## _cr12341

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### Executive Summary
- French financial system total assets: €10 trillion at end-2011 (five times France’s GDP).
- System dominated by five banking groups, four identified as G-SIBs.
- Key vulnerabilities:
  - Overreliance on wholesale funding.
  - Size and complexity of large banks.
  - Uncertainty from eurozone crisis resolution.
- Authorities’ focus: require banks to build adequate capital and liquidity buffers; large banks announced plans to meet Basel III CET1 capital targets during 2013 and divested noncore assets.
- Market perception: some banks’ market equity values remain below book value; an intensification of the euro-zone crisis could cause a significant shock to private sector activity and capital pressures on some banks.

### Banking Sector: Restructuring, Resilience, and Risks
- Restructuring actions taken by banks:
  - Increasing liquidity and reducing dependence on short-term and U.S. dollar wholesale funding, including deleveraging abroad.
  - Reducing cross-border presence and divesting noncore assets.
  - Raising solvency ratios mainly through retained earnings and lower dividends.
  - Reducing activities dependent on short-term funding, capital intensive, and less profitable.
- Funding and liquidity facts:
  - Customer deposits: one third of total liabilities at end-2011.
  - French banks’ exposures to high-yield Euro area countries: $677 billion at end-December 2011 (close to $400 billion to Italy).
  - ECB three-year LTROs drawn: €169 billion as of May 2012 (close to €140 billion deposited at the ECB).
  - Emergency liquidity assistance (ELA): €18.7 billion at end-2011.
  - Issuances in H1 2012: €48 billion; prefunding done in 2011: €19 billion; covered about 77 percent of 2012 financing needs (~€84 billion).
  - Maturing debt in 2013–2014: €131 billion.
- Deleveraging:
  - Cross-border assets reduced by over half a trillion U.S. dollars in H2 2011; trend continued in 2012 at a slower pace.
  - Outstanding legacy assets net of provisions declined by 10 percent in 2010 to €96 billion.
  - Cumulative losses through 2012 for five largest French banks: €34 billion.
- Asset quality:
  - Domestic asset quality high; vulnerabilities mainly from exposures to high-yield Euro area countries.
  - Total foreign claims about €2.7 trillion as of end-June 2011.

### Stress Tests, Liquidity, and Contagion Findings
- Stress test conclusions:
  - Regulatory capital sufficient to cope with a range of adverse macroeconomic scenarios, including a housing downturn.
  - Exposures to vulnerable European sovereigns seem manageable.
  - Banks remain vulnerable to sustained disruptions in funding markets despite improved liquidity and ECB long-term funding relief.
  - Adequate collateral to access secured debt markets/central bank facilities is important.
- Liquidity stress-test (survival period / banks meeting obligations without ECB / with ECB):
  - Up to one day: 7 / 7
  - > one day up to one week: 6 / 7
  - > one week up to one month: 6 / 7
  - > one month up to two months: 6 / 7
  - > two months up to three months: 6 / 7
  - > three months up to six months: 5 / 7
  - > six months up to one year: 5 / 7
  - > one year up to two years: 5 / 7
- Reverse stress test:
  - Three banks would recur to central bank liquidity above a 5 percent loss of wholesale funding.
  - With ECB support, four banks could address up to a maximum loss of about 15 percent of all wholesale funding.
- Contagion and interbank exposures:
  - Two banks lend 60 percent of all interbank net flows; one bank receives over 40 percent of interbank flows; exposures relatively small (under 3 percent of total assets).
  - Failure of a single bank would reduce CET1 ratio from 9.9 percent to 8.5 percent.
  - Network analysis: U.S., U.K., and Germany represent biggest potential systemic risk for French banking system, followed by Italy.

### Real Estate and Mortgage Resilience (Box 2)
- Residential prices:
  - Surge after mid-1990s (over 100 percent in real terms), drop ~10 percent during 2008–2009, recovered to just below pre-crisis peak.
  - Estimates of overvaluation at end-2011: range from 10 percent to over 20 percent.
- Stress test results:
  - A 25 percent decline in property prices showed negligible impact on CET1 ratios in model-based sensitivity tests.
  - Model-based estimates cited home prices 10–20 percent above equilibrium at end-2010.
- Mortgage market features mitigating risk:
  - Fixed-rate loans predominate; underwriting emphasizes borrower income sustainability.
  - Almost half of mortgages originated in 2011 had down-payments of 5 percent or less.
  - Buy-to-let loans represented 16.3 percent of loans in 2011.
- Policy options:
  - Macroprudential measures such as LTV ceilings if indicators point to excessive risk-taking.
  - Precautionary recommendation: increase quality and availability of micro data to enable targeted measures.

### Supervision and Regulatory Framework: Findings and Legislative Gaps
- Supervisory strengths:
  - ACP supervisory practices are of very high standard; BdF/ACP combination creates synergies for bancassurance oversight.
  - High level of compliance with Basel Core Principles, IOSCO principles, and CPSS/IOSCO for CCPs in many respects.
- Key legislative and governance deficiencies:
  - ACP lacks formal powers to assess suitability of Boards and to suspend or dismiss unsuitable Board members.
  - ACP does not have formal power to approve foreign acquisitions by French banks outside the EEA; prior notification powers recommended.
  - Legislative limits on ACP, AMF, and H3C headcount constrain supervisory resources.
  - Role of MoF in ACP and AMF Boards (participation without vote but right to request second deliberation) could blur accountability and perception of independence.
- Disclosure and transparency:
  - France lags many countries in public disclosure of financial sector data.
  - Recommendation: ACP should enforce publication of regular and comparable institution-by-institution data and publish a Financial Stability Report with systemic risk analysis results.
- Capital definition and disclosure issues:
  - Material weaknesses in the definition of capital and public reporting vis-à-vis Basel II/II.5, especially for bancassurance groups and mutual groups with cross-holdings.
  - Recommendation: require full and consistent disclosure of capital treatment and intra-group financial interactions.

### Insurance Sector: Solvency and Supervisory Preparedness
- Current regime: predominantly Solvency I; ACP Solvency II preparations well advanced.
- Stress tests:
  - Life insurers: 12 life insurers (70 percent market share) — under worst global scenario only two entities would present solvency ratio below 100 percent; average solvency margin ~109 percent of current requirements after shocks.
  - Nonlife insurers: two entities would have solvency ratio below 100 percent after shocks; solvency margin averages 231 percent of requirements following shocks (244 percent before shock).
- Key supervisory recommendations:
  - Early introduction of specific Board requirements on risk-appetite statements, risk management, delineation between Board and control functions, remuneration, and duty to act in interests of policyholders.
  - Require internal audit and actuarial control functions.
  - Enhance public disclosure on valuation of technical provisions, risk exposures and concentrations, risk management, and stress-testing sensitivity results.
  - Extend fit-and-proper assessments and ACP powers to remove unsuitable persons across all key functions.

### Securities Regulation, Market Infrastructure, and LCH.Clearnet SA
- Securities regulation:
  - France exhibits a high level of IOSCO implementation; AMF and ACP have broad licensing, supervisory, investigative, and enforcement powers.
  - Areas needing strengthening: AMF onsite inspections of ISPs and FIAs, ACP enforcement and more frequent capital adequacy reporting for ISPs, H3C staffing and enforcement powers.
  - Market fragmentation from MiFID noted; MiFID review is an opportunity to address pre- and post-trade transparency issues.
- LCH.Clearnet SA findings and recommendations:
  - High observance of CPSS/IOSCO recommendations; sound legal basis; comprehensive risk management; cash settlement in central bank money for most euro payments.
  - Recommendations include:
    - Measure exposures continuously throughout the business day.
    - Intensify stress testing and back-testing.
    - Strengthen control of the IT insourcing company and formalize external audits.
    - Carry out annually an external audit of business continuity plan, including that of the in-sourcing company.
    - BdF should have stronger legal basis to implement oversight; increase intensity of onsite inspections with staff participation from all relevant authorities.

### Crisis Management, Resolution, and Safety Nets
- FGD (Fonds de Garantie des Dépôts) role:
  - May act as pay-box or intervene to ensure orderly resolution; decisions based on “least-cost” considerations.
  - Current Board composition includes active bankers — recommendation to modify composition to limit conflicts of interest.
  - Expand FGD powers to subscribe to capital of a bridge bank and assume assets/liabilities from a failing bank.
- EU Resolution Directive (draft, June 2012) implications:
  - Member states to adopt sale-of-business, bridge institution, asset separation, and statutory bail-in tools.
  - Authorities will need powers to force sales, write off or cancel shares, write down or cancel debt, replace senior management, and impose temporary moratoria on payment of claims.
- Recovery and resolution plans:
  - Progress under way; banks submitted group-wide RRPs; discussions in supervisory colleges and Crisis Management Groups since 2009/2011.

