employee (in euro millions) 2/: 1998: 1.2; 1999: 1.4; 2000: 1.4; 2001: 1.4; 2002: 1.5
- Earnings and profitability
  - Loss ratio (net claims / net premium): 1998: 81.8; 1999: 88.1; 2000: 84.7; 2001: 81.1; 2002: 79.6
  - Expense ratio (expenses/net premium): 1998: 25.4; 1999: 25.4; 2000: 25.7; 2001: 25.6; 2002: 24.8
  - Combined ratio (loss ratio+ expense ratio): 1998: 107.1; 1999: 113.5; 2000: 110.4; 2001: 106.8; 2002: 104.4
  - Investment income/net premium: 1998: 14.7; 1999: 20.1; 2000: 19.8; 2001: 15.4; 2002: 8.9
  - Investment income/investment assets: 1998: 6.0; 1999: 7.8; 2000: 7.7; 2001: 6.1; 2002: 3.7
  - ROE (return on equity): 1998: 1.9; 1999: 3.8; 2000: 9.7; 2001: 8.6; 2002: 3.4

_Source: CCA. Notes and footnotes as in original table._

### Banking sector stress testing results (Table 6a — selected scenarios)
- Risk factor tests — bank estimates (impact presented as: After-Tax Profits relative to 2003; Relative to end-2003 CAR; Relative to Basel II-Type CAR where available)
  - F1 Rise and flattening of the yield curve 4/: After-Tax Profits: -3.8 (Average); -20.2 (Largest). Relative to End-2003 CAR: -0.05 (Average); -0.48 (Largest).
    - Of which: due to insurance subsidiaries: After-Tax Profits: -0.6 (Average); -7.2 (Largest). Relative to End-2003 CAR: -0.01 (Average); -0.13 (Largest).
  - F2 Fall and steepening of the yield curve 5/: After-Tax Profits: 0.6 (Average); -2.9 (Largest). Relative to End-2003 CAR: 0.01 (Average); -0.04 (Largest).
  - F3a Sustained rise in all interest rates 6/: After-Tax Profits: -35.7 (Average); -54.7 (Largest). Relative to End-2003 CAR: -0.34 (Average); -0.98 (Largest).
  - F4 Deterioration in domestic loan quality 7/: After-Tax Profits: -44.5 (Average); -71.8 (Largest). Relative to End-2003 CAR: -0.56 (Average); -1.06 (Largest).
  - F5 Fall in equity prices 8/: After-Tax Profits: -21.4 (Average); -84.8 (Largest). Relative to End-2003 CAR: -0.30 (Average); -1.62 (Largest).
    - Of which: due to insurance subsidiaries: After-Tax Profits: -0.6 (Average); -5.5 (Largest). Relative to End-2003 CAR: -0.01 (Average); -0.04 (Largest).
  - F6a Euro appreciation against major currencies 9/: Relative to End-2003 CAR: 1.1 (Largest)
  - F6b Euro depreciation against major currencies 9/: After-Tax Profits: 1.6 (Average); -0.4 (Largest). Relative to End-2003 CAR: 0.02 (Average); -0.01 (Largest).
  - F7 Deterioration in emerging market loans 10/: After-Tax Profits: -7.1 (Average); -22.2 (Largest). Relative to End-2003 CAR: -0.10 (Average); -0.19 (Largest).
  - F8 Rise in financial market volatility 11/: After-Tax Profits: 2.0 (Average); -1.2 (Largest). Relative to End-2003 CAR: 0.03 (Average); -0.02 (Largest).
  - F9 Combination of F1 and F5: After-Tax Profits: -30.1 (Average); -87.0 (Largest). Relative to End-2003 CAR: -0.40 (Average); -1.66 (Largest).
    - Of which: due to insurance subsidiaries: After-Tax Profits: -5.0 (Average). Relative to End-2003 CAR: -0.05 (Average); -0.13 (Largest).
- Macroeconomic scenario tests — bank estimates
  - M1 Fall in world demand 12/: After-Tax Profits: -23.6 (Average); -46.9 (Largest). Relative to End-2003 CAR: -1.06 (Average); -1.42 (Largest). Relative to Basel II-Type CAR: -2.10 (Average); -2.25 (Largest).
  - M2 Rise in oil prices 13/: After-Tax Profits: 2.0 (Average); -10.4 (Largest). Relative to End-2003 CAR: -0.83 (Average); -0.97 (Largest). Relative to Basel II-Type CAR: -0.15 (Average); -0.42 (Largest).
  - M3 Rise in oil prices with policy reaction 14/: After-Tax Profits: 8.7 (Average); -6.5 (Largest). Relative to End-2003 CAR: -0.84 (Average); -0.96 (Largest). Relative to Basel II-Type CAR: -0.10 (Average); -0.42 (Largest).
  - M4 Dollar depreciation 15/: After-Tax Profits: -4.4 (Average); -20.1 (Largest). Relative to End-2003 CAR: -0.77 (Average); -1.06 (Largest). Relative to Basel II-Type CAR: -0.80 (Average); -0.98 (Largest).
- Commission Bancaire estimates (selected)
  - M1 Fall in world demand 12/: After-Tax Profits: -26.0 (Average). Relative to End-2003 CAR: -1.09 (Average). Relative to Basel II-Type CAR: -2.10 (Average).
  - M2 Rise in oil prices 13/: After-Tax Profits: 7.0 (Average). Relative to End-2003 CAR: -0.79 (Average). Relative to Basel II-Type CAR: -0.11 (Average).
  - M3 Rise in oil prices with policy reaction 14/: After-Tax Profits: 13.2 (Average). Relative to End-2003 CAR: -0.80 (Average). Relative to Basel II-Type CAR: -0.05 (Average).
  - M4 Dollar depreciation 15/: After-Tax Profits: -9.2 (Average). Relative to End-2003 CAR: -0.73 (Average). Relative to Basel II-Type CAR: -0.83 (Average).
- Liquidity test (Percent average 1999–2003)
  - Liquidity Ratio Below 100 percent of Requirement
    - Share of number of banks: 1.4
    - Share of total bank assets 16/: 1.0
  - Liquidity Ratio Between 100 and 120 percent of Requirement
    - Share of number of banks: 7.9
    - Share of total bank assets 16/: 32.3