### Main Recommendations (selected from Table 1 / Annex Table 2 / Annex Table 6)
- Overall financial sector oversight:
  - Enhance public disclosure of financial institution conditions and risks. — Priority: H; Timing: S
  - Consider modifying MoF participation in ACP and AMF Boards to support supervisory independence. — Priority: M; Timing: M
  - Eliminate headcount limits for ACP, AMF, and H3C. — Priority: M; Timing: M
- Banking supervision:
  - Continue monitoring banks’ funding position and availability of collateral for secured debt market/central bank facilities. — Priority: H; Timing: H
  - Give ACP powers to assess Board member suitability and remove unsuitable Board members. — Priority: H; Timing: M
  - Give ACP powers to receive prior notification of major acquisitions (ex ante). — Priority: H; Timing: S
  - Require full and consistent disclosure of capital treatment and intra-group financial interactions. — Priority: H; Timing: S
- Insurance supervision:
  - Introduce enforceable legal/regulatory corporate governance requirements (Boards). — Priority: H; Timing: M
  - Require internal audit and actuarial control functions. — Priority: H; Timing: M
  - Enhance insurers’ disclosure including valuation of technical provisions and stress-test sensitivity. — Priority: H; Timing: S
- Securities regulation and H3C:
  - Strengthen AMF supervision of investment service providers and financial advisors via increased onsite inspections. — Priority: H; Timing: S
  - Provide greater enforcement powers to H3C and increase staffing levels. — Priority: M; Timing: M
- Resolution framework and FGD:
  - Modify composition of FGD Board to limit conflicts of interest. — Priority: H; Timing: M
  - Expand FGD powers to assume assets and liabilities from failing banks. — Priority: H; Timing: S
- Central counterparties:
  - LCH.Clearnet SA should measure exposures continuously intraday. — Priority: H; Timing: S
  - Carry out annually an external audit of LCH.Clearnet SA business continuity plan (including in-sourcing company). — Priority: H; Timing: M
- AML/CFT:
  - Strengthen implementation in overseas territories. — Priority: H; Timing: M
  - Complete legislation to enable authorities to seize laundered property. — Priority: H; Timing: M

### Risk Assessment Matrix — Selected Entries
- Prolonged recession in advanced economies:
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in Next 1–3 Years: High
  - Expected Impact on Financial Stability if Realized: high
- Strong intensification of the Euro Area crisis:
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in Next 1–3 Years: High
  - Expected Impact on Financial Stability if Realized: high
- Closure of wholesale funding to French banks:
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in Next 1–3 Years: High
  - Expected Impact on Financial Stability if Realized: High
- Housing price correction:
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in Next 1–3 Years: Medium-Low
  - Expected Impact on Financial Stability if Realized: Medium

### Key Economic and Financial Indicators (selected from Appendix Table 1–3)
- Real GDP (change in percent): 2009 -3.1; 2010 1.7; 2011 1.7; 2012 0.2; 2013 0.4; 2014 1.0; 2015 1.5; 2016 1.7; 2017 1.9
- Nominal GDP (billions of euros): 2009 1886; 2010 1937; 2011 1997; 2012 2042; 2013 2095; 2014 2161; 2015 2244; 2016 2334; 2017 2433
- General government gross debt (percent of GDP): 2009 79.0; 2010 82.3; 2011 86.0; 2012 89.5; 2013 90.9; 2014 91.3; 2015 90.2; 2016 88.0; 2017 84.6
- Unemployment rate (percent): 2009 9.5; 2010 9.7; 2011 9.6; 2012 10.3; 2013 10.6; 2014 10.7; 2015 10.5; 2016 10.1; 2017 9.7
- Regulatory capital to RWAs (FSIs): 2003 11.9; 2004 11.5; 2005 11.3; 2006 10.9; 2007 10.2; 2008 10.5; 2009 12.4; 2010 12.5; 2011 12.2
- Regulatory Tier I capital to RWAs: 2003 9.0; 2004 8.8; 2005 8.2; 2006 8.2; 2007 7.7; 2008 8.5; 2009 10.2; 2010 10.7; 2011 10.9
- Nonperforming loans to total gross loans: 2003 4.8; 2004 4.2; 2005 3.5; 2006 3.0; 2007 2.7; 2008 2.8; 2009 3.6; 2010 3.5; 2011 3.5
- Liquid assets to total assets: 2003 21.6; 2004 21.3; 2005 20.5; 2006 19.9; 2007 18.9; 2008 18.3; 2009 18.3; 2010 23.0; 2011 24.1
- Liquid assets to short-term liabilities: 2003 153.7; 2004 155.1; 2005 150.1; 2006 146.7; 2007 150.3; 2008 139.6; 2009 150.1; 2010 144.4; 2011 136.3

*Source: IMF Financial Sector Assessment Program — Executive Summary and related chapters in _cr12341*

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

### Executive Summary

### Overview and Key Challenges
- French banks have shown significant resilience during the global financial crisis, but face challenges related to size, complexity, and an altered regulatory and operating environment.
- Permanent changes have exposed an overreliance on wholesale funding and recent events in Europe are putting pressure on regional and international activities in retail and capital markets.
- Significant uncertainties remain on the resolution of the eurozone crisis and how it may affect the French financial system and economy.
- France’s financial system: total assets amounted to €10 trillion at end-2011, or five times France’s GDP; the system is dominated by five banking groups, four of which have been identified as global systemically important banks (G-SIBs).

### Banking Sector: Restructuring, Resilience, and Risks
- Restructuring actions by banks:
  - Increasing liquidity and reducing dependence on short-term and U.S. dollar wholesale funding, including through deleveraging abroad.
  - Reducing cross-border presence in Europe and elsewhere.
  - Raising solvency ratios, mainly through retained earnings and lower dividends.
  - Reducing activities that are dependent on short-term funding, capital intensive, and less profitable.
- So far, deleveraging does not appear to have weighed on the real economy, but the future path could be more challenging if the eurozone crisis intensifies.
- Short-term risks to financial stability:
  - Possibility of a sustained closure of funding markets.
  - Reduced profitability.
- Stress test findings:
  - Banks’ regulatory capital is sufficient to cope with a range of adverse macroeconomic scenarios, including a downturn in the housing market.
  - Exposures to vulnerable European sovereigns seem manageable.
  - French banks remain vulnerable to sustained disruptions in funding markets, despite improvements in liquidity positions and relief from ECB long-term funding.
  - Adequate collateral to access liquidity through the secured debt market and/or central bank facilities is important to manage potential stress events.
- Market perception:
  - The market value of equity of some French banks remains below book value, suggesting continued market concerns.
  - An intensification of the euro-zone crisis could cause a significant shock to private sector activity in the region and put capital pressures on some banks.

### Authorities’ Policy Response and Recommendations (Banks)
- Authorities’ focus on requiring banks to continue to build up adequate capital and liquidity buffers is appropriate.
- Large French banks have announced plans to meet Basel III Common Equity Tier 1 (CET1) capital targets during 2013 and have divested noncore assets.
- Authorities should continue to:
  - Monitor banks’ capital and liquidity plans closely, including through stress tests.
  - Be ready to impose capital conservation measures (such as suspension of dividend and bonus payments) should banks encounter difficulties in meeting agreed targets.

### Supervision and Regulatory Framework
- Supervisory quality:
  - Banking supervisory practices are of very high standard, but need more timely feedback and strengthened follow-up mechanisms to ensure banks act upon weaknesses identified.
- Legislative and disclosure enhancements recommended:
  - Strengthen ACP’s powers to set requirements for Board responsibilities, and to suspend or dismiss unsuitable Board members.
  - Give ACP formal powers to approve foreign acquisitions by French banks outside the European Economic Area.
  - Require fuller and more consistent disclosure of bank capital treatment and related financial interactions within complex groups.
  - Clarify the reform agenda foreseen by the new government to eliminate regulatory uncertainty.
- Governance and coordination:
  - Cross-Board memberships among financial authorities support cooperation and information sharing but could blur transparency and accountability.
  - The treasury attends meetings of several supervisory bodies (no voting rights); consideration should be given to establishing separate coordination arrangements to preserve effective advice while avoiding perceived threats to supervisory independence.
- Transparency and market discipline:
  - France lags behind many countries in public disclosure of financial sector data.
  - ACP should enforce publication of regular and comparable data on an institution-basis for banks, insurance companies, and securities firms, including data from prudential returns, as appropriate.
  - Publication of a Financial Stability Report covering financial sector developments in France, along with results from systemic risk analysis, would be desirable.

### Insurance, Securities, and Market Infrastructure
- Insurance sector:
  - Current regulatory and supervisory approach has produced financially sound insurers.
  - Key challenges: persistently low interest rates and competition from other savings products.
  - Preparations for Solvency II are underway and will require important changes in regulatory requirements and supervisory assessments of insurers’ financial soundness, governance, and risk management.
  - Authorities should work toward early introduction of specific Board requirements in areas of risk-appetite statements, risk management, delineation of responsibilities between the Board and key control functions, remuneration policy, and a duty to act in the interests of policyholders.
- Securities regulation and market infrastructure:
  - Oversight is of a high standard.
  - Areas for improvement:
    - Supervision of investment service providers and financial investment advisors.
    - Greater enforcement of securities regulation.
    - Higher intensity of onsite inspections of the central counterparty by all relevant authorities.

### Main Recommendations (Table 1: France: FSAP Update—Main Recommendations)
- Format note: Recommendations table uses "Priority (H/M)" and "Timing (S/M)" where H/M indicates high or medium priority; S/M indicates the time span in which the recommendation could be implemented (short or medium term).
- Overall Financial Sector Oversight:
  - Enhance public disclosure of financial institution conditions and risks. — Priority: H; Timing: S
  - Give serious consideration to modifying MoF participation in the Boards of ACP and AMF to support independence of the supervisory process. — Priority: M; Timing: M
  - Eliminate limits on headcount for ACP, AMF, and H3C. — Priority: M; Timing: M
- Banking Supervision:
  - Continue monitoring banks’ funding position and availability of collateral to access liquidity through the secured debt market and/or central bank facilities. — Priority: H; Timing: H
  - Give ACP powers to assess the suitability of Board members (of both banks and insurance companies) and to require removal of all unsuitable Board members. — Priority: H; Timing: M
  - Give ACP powers to ensure it receives prior notification of major acquisitions and is, therefore, able to consider them ex ante. — Priority: H; Timing: S
  - Require full and consistent disclosure of the capital treatment in place and the related financial interactions within complex groups. — Priority: H; Timing: S
- Insurance Supervision:
  - Introduce enforceable legal and regulatory corporate governance requirements. — Priority: H; Timing: M
  - Require insurance companies to have internal audit and actuarial control functions. — Priority: H; Timing: M
  - Enhance insurance companies’ disclosures, including on valuation of technical provisions; risk exposures and concentrations; risk management; corporate governance; and sensitivity results from forms of stress testing. — Priority: H; Timing: S
- Securities Regulation:
  - Establish stronger conflict-of-interest arrangements to govern industry participation in the AMF Board. — Priority: H; Timing: M
  - Strengthen AMF’s supervision of investment service providers and financial advisors by increasing onsite work, including inspections. — Priority: H; Timing: S
  - Provide greater enforcement powers to the H3C and increase its staffing levels. — Priority: M; Timing: M
- Resolution Framework:
  - Modify composition of Fonds de Garantie des Dépôts (FGD) Board to limit the potential for conflict of interest. — Priority: H; Timing: M
  - Expand FDG’s powers in the resolution process, so as to assume assets and liabilities from a failing bank. — Priority: H; Timing: S
- Central Counterparties:
  - LCH.Clearnet SA should measure its exposures continuously throughout the business day. — Priority: H; Timing: S
  - Carry out annually an external audit of LCH.Clearnet SA business continuity plan, including that of the in-sourcing company. — Priority: H; Timing: M
- AML/CFT:
  - Strengthen the implementation of AML/CFT measures in the overseas territories. — Priority: H; Timing: M
  - Complete legislation to enable the authorities to seize laundered property. — Priority: H; Timing: M

*Source: IMF Financial Sector Assessment Program — Executive Summary*

### 2.      Before the crisis, the French financial system created a robust income generating

### 2. Before the crisis, the French financial system created a robust income generating capacity, but also became more vulnerable to shocks

### Pre-crisis expansion and vulnerabilities
- Rapid balance sheet growth during the second half of the 2000s was driven by banks’ expansion into international corporate and investment banking (CIB) and derivatives products, funded in the wholesale market, and a more limited international retail expansion, particularly in high-yield Euro area countries.
- Domestic retail activity and asset-gathering margins helped cover losses on CIB activities during the 2008 global financial crisis, supporting net profits for most banks.
- With the worsening of the European sovereign debt crisis in 2011, market perceptions deteriorated sharply because of:
  - high leverage and reliance on wholesale funding;
  - high exposure to potential losses in high-yield Euro area countries; and
  - capital levels below the international average.
- Dependence on wholesale funding remains a key risk despite improvements in solvency and liquidity since 2008–09.

### Crisis events, policy responses, and immediate impacts
- Key policy measures taken by authorities:
  - Recapitalization of the Dexia Group in 2008: total €6.4 billion recapitalization with the French government contributing €1 billion and the Caisse des Dépôts et Consignations (CDC) contributing €2 billion; governments of France, Belgium, and Luxembourg issued guarantees on Dexia’s obligations (€90 billion at the peak).
  - Creation of the Société de Financement de l’Économie Française (SFEF) to undertake refinancing operations up to €265 billion; SFEF issued government-guaranteed bonds equivalent to €77 billion (about 4 percent of GDP), on-lent to banks in proportion to market shares. The scheme expired at end-2009.
  - Creation of the Société de Prise de Participations de l’État (SPPE) for bank recapitalization, endowed with up to €40 billion; about half of this amount was injected into the six largest French banks in the form of subordinated debt securities and preference shares. All banks, except Dexia, have since repaid the state.
  - Support for the creation of the BPCE group with a capital injection of €5 billion by SPPE.
- Legacy assets and capital:
  - Outstanding legacy assets net of provisions declined by 10 percent during 2010 (to €96 billion). 1
  - Cumulative losses through 2012 for the five largest French banks reached €34 billion.1
- Market pressures in mid-2011:
  - French banks’ exposures to high-yield Euro area countries totaled $677 billion at end-December 2011, of which close to $400 billion to Italy.
  - Bank equity prices fell by 50–60 percent during the summer of 2011 and CDS spreads widened.
  - U.S. money market mutual funds cut exposure to French banks by 80 percent in the second half of 2011.
  - The European Banking Authority (EBA) concluded that French banks needed an extra €7.3 billion in capital by mid-2012, including a temporary buffer against sovereign risk—an objective that was achieved by March 2012.
- Liquidity measures and funding outcomes:
  - The ECB’s three-year Long-Term Refinancing Operations (LTROs) were drawn to the tune of €169 billion as of May 2012, of which close to €140 billion were deposited at the ECB.
  - Emergency liquidity assistance (ELA) stood at €18.7 billion at end-2011.
  - French banks issued €48 billion in the first half of 2012, and together with €19 billion of prefunding done in 2011, were able to cover about 77 percent of their 2012 financing needs (close to €84 billion), taking into account deleveraging plans.
  - Maturing debt in 2013 and 2014 remained high at €131 billion, posing refinancing challenges if market conditions do not improve significantly.

### Balance sheet adjustments and deleveraging
- Deleveraging plans announced by the five largest banks in mid-2011 focused primarily on disposing of noncore, dollar-funded international assets.
- Banks reduced cross-border assets by over half a trillion U.S. dollars in the second half of 2011; the trend continued in 2012 at a slower pace.
- Disposal of remaining legacy assets from the first phase of the crisis accelerated to free up regulatory capital.
- Domestic credit activity was largely maintained and continued to grow, though at declining rates due to slower demand for bank loans; loan growth slowed in 2012 and was substituted in part by corporate bond issuance.

### Funding structure and liquidity challenges
- Large French banks had one of the lowest shares of retail funding in Europe, with customer deposits a third of total liabilities at end-2011.
- Wholesale funding was concentrated at the short end.
- Meeting Basel III liquidity ratios will require significant efforts to raise deposits and lengthen funding maturities.
- Banks reacted by actively seeking retail deposits, helped by low interest rates and risk aversion that made insurance and mutual fund placements relatively unattractive.
- Structural shifts in household savings allocation will require a reassessment of tax incentives for long-term savings instruments, notably life insurance and regulated savings products.
- In the interim, banks need to ensure adequate collateral to access additional funding and liquidity through the secured debt market and/or central bank facilities.
- French banks routinely issue structured notes through private placements and covered bonds.

### Asset quality and concentration risks
- Asset quality concerns mainly stem from exposures to high-yield Euro area countries; domestic asset quality is high.
- Sovereign exposures are sizeable in Italy, though they declined markedly in the second half of 2011. Exposures to Greece materially decreased.
- A worsening European situation could lead to rising cost of credit and higher sovereign spreads, producing significant losses for some banks and potentially undermining capital-building efforts.
- Cross-border financial linkages are significant: total foreign claims amounted to about €2.7 trillion as end-June 2011.
- Network/contagion analysis findings (summary of simulations):
  - The United States, United Kingdom, and Germany represent the biggest potential systemic risk for the French banking system, followed by Italy.
  - French interbank exposures to the United Kingdom, United States, and Germany are sizable but small compared to exposures to derivatives or contingent liabilities, to sovereigns, and especially to foreign corporates.
  - Credit and funding shocks through the Italian interbank market would be contained to about 30 percent or less of capital, but knock-on effects on banks from the corporate and sovereign sectors would represent 70 percent of capital; Belgium’s impact would be about 50 percent of capital.