_Source: French authorities, and staff estimates. Footnotes and scenario definitions as in original table._

### Insurance sector stress testing results (Table 6b — selected outcomes)
- Life insurance companies — initial levels and scenario impacts (selected)
  - Initial level — Yield on policies: Average: 12.4; Lowest: 7.6; Companies (Number): 294; Companies with ratio<100 (Number): 181
  - F1 Rise and flattening of the yield curve 6/: Yield on policies: Average: -3.9; Lowest: -5.6; Companies: 200; Companies with ratio<100: 87; Solvency shortfall/ liabilities (for companies whose solvency ratio <100): 2; Average: 0.41; Lowest: 3.3; Yield shortfall/liabilities (for companies unable to meet minimum guaranteed yield): 6; 0.93 (Lowest)
  - F3a Sustained rise in all interest rates 7/: Yield on policies: Average: -10.8; Lowest: -15.7; Companies: 156; Companies with ratio<100: 83; Solvency shortfall/ liabilities: 2; Average: 0.46; Lowest: 3.3; Yield shortfall/liabilities: 13; 6.65 (Lowest)
  - F11 Rise in interest rates and equity price fall 10/: Yield on policies: Average: -7.7; Lowest: -10.6; Companies: 107; Companies with ratio<100: 8; Solvency shortfall/ liabilities: 8; Average: 0.77; Lowest: 3.3; Yield shortfall/liabilities: 12; 3.63 (Lowest)
- Non-life insurance companies — initial levels and scenario impacts (selected)
  - Initial level — Available/required solvency margin 2/: Average: 46.3; Lowest: 24.2; Companies (Number): 568; Companies with ratio<100 (Number): 232
  - F1 Rise and flattening of the yield curve 6/: Available/required solvency margin: Average: -3.0; Lowest: -5.1; Companies: 530; Companies with ratio<100: 204
  - F3a Sustained rise in all interest rates 7/: Available/required solvency margin: Average: -8.3; Lowest: -15.4; Companies: 527; Companies with ratio<100: 204
  - F5 Fall in equity prices 6/: Available/required solvency margin: Average: -17.8; Lowest: -57.2; Companies: 336; Companies with ratio<100: 173
  - F12 Large natural disaster, before reinsurance 11/: Available/required solvency margin: Average: -23.1; Lowest: -66.0; Companies: 266; Companies with ratio<100: 46; Solvency shortfall/liabilities: 2; Average: 1.96
  - F12 Large natural disaster, after reinsurance 11/: Available/required solvency margin: Average: -7.5; Lowest: -20.5; Companies: 470; Companies with ratio<100: 142

- Definitions and notes (as in original table)
  - 1/ Impact on solvency margin, in percent, assuming the solvency margin absorbs risk to the limit permitted by regulations.
  - 2/ Ratio of available solvency margin to minimum required solvency margin, in percent, assuming the solvency margin absorbs risk to the limit permitted by regulations.
  - 3/ Current percentage yield on policies, assuming the current yield absorbs downside risk to the limit permitted by regulations.
  - 4/ For those companies whose solvency ratio falls below 100 percent, additional capital needed as a percentage of main insurance liabilities.
  - 5/ For those companies unable to meet the minimum guaranteed yield on policies, yield shortfall as a percentage of main insurance liabilities.
  - 6/ See footnotes to Table 6a. 7/ Sustained increase in all interest rates of 300 basis points. 8/ Sustained decrease in all interest rates of 100 basis points. 9/ Fall in real estate prices of 30 percent. 10/ Sustained increase in all interest rates of 100 basis points combined with fall in equity prices by 30 percent, assuming all policies are cashed in. 11/ Claims twice those from the largest previous incident.

_Source: French authorities, and staff estimates._

*Source: _cr04344 - 0.1 percent of GDP._ PDF chapter (statistical tables).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04344.pdf_