### Resilience of household mortgage lending and real estate risks
- Lending criteria emphasize borrower income sustainability rather than collateral value; fixed-rate loans predominate; financial innovation is limited.
- Loan-to-value (LTV) ratios are high compared to other advanced countries, but debt service payments for the average household are conservative and arrears have been structurally low.
- France’s social security system and the use of mortgage insurance and other third-party guarantees have limited the translation of income shocks into credit losses.
- Indicators and trends:
  - Residential real estate prices continued to recover in 2011, while demand softened as the rate of new construction decreased.
  - Arrears on housing loans remained structurally low.
  - Relative loan profitability: mortgage interest rates rose modestly while the 10-year government bond yields moved; fixed-rate loans predominate.

### Policy and supervisory priorities (implicit and explicit)
- Strengthen banks’ funding profiles by:
  - raising retail deposits and lengthening funding maturities;
  - ensuring adequate collateral for access to secured funding and central bank facilities.
- Reassess tax incentives for long-term savings instruments, notably life insurance and regulated savings products, to address structural shifts in household savings allocation.
- Continue disposal of noncore and legacy assets to free regulatory capital and reduce dollar-funded risk exposures.
- Improve oversight framework to support a safer and sounder financial system going forward, including monitoring cross-border linkages and spillover risks.

*Source: IMF staff chapter: "Before the crisis, the French financial system created a robust income generating capacity, but also became more vulnerable to shocks."*

### Box 2. Real Estate Risks

### Box 2. Real Estate Risks

### Residential and commercial price developments
- Residential real estate prices surged sharply after the mid-1990s (by over 100 percent in real terms), dropped by about 10 percent during the 2008–2009 crisis, and have since recovered to just below their pre-crisis peak.
- Most estimates of price overvaluation at end-2011 range from 10 percent to over 20 percent.
- The length of the downturn in France was relatively short: 4 quarters (compared to over 10 quarters for Spain, Ireland, and the United States).
- Real estate price developments appear much more related to credit growth than to the business cycle.
- The residential market has historically borne a very low default risk.
- Commercial property: CB Richard Ellis Paris office capital value index decreased by over 30 percent during the 2008–09 crisis and has risen by more than 20 percent y/y since 2010; the rate of capital value growth started to slow in 2012: Q1.
- The commercial real estate (CRE) market is struggling with a sharp increase in problem loans when considering French banks’ exposures to CRE worldwide.

### How France differs from other boom-bust cases
- Since the mid-1990s, house price inflation in France was lower than in other major European countries with housing booms.
- No surge in residential investment, reflecting structural constraints: scarcity of buildable land in dense metropolitan areas and regulatory barriers to new housing construction.
- Credit growth has been more tempered in France and targeted at households, not property developers.
- Underwriting quality: tight underwriting criteria emphasizing sustainability of borrower income rather than collateral value.
- Interest rate risk largely borne by credit institutions and mortgage bond investors due to the preponderance of fixed-rate or quasi-fixed rate mortgages.
- Limited speculative activity:
  - Buy-to-let investments represented only 16.3 percent of loans in 2011.
  - In CRE, debt financing constraints are binding and active lenders direct capital toward high-quality prime core properties.
- Elevated loan-to-value (LTV) ratios coexist with high mortgage asset quality:
  - Almost half of mortgages originated in 2011 had down-payments of 5 percent or less.
  - LTV ratios exceeding 100 percent are not uncommon.

### Fundamentals supporting prices and risk attenuation
- Prices supported by “fundamentals”: population growth, low supply, and comparatively low household indebtedness.
- Factors that would attenuate financial stability risks even if prices fall:
  - (i) overall sound underwriting and risk management practices resulting in a prudent debt service to income ratio for the average household;
  - (ii) the absence of nonrecourse loans;
  - (iii) currently cautious lending criteria for commercial real estate.
- Sensitivity stress tests of a decline in property prices of 25 percent did not show a significant impact on bank capital ratios.

### Policy actions taken and possible further measures
- Steps already taken to cool the market include:
  - Recent government measures reduced tax incentives for buy-to-let investors and new home purchases, and doubled the holding period for exemption from capital gains tax.
  - The ACP increased scrutiny of housing loans through additional reporting from banks, among others, but has not imposed a cap on LTV or debt-to-income ratios.
- The decline of home prices since the last quarter of 2011 suggests the steps taken by the authorities have begun to be effective.
- Potential macroprudential measures if indicators point to excessive risk-taking:
  - LTV ceilings could curb demand and avoid a credit-driven price increase.
  - Negative impact on access to credit for some vulnerable categories could be limited by setting tighter limits based on, for example, loan amounts.
- Precautionary step recommended:
  - Increasing the quality and availability of micro data to help supervisors and market participants acquire in-depth knowledge of the real estate market and enable the use of LTV limits, if necessary.

### Linkages to broader financial stress testing and vulnerabilities
- Model-based estimates cited: home prices are 10–20 percent above their equilibrium levels, leaving banks vulnerable to losses if macroeconomic developments translate into significant borrower income losses and higher probabilities of default.
- Stress test context (Box 3 and related text):
  - Single-factor tests included a 25 percent shock to real estate prices.
  - BU stress tests indicated shocks to real estate prices have a negligible impact on CET1 ratios.
  - Sensitivity analysis showed an extreme shock affecting all sovereign holdings would impact the initial aggregate CET1 capital level by a further 5 percent.
- Overall assessment: despite pockets of vulnerability (notably liquidity risks and some concentration risks), banks’ mortgage and real estate exposures appear mitigated by underwriting standards, product structure, and recent reductions in exposures to high-yield sovereigns.

*Source: _cr12341 - Box 2. Real Estate Risks*

### 25.      Despite improvements in bank funding profiles during 2011, vulnerability to

### 25.      Despite improvements in bank funding profiles during 2011, vulnerability to

### Liquidity stress-test findings
- Liquidity stress tests assessed resilience to a strong shock characterized by run-off rates and haircuts on assets calibrated by type on French historical data, and no market access.
- Assuming no recourse to ECB liquidity, significant reliance on short-term funding would result in difficulties for two banks to meet liquidity needs from outflows (mostly unsecured wholesale funding from banks and other institutions) with available buffers, standby liquidity from inflows, and asset sales.
- A two-notch bank downgrade under these circumstances could impose added stress through collateral and margin calls, with a significant effect on some banks.
- All banks would pass the test, assuming access to ECB liquidity.
- A reverse stress test on the maximum potential loss of wholesale funding, by currency, showed:
  - three of the banks recurring to central bank liquidity above a 5 percent loss of wholesale funding.
  - With ECB support, four banks would be able to address up to a maximum loss of about 15 percent of all wholesale funding.
- Table 2. France: Bank Liquidity Stress Test Results (Survival period / Number of banks meeting contractual obligations without ECB support / Number of banks meeting contractual obligations with ECB support):
  - Up to one day: 7 / 7
  - Greater than one day up to one week: 6 / 7
  - Greater than one week up to one month: 6 / 7
  - Greater than one month up to two months: 6 / 7
  - Greater than two months up to three months: 6 / 7
  - Greater than three months up to six months: 5 / 7
  - Greater than six months up to one year: 5 / 7
  - Greater than one year up to two years: 5 / 7
- Source of table: ACP.

### Contagion risk and interbank exposures
- The French banking network is moderately concentrated, with most interbank exposures within it relatively small.
- In terms of net exposures:
  - two banks lend 60 percent of all interbank net flows.
  - one bank receives over 40 percent of French interbank flows.
  - these exposures are relatively small (under 3 percent of total assets).
- Therefore, contagion risk among French banks appears limited.
- Failure of a single bank would result in a CET1 ratio decline to 8.5 percent from 9.9 percent.
- Larger contagion effects may emerge from exposures to non-French bank counterparts in the interbank market, including other European banks, U.S. investment banks, and banks from Japan and Gulf Cooperation Council (GCC) countries.

### Insurance stress-test findings — life insurers
- Stress tests were run on a solo basis on 12 life insurers accounting for 70 percent of the domestic market.
- Despite an unfavorable environment in 2011, the impact on life insurers’ solvency ratios was moderate, thanks to absorption mechanisms linked to revenues attributed to beneficiaries and the ability to tap into reserves to offset shocks.
- Final cash flow was positive for all companies during the year, but some companies chose to hold larger portions of assets in cash because surrenders were peaking and uncertainty over fixed income markets existed.
- Under the most severe application of the global scenario:
  - only two entities would present a solvency ratio below 100 percent.
  - the average solvency margin for the participating companies would approximate 109 percent of current requirements.

### Insurance stress-test findings — nonlife insurers
- The impact on nonlife entities of the market and insurance shocks would be greater, partly because nonlife insurers do not have as many shock-absorption mechanisms as life insurers.
- Two nonlife entities would have a solvency ratio below 100 percent after shocks.
- Insurance shocks are more significant for nonlife insurers than for life insurers, but impacts are tempered by reinsurance coverages, including a national risk pool for natural disasters, and by high levels of solvency margin.
- For participating nonlife companies:
  - solvency margin averages 231 percent of requirements following the application of shocks.
  - solvency margin averaged 244 percent before shock.

### Supervisory capacity and stress-testing practice
- Going forward, more regular use of ACP’s stress testing capabilities would help monitor bank capital and liquidity plans.
- ACP has started using bank-by-bank TD stress tests, including as a benchmarking tool for BU tests run by banks.
- ACP should refine the toolkit to assess risks to financial stability to allow projections of losses by risk type and RWAs by asset class and collect more granular bank-by-bank data (for instance, for calculation of risk parameters related to retail lending).

### Institutional developments and financial stability framework
- Post-crisis institutional changes:
  - The Autorité de Contrôle Prudentiel (ACP), attached to BdF, was established, bringing together prudential supervision of banks, insurers, investment firms, and market infrastructure providers, and a new mandate for consumer protection.
  - The Conseil de Régulation Financière et du Risque Systémique (Corefris) was created as an interagency cooperation and coordination mechanism on systemic risk prevention and management, including crisis times.
- Corefris is not a decision-making body; each individual authority retains responsibility to act in its own right.
- France has not yet designated an authority with formal powers to conduct macroprudential policy as envisaged by CRR/CRD IV.
  - To be credible, such an authority should anchor decision making in analyses of financial stability that help shape market participants’ and the public’s knowledge and expectations.

### Disclosure, governance, and accountability issues
- Disclosure improvements recommended:
  - ACP should publish regular and comparable bank-by-bank data, including prudential returns when appropriate.
  - All major banking groups should publish more detailed quarterly financial information, harmonized at both the group and listed entity level for cooperative banks.
  - Reports of BdF, ACP, and Corefris should provide comprehensive information on financial sector developments in France; an exercise is in place but no decision on publication has been taken.
- Cross-Board memberships among financial authorities:
  - Provide cooperation and information sharing, but could blur accountabilities and transparency.
  - The treasury participates, without voting rights, at the meetings of Boards of several supervisory bodies and can ask for a second deliberation in certain circumstances, which could present potential conflicts of interest.
  - Consideration should be given to establishing separate coordination arrangements to preserve supervisory independence and avoid perception of threats to independence.

### Legislative and supervisory recommendations for ACP
- ACP is starting to benefit from synergies in banks and insurers supervision as part of BdF, but:
  - The new consumer protection mandate has used material additional resources; it will be important not to let consumer protection crowd out the essential micro-prudential contribution of ACP to financial stability.
- Areas to strengthen:
  - Improve timeliness and flexibility of feedback mechanisms to complement high-quality onsite inspections.
  - Further develop assessment of the quality of risk governance and better define rating criteria for supervisors to judge risk management quality.
- Concerns that could undermine ACP independence:
  - Role of the MoF in the ACP Board could create reputational risk.
  - Legislative limits on ACP headcount.
  - ACP cannot independently set any prudential rules.
  - ACP could be given a more formalized role in recommending prudential rules.
- Two legislative deficiencies that could hamper supervisory effectiveness:
  - Lack of a complete legislative framework related to ACP’s powers to regulate responsibilities of banks’ Board of Directors, distinct from senior management. Consequences include limitations on fit-and-proper process integrity, inability to suspend or dismiss Board members, and inability to set Board requirements for oversight and risk governance.
  - ACP does not have formal power to approve acquisitions by French banks when the target is outside France, weakening ex ante oversight of cross-border acquisitions and consolidated supervision.

*Source: IMF staff summary of ACP, BdF, and related supervisory material contained in the provided content.*

### 39.      While capital requirements are in many ways prudent and appropriate, there

### While capital requirements are in many ways prudent and appropriate, there

### Capital requirements, definition of capital, and disclosure
- Current capital regulations in France, pursuant to EU capital rules, fall short of the applicable Basel standards (Basel II.5) in a few areas.
- Material weaknesses exist in the definition of capital, and related public reporting vis-à-vis current Basel II/II.5 requirements.
- Issues particularly affect:
  - Bancassurance groups: reported Tier 1 capital ratios can be lower than the applicable Basel requirement and can involve recognition of capital that may not be available to the banking part of the group, or double counting of capital.
  - Mutual bank groups with cross-holdings of banks by certain major internationally active publicly traded entities: overall consolidated group capital calculation is compliant, but public disclosures can be confusing.
- The Autorité de Contrôle Prudentiel (ACP):
  - Focuses on consolidated group capital position, on various sub-measures, and on financial relations within groups, showing excellent understanding.
  - Despite improvements in public disclosures after the mission date, current approaches risk confusion for marketplace participants.
  - Recommendation: authorities should require full and consistent disclosure of the capital treatment in place, and the related financial interactions within complex groups.
- Specific concerns:
  - The treatment of bank cross-holdings affects the publicly reported capital of some material internationally active subsidiaries in the affected groups, but does not affect the consolidated capital position of the groups.
    - Result can be double counting of capital in the relevant banking part of the group, or counting as capital amounts that may not be available in the event of need, leading to market and investor misunderstanding.
  - The treatment of insurance investments of bank-insurance conglomerates affects the consolidated Tier 1 capital position, and results in overstatement of this ratio compared to Basel requirements.
    - Total capital ratios for the group are calculated appropriately, but the issue can affect the public disclosures of CET1 ratios by banks within the group.
- Footnotes in source:
  - For some major mutual groups, cross-holdings of equity between the main bank, central body (at sub-consolidated level) or main bank’s subsidiary and the regional banks that are shareholders of the main bank are not deducted from capital; instead, a risk weight is applied to them.
  - In France, certain banks have opted to use the EU conglomerate directive method (which Basel II explicitly permits), thereby including insurance entities within the scope of consolidation. Many others deduct insurance cross-holdings, following the preferred approach under Basel II, and allowed by the French and EU rules. However, deductions are from total capital, instead of from Tier 1 and Tier 2 equally.

### Single Supervisory Mechanism (SSM) implications
- Ongoing discussions on a single supervisory mechanism (SSM) for euro area banks could significantly alter supervisory processes in France.
- The SSM is likely to involve an allocation of supervisory tasks and powers between the center and national authorities.
- If key areas of improvement identified remain a national responsibility, the recommendations in the report would help enhance the effectiveness of supervision both before and after the SSM.

### Insurance supervision (Solvency I to Solvency II transition)
- Current regime:
  - Insurance regulation and supervision in France is predominantly carried out using a Solvency I approach, though preparations for Solvency II are underway.
  - The current thorough approach to assessing insurer technical provisions and their coverage by admissible assets, as well as current and likely future solvency against Solvency I solvency margin requirements, has led to financially sound insurers.
- Solvency II expectations and preparedness:
  - Solvency II is to be more based on economic risk and should provide greater incentives for insurers to properly measure and manage their risks; commencement date is yet to be announced.
  - ACP’s Solvency II preparations are well advanced; ACP staff have been heavily involved and have contributed to EU work on Solvency II.
  - France has been waiting for the finalization of the EU technical standards before moving to implement Solvency II type requirements.
- Assessment against ICPs:
  - The insurance supervisory framework was assessed against the revised Insurance Core Principles (ICP), issued in October 2011.
  - The revised ICPs include more extensive requirements relating to risk management in insurers and macroprudential issues and are written in contemplation of Solvency II adoption by supervisors.
- Recommended regulatory and supervisory changes ahead of Solvency II:
  - Early introduction of specific requirements for insurer Boards in areas of risk appetite statements, risk management within the appetites, delineation of responsibilities between the Board and key persons in control functions, remuneration policy, and a duty to act in the interests of policyholders.
  - Fit-and-proper assessments should be more extensive, covering all key roles in insurers:
    - Fit-and-proper assessments at licensing, change of control, mergers and acquisitions, and on movement of personnel should cover all Board members or persons controlling key functions.
    - EU Solvency II Directive requires that all persons that perform key functions are fit and proper; changes will be needed on implementation.
    - Recommendation: extend ACP’s power to remove unsuitable persons to cover all such roles.
  - Public disclosure requirements on insurers need improving; further detail and wider information will be required with full implementation of Solvency II.

### Securities regulation
- Implementation and institutional capacity:
  - France exhibits a high level of implementation of the IOSCO principles.
  - Legal framework is robust and provides AMF and ACP with broad licensing, supervisory, investigative, and enforcement powers within their competencies.
  - Robust arrangements exist for cooperation between AMF and ACP.
  - Offsite mechanisms and risk-scoring frameworks are in place for investment services providers (ACP) and for portfolio management companies (AMF).
  - AMF has robust market surveillance systems and has been active in enforcement of market abuse provisions.
  - Authorities have implemented supervisory arrangements pertaining to identification and monitoring of emerging and systemic risks, though best practices and IOSCO guidance are limited.
- Areas needing strengthening:
  - AMF should dedicate more resources to onsite work (including inspections) of investment services providers, notably financial investment advisors.
  - ACP should make greater use of stronger enforcement measures, including sanctions when necessary, and increase frequency of reporting of capital adequacy for investment services providers to enhance early warning.
  - H3C’s effectiveness in supervising auditors’ oversight is severely constrained due to limited human resources; increasing staffing levels is an urgent priority.
  - Giving H3C greater direct enforcement powers would enhance auditors’ oversight effectiveness.
- Governance concerns:
  - Participation of the treasury in all deliberations of the AMF Board (without a voting right but with the ability to ask for a second deliberation), as well as in the AMF enforcement committee (except during deliberations), and participation of industry representatives—some on active duty—on Boards of AMF and H3C could potentially undermine independence or create conflict with commercial interests.
  - Arrangements exist to address conflicts of interest, but alternative mechanisms should be established to ensure market expertise is brought into decision-making.
  - Limited direct representation of retail investors at Board level should be addressed.
  - Legislative limits to AMF and H3C headcount could affect their ability to command sufficient resources for market supervision.

### Market fragmentation and European-level action
- MiFID implementation reduced transaction costs in European securities markets but has led to market fragmentation.
- Market fragmentation challenges to transparency and securities markets oversight should be addressed at the European level.
- The current review of MiFID is an opportunity to address these challenges.

### Soundness and oversight of market infrastructures (LCH.Clearnet SA)
- Observance and legal framework:
  - LCH.Clearnet SA displays a high level of observance of the CPSS/IOSCO recommendations.
  - It has a sound and transparent legal basis and an adequate risk management framework to address financial and operational risks.
  - Participant default rules and procedures are comprehensive.
  - Participant assets and CCP collaterals are kept in supervised banks and regulated securities depositories.
  - Cash settlement in central bank money and access to central bank facilities minimize liquidity risk.
  - Governance arrangements and composition of Boards and management are well defined and adequately staffed.
- Performance during crisis and recommendations:
  - LCH.Clearnet SA managed well the challenges of the financial crisis, including prompt dealing with defaults of major participants and effective management of increased price volatility, including sovereign debt.
  - Recommendations to strengthen resilience:
    - Monitor and measure exposures continuously throughout the business day.
    - Intensify use of stress testing and back-testing mechanisms.
    - Strengthen control of the information technology company that supplies and operates the infrastructure.
    - Formalize external audits.
  - Importance of ensuring that ongoing reorganization of ownership structure and realignment of business lines does not erode LCH.Clearnet SA’s decision-making process.
- Oversight framework and legal basis:
  - Regulatory, supervisory, and oversight framework is comprehensive and effective:
    - As a credit institution, LCH.Clearnet SA is subject to ACP supervision.
    - As a clearing house, it is subject to AMF regulation.
    - As a systemically important market infrastructure, it is subject to BdF oversight.
  - Authorities’ objectives, policies, and roles are well defined and public.
  - Recommendation: BdF should have a stronger legal basis to effectively implement its oversight responsibility.
  - Enforcement can be improved by increasing intensity of onsite inspections, including participation of staff from all relevant authorities.
  - Cross-border cooperation with relevant foreign authorities is well developed, with comprehensive memoranda of understanding and a college that meets regularly.

### Crisis management and safety nets
- Pre-crisis framework:
  - France had a comprehensive framework for crisis management and bank resolution that allowed authorities to deal with problem financial institutions effectively.
- Instruments and measures (largely consistent with international best practices):
  - ACP has powers to initiate or execute resolution aiming to restructure institutions or ensure orderly liquidation, although no specific resolution framework for financial institutions is in place.
  - Formalized interaction between ACP (sometimes the Fond de Garantie des Dépôts-FGD) and the judicial system ensures fair treatment of owners and other rights’ holders and broader interests such as financial stability.
  - ACP’s crisis preparation, identification, and management processes are comprehensive and well structured, allowing proper identification of weak banks and requests for remedial measures (although delays occur in some cases).
  - ACP actively uses the Basel II Pillar 2 instrument to require add-ons to minimum regulatory capital on an individual bank basis, reflecting assessed riskiness.
  - ACP has a wide range of remedial and sanctionary powers (e.g., right to appoint an interim administrator); it may revoke a bank’s license, which starts judicial liquidation.
  - Recommendation: ACP would benefit from a structured framework for “early action” where supervisory judgments and formal breaches can lead to remedial measures to avoid delayed action.
- Recovery and resolution plans (RRPs):
  - Progress underway on preparation of RRPs for large banks.
  - Banks have submitted group-wide RRPs capturing all key dimensions.
  - Related issues have been discussed since 2009 in core supervisory colleges and, since 2011, in Crisis Management Groups associating central banks and supervisors from relevant host jurisdictions.
- Role of Banque de France (BdF) in safety net:
  - BdF’s specific and only role in the safety net is the provision of liquidity through standing or extraordinary facilities.
  - All liquidity provision is subject to the rules and restrictions of the Eurosystem.

### Select recent interventions (Box 5 excerpts)
- Dexia Group (2008 and 2011–12):
  - Capital support: €6.4 billion overall, shared by Belgium, France, and Luxembourg. French support: €1 billion from the government and €2 billion from CDC.
  - Liquidity support and guarantees: BdF provided liquidity support. State guarantees amounted to €150 billion (shared among Belgium, France, and Luxembourg), later reduced to €100 billion.
  - Other support: First-loss guarantee on DCL-held portfolio of US-based assets of $12 billion provided by France and Belgium; portfolio sold in 2011 without invoking the guarantee.
  - November 2011 restructuring: state guarantees by France, Belgium, and Luxembourg of up to €90 billion, of which €55 billion received European Commission approval.
  - Additional capital injections proposed in November 2012: €5.5 billion into Dexia SA by Belgium (€2.9 billion) and France (€2.6 billion); additional state guarantees (up to €85 billion) under a modified burden sharing key were proposed.
  - Exit strategy for DCL involves sale partly or wholly to parties such as CDC and/or Banque Postale; approval by the European Union expected by the end of 2012.
- Groupama (2011):
  - Net losses of €1.8 billion in 2011, including €1.55 billion on Greek sovereign debt and €1.5 billion on equity investments.
  - Despite growth in operating income, solvency position remained above 100 percent of statutory requirements.
  - Management restructured late 2011; restructuring plan includes sale of subsidiaries abroad and reduction of exposure to market risk, real estate, equities, and sovereign debt positions.
- Crédit Immobilier de France (CIF) (2012):
  - CIF is a wholesale-funded mortgage financial institution stressed in 2011 due to rising impairment charges and funding costs and low earning capacity.
  - External auditor’s unwillingness to attest to “operating continuity” led to suspension of public trading of its bonds by AMF; CIF 2011 accounts were published in May 2012 under going concern principles and trading suspension was lifted.
  - CIF’s Tier 1 Basel II: 14.8 percent at end-2011.
  - Total assets about €40 billion; CIF has issued about €25 billion of covered bonds.
  - CIF’s business model is not considered viable long run due to exclusive reliance on wholesale funding; discussions ongoing to find an investor to provide backup funding.  

*Source: _cr12341 - 39.      While capital requirements are in many ways prudent and appropriate, there*

### 57.      Coordination in monitoring of financial stability and in the prevention and

### _cr12341 - 57.      Coordination in monitoring of financial stability and in the prevention and

### Coordination of financial stability monitoring and crisis management
- Structural relationships between relevant authorities facilitate coordination in monitoring financial stability and in the prevention and management of crises.
- Current structure: ACP leads on crisis prevention and management; BdF leads on wider macrofinancial monitoring.
- Best practices require transparent expression of separate views of relevant agencies based on their specific objectives.
- Measures to increase accountability and transparency:
  - Publish ACP meeting records, except when individual institutions are involved.
  - Conduct written consultations between the ACP and the BdF on issues pertaining to their respective mandates; or financial stability and macroprudential considerations regarding the ACP.
- Note: No domestic Memorandum of Understanding specific to crisis management has been agreed.

### Fonds de Garantie des Dépôts (FGD): role and governance issues
- FGD functions:
  - May operate as a pay-box for compensating depositors.
  - May operate as a scheme to intervene in financial institutions to ensure orderly resolution.
- Decision criterion: FGD’s decision to provide financial support or pay out depositors in liquidation will be based on “least-cost” considerations.
- Current procedure: ACP recommends but does not compel the FGD to intervene—deemed appropriate because ACP has good knowledge of the concerned bank and of the state of the financial sector.
- Concern: A privately owned FGD may potentially provide open bank assistance, which may increase losses to the deposit fund and create legal risk for the FGD.

### Measures to increase FGD effectiveness (recommendations)
- Formalize rules on communication from the ACP on problem banks to ensure timely provision of information.
- Modify composition of the FGD Board, which currently contains active bankers, to limit potential conflict-of-interest issues.
- Expand FGD powers in the resolution process, for example:
  - Power to subscribe to the capital of a newly established bank (“bridge bank”) to assume assets and liabilities from a failing bank.
- Ensure the FGD may only provide open bank assistance after a clear assessment that the bank is viable in the medium to long term.

### EU Resolution Directive and required resolution powers
- Authorities intend to adopt the proposed EU Resolution Directive published in June 2012.
- Under the draft directive, member states required to have a minimum set of resolution tools, including:
  - sale-of-business tool,
  - bridge institution tool,
  - asset separation tool,
  - statutory bail-in tool.
- Authorities will need legal powers to apply these tools, including powers to:
  - force a sale,
  - write off or cancel shares,
  - write down or cancel debt,
  - replace senior management,
  - impose a temporary moratorium on the payment of claims.
- Once implemented, the directive will result in a significant improvement in the bank-resolution capabilities of French authorities.
- Note on bail-in tool (excerpted): The bail-in tool may only be applied to (i) recapitalize an institution if it would restore regulatory compliance and long-term viability; or (ii) convert to equity or reduce the principal amount of claims or debt instruments that are transferred to a bridge institution with a view to capitalizing the bridge institution. The proposal lists liability that would be excluded from the scope of this tool.

### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT): overall assessment
- France has a comprehensive legal and institutional framework achieving a high level of compliance with the Financial Action Task Force (FATF) 40 + 9 Recommendations.
- Regime largely in line with the AML/CFT standard in place at the time of the mutual evaluation visit in a number of areas, including:
  - criminalization of money laundering and terrorist financing on the basis of United Nations conventions,
  - international cooperation and exchange of information.
- Customer due diligence, record keeping, and suspicious transaction reporting requirements are largely compliant with the standard.
- Supervision of financial institutions is efficient and effective.
- This section draws on the Financial Action Task Force (FATF) Mutual Evaluation Report of France undertaken in early 2010. The report was adopted by FATF plenary in February 2011. The Report on Observance of Standards and Codes is expected to be published in early-2013. FATF adopted a revised standard on in February 2012.

### AML/CFT key challenges and recommended actions
- Low level of compliance of the nonfinancial professions (notably, casinos; real estate agents; company domiciliation agents; and jewelers).
  - The supervisory and sanctions regime for nonfinancial professions needs to be enhanced.
  - A national entity was created in 2011 to enhance reporting entities’ and especially the nonfinancial professions’ involvement in and commitment to the AML/TF process, allowing exchange of views between reporting entities and public authorities.
- Doubts remain on effective implementation of AML/CFT measures in the overseas territories, suggesting vulnerability in the French AML/CFT system.
- Additional measures required:
  - Complete legislative measures to enable authorities to seize and confiscate laundered property and proceeds of money laundering and predicate offenses.
  - Enhance identification of nonresident shareholders despite dematerialization of securities reducing shareholder anonymity risks.
- TRACFIN (the financial intelligence unit—FIU):
  - Has made good progress in collecting, analyzing, and disseminating suspicious transaction reports to judicial and law-enforcement authorities.
  - Needs to issue more guidance to nonfinancial professions and requires additional resources to increase analytical capacity.
  - Has undergone a reorganization since its mutual evaluation to better focus on core FIU functions and adopted a more pedagogical approach toward nonfinancial professions through bilateral engagement.

### Appendix I — Main recommendations of the 2004 FSAP: selected implementation status highlights
- Commercial banks:
  - Reform of government influence over savings allocation: Partly done. The 2009 Livret A Reform extended distribution rights but did not establish a fully market-based system.
  - Competition and positive credit registry: Done. La Poste’s banking activities were transferred to Banque Postale; coverage of the credit registry was expanded to include positive information on bank lending and is used by banks.
  - Corporate governance and risk monitoring: Partly done. ACP enhanced risk taking monitoring; further improvement in corporate governance supervision needed.
  - Bankruptcy law reforms: Done. Law n°2005-845 of the 26th July 2005 (Loi de Sauvegarde) created “Conciliation” and “Sauvegarde” procedures; banks allowed to write off NPLs without jeopardizing legal claim on debtor.
- Insurance:
  - Upgraded regulations on corporate governance, internal controls, and risk management: Done. ACP can issue binding directives and guidelines; resources increased and supervision consolidated.
  - Reinsurance supervision: Done. ACP requires annual reinsurance policy statements and cooperates with other EU supervisors.
- Securities market:
  - Strengthen securities regulator effectiveness and remove government presence on sanctioning commission: Partly done. Legal framework requires cooperation; MoF retains presence on Sanctions Committee without right to ask for second deliberation.
  - Standards of conduct, inspections, oversight of audits, and insider transaction disclosure: Partly done. CIS standards implemented; resources for inspections limited; H3C created to oversee auditors but faces resource and enforcement challenges; insider notifications aligned with best practices.
- Payment and securities settlement systems:
  - Implement safeguards for multilateral netting systems and analyze concentration risk: Done. Reforms in market infrastructure implemented new systems addressing these issues.
- Anti-Money Laundering:
  - Expand resources for TRACFIN, law enforcement, prosecution, and supervisory authorities; issue guidelines to assist reporting parties; boost compliance in DOM-TOM: Partly done. TRACFIN resources remain insufficient; resources in metropolitan France adequate excluding insurance supervisor; more resources required for overseas territories.
  - Improve guidance to nonfinancial professions and quality of suspicious transaction reports: Partly done. Detailed advice exists for financial institutions; nonfinancial professions receive only general information; overall report quality needs enhancement.
  - Address regulatory/supervisory gaps for insurance, AMF-supervised entities; manage risks from informal money or value transfer businesses; ensure originator information in wire transfers: Partly done. New customer-due-diligence requirements issued; licensing and supervision consolidated under ACP in 2010; effectiveness of new supervisory system not yet assessed. Regulation on payer information for wire transfers applied in metropolitan France and overseas departments; additional efforts required to address informal services and strengthen oversight of providers of payment services.

### Appendix II — Risk Assessment Matrix (selected entries)
- 1. Prolonged recession in advanced economies
  - Overall Level of Concern: Staff assessment: Medium
  - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: High
  - Expected Impact on Financial Stability if Threat is Realized: high
  - Key points:
    - Signs of deceleration in global data and recent European political developments continue to fuel uncertainty.
    - France exposed to export and financial shocks through real linkages with the United States, Germany, and large southern Euro Area countries, and financial linkages with the United Kingdom.
    - Weaker global environment would weaken confidence, lower domestic consumption and investment, affect bank asset quality and equity value, reduce bank earnings, and amplify the recession via increased spreads and reduced credit supply.
- 2. Strong intensification of the Euro Area crisis
  - Overall Level of Concern: Staff assessment: Medium
  - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: High
  - Expected Impact on Financial Stability if Threat is Realized: high
  - Key points:
    - European environment highly volatile with uncertainties on ability to resolve debt crisis.
    - Widening of the crisis could result in very weak growth for the Euro Area and wider sovereign spreads.
    - French SIFIs’ exposure to high-yield Euro area countries (Italy in particular) is large and could translate into bank losses through declines in loan quality and sovereign bond values.
    - Further deleveraging by French banks may lower returns if it involves disposing of profitable activities.

*Source: _cr12341 - 57.      Coordination in monitoring of financial stability and in the prevention and management of crises (excerpt).*

### 3. France’s

### 3. France’s sovereign rating downgrade

### Sovereign rating risks and banking exposure
- France’s sovereign rating faces the risk of further reductions because of its relatively high public debt stock and budget deficit relative to other AAA-rated European countries.
- Authorities are committed to meeting the fiscal targets of France’s Stability Program; additional efforts may be required in 2013, if growth is lower than the current official forecast of 1.7 percent.
- One rating agency downgraded France’s AAA rating in January 2012 and another one in November 2012.
- A loss of the AAA rating may result in higher French sovereign spreads.
- As of end-2011, the exposure of the eight largest French banking groups to their sovereign was 2.5 percent of their consolidated assets.
- Impact on funding costs of banks and corporates due to contagion could be material if not already factored in by markets.
- Possible spillovers from sovereign rating downgrade to banks’ ratings.
- The downgrade in credit ratings could affect French banks’ large derivative business and, through higher margin calls, may put pressure on their liquidity.

### Staff assessment
- Overall Level of Concern: High
- Likelihood of Severe Realization of Threat in the Next 1–3 Years: Medium
- Expected Impact on Financial Stability if Threat is Realized: (high, medium or low) — Staff assessment: Medium

---

### 4. Closure of wholesale funding to French banks

### Market conditions and funding needs
- Long-term funding improved significantly in the first months of 2012, following the ECB’s three-year LTROs, but has recently become more difficult.
- Market conditions are still uncertain for the rest of the year.
- French banks have significant refinancing needs in 2013–14, and market access may be challenging.
- The business model of some French SIFIs has been called into question, since unavailability of low funding costs puts at risk their global investment banking operations.
- French banks are reliant on significant amounts of wholesale funding.
- The domestic interbank market remains partly frozen.
- French banks, like other European banks, have increased their access to the ECB window.
- Potential negative second round-effects relate to cross-border interbank exposures and derivatives positions. This could create conditions for a systemic liquidity shock.

### Staff assessment
- Overall Level of Concern: Medium
- Likelihood of Severe Realization of Threat in the Next 1–3 Years: High
- Expected Impact on Financial Stability if Threat is Realized: Staff assessment: High

---

### 5. Housing price correction

### Drivers and vulnerabilities
- Housing prices have been supported until recently by fundamental factors, asset allocation factors (the perception of real estate as a safe haven), and a low interest rate environment.
- Downside risks remain due to high LTV ratios, a worsening of the economic outlook, and a possible unexpected increase in interest rates.
- Staff estimates suggest that France’s housing prices were 10–25 percent overvalued at end-2010.
- Risks to banks appear limited as French households have comparatively low levels of debt and lending standards are overall sound notwithstanding some relaxation during the boom years.
- Given the large share of real estate in total households’ net wealth, there are potentially indirect effects via the impact of a real housing price correction on confidence and, thus, on GDP growth (as evidenced during the 2008–09 down cycle).

### Staff assessment
- Overall Level of Concern: Medium
- Likelihood of Severe Realization of Threat in the Next 1–3 Years: Medium-Low
- Expected Impact on Financial Stability if Threat is Realized: Staff assessment: Medium

---

### Appendix III. Overview of stress tests for banks — key assumptions and scenarios

### Institutions and coverage
- Bottom-Up by Banks: Eight major banks (BNP Paribas, Groupe Crédit Agricole, Société Générale, Groupe Crédit Mutuel, Groupe BPCE, HSBC France, Caisse des Dépôts et Consignations, and La Banque Postale). Market share: 97 percent of the banking system. Data and baseline date: December 2011. Scope: consolidated banking group.
- Top-Down by Authorities: Five banks (BNP Paribas, Groupe Crédit Agricole, Société Générale, Groupe BPCE, and HSBC France). Market share: 85 percent of the banking system. Data and baseline date: December 2011. Scope: consolidated banking group.
- Top-down by FSAP Team: Eight major banks (same as bottom-up list). Market share: 97 percent of the banking system. Data and baseline date: December 2011 when available. Public data sources: Bankscope, Bloomberg, SNL, Annual Reports, EBA, Fitch Reports.

### Scenario framework (common elements)
- Baseline: February 2012 WEO, real GDP growth rate for 2012 is 0.5 percent and for 2013 is 1.0 percent.
- Adverse: Cumulative deviation from baseline of 2.1 standard deviation of GDP growth for 2012–13, driven by:
  - (1) reduction of external demand caused by a euro area recession,
  - (2) a fiscal shock resulting from a temporary rise in sovereign spreads and funding cost,
  - (3) worsening in banking funding costs that leads to a credit contraction.

### Sovereign spread shocks and haircuts
- Shocks to sovereign spreads: Size of parallel shift by country: 90 bps for France and 160bps for Euro area (weighted average by gross debt).
- Top-down by FSAP Team: Haircuts applied to all sovereign holdings in all portfolios.
- Top-Down by Authorities: Additional assumption of investors’ flight to AAA sovereign bonds (haircuts only apply to non-AAA sovereigns—France is excluded—in the trading and AfS books—HTM excluded).
- Bottom-Up sensitivity: Liquidation of non-AAA sovereign bonds in the HTM portfolio; CTP1–6: Failure of largest five corporate exposures by name and by country; FX: USD/euro exchange rate shock of +/- 20 percent; IR: interest rate shock of 200 bps affecting positions in the banking book; RE: shock to real estate prices of -25 percent.

### Risks and parameters
- Risks/factors assessed: Credit risk (households and corporates, domestic and foreign exposures), sovereign risk (non-AAA government bonds for bottom-up; AAA government bonds in all books for authorities; GIIPS, Belgium, and France government bonds for FSAP team), counterparty risk in the banking book, funding risk, market risk including equity and exchange rate risks, interest rate risk in the banking book.
- Calibration of sovereign risk shock: ninetieth percentile of historical distribution of changes of daily bond yields for the adverse scenario, and fiftieth percentile for the baseline, using actual maturities (authorities) or an assumption of five-year maturity (FSAP team).
- RWAs: Estimated using through-the-cycle PDs (bottom-up and authorities) and point-in-time PDs (FSAP team).
- Behavioral adjustments: Deleveraging assumption; Zero payout under stress.
- Regulatory standards applied: CRD IV (Common Equity Tier 1, Tier 1, Total Capital, conservation buffer, loss absorbency requirement for G-SIBs) phased in line with Title I of Part Ten of CRR (bottom-up and authorities); Basel III phased in for FSAP team.

### Liquidity stress testing (bottom-up)
- Methodology: Cash flow-based liquidity stress test using maturity buckets.
- Assumptions on withdrawals based on banks’ past crisis experiences, benchmarks from previous EBA exercises, and LCR weights, by source of funding.
- Assessment of liquidity buffers and haircut on assets if sold.
- Focus risks: Funding liquidity and market liquidity.
- Regulatory standard tested: Ability to respond to withdrawals without having access to ECB facilities.

### Financial contagion and spillovers
- Authorities’ analysis: Seven major banks (BNP Paribas, Groupe Crédit Agricole, Société Générale, Groupe Crédit Mutuel, Groupe BPCE, HSBC France, and La Banque Postale) and sovereigns to which French banks are exposed. Market share: Ninety-five percent of the banking system.
- FSAP team network analysis: One hundred percent of the banking system using BIS data on cross-border consolidated banking exposures (September 2011).
- Methodologies: Network analysis model developed by the authorities; Network model for spillovers by Espinosa-Vega and Solé (2010).

---

### Appendix Table 1. France: Selected Economic Indicators, 2009–17 (highlights)

- Real GDP (change in percent): 2009 -3.1; 2010 1.7; 2011 1.7; 2012 0.2; 2013 0.4; 2014 1.0; 2015 1.5; 2016 1.7; 2017 1.9
- Domestic demand (change in percent): 2009 -2.6; 2010 1.6; 2011 1.7; 2012 -0.4; 2013 0.5; 2014 1.2; 2015 1.3; 2016 1.3; 2017 1.5
- Nominal GDP (billions of euros): 2009 1886; 2010 1937; 2011 1997; 2012 2042; 2013 2095; 2014 2161; 2015 2244; 2016 2334; 2017 2433
- CPI (year average): 2009 0.1; 2010 1.5; 2011 2.1; 2012 2.0; 2013 1.6; 2014 1.5; 2015 1.7; 2016 1.8; 2017 1.9
- Unemployment rate (in percent): 2009 9.5; 2010 9.7; 2011 9.6; 2012 10.3; 2013 10.6; 2014 10.7; 2015 10.5; 2016 10.1; 2017 9.7
- General government gross debt (percent of GDP): 2009 79.0; 2010 82.3; 2011 86.0; 2012 89.5; 2013 90.9; 2014 91.3; 2015 90.2; 2016 88.0; 2017 84.6
- Central government balance (percent of GDP): 2009 -6.2; 2010 -6.3; 2011 -4.4; 2012 -3.7; 2013 -2.7; 2014 -2.1; 2015 -1.5; 2016 -1.0; 2017 -0.2
- General government balance (percent of GDP): 2009 -7.5; 2010 -7.1; 2011 -5.2; 2012 -4.5; 2013 -3.5; 2014 -2.9; 2015 -2.1; 2016 -1.2; 2017 -0.1
- Structural balance (percent of potential GDP): 2009 -4.7; 2010 -4.6; 2011 -3.5; 2012 -2.6; 2013 -1.4; 2014 -1.1; 2015 -0.8; 2016 -0.5; 2017 0.0
- Primary balance (percent of GDP): 2009 -5.1; 2010 -4.7; 2011 -2.6; 2012 -1.9; 2013 -1.0; 2014 -0.4; 2015 0.4; 2016 1.3; 2017 2.4
- Exports of goods (percent of GDP): 2009 18.4; 2010 20.2; 2011 21.2; 2012 21.1; 2013 20.6; 2014 20.3; 2015 20.3; 2016 20.5; 2017 20.7
- Imports of goods (percent of GDP): 2009 20.7; 2010 23.0; 2011 24.9; 2012 24.2; 2013 23.6; 2014 23.3; 2015 23.0; 2016 22.8; 2017 22.7
- Trade balance (percent of GDP): 2009 -2.3; 2010 -2.7; 2011 -3.7; 2012 -3.1; 2013 -3.0; 2014 -3.0; 2015 -2.7; 2016 -2.3; 2017 -2.0
- Current account (percent of GDP): 2009 -1.3; 2010 -1.6; 2011 -1.9; 2012 -1.5; 2013 -1.5; 2014 -1.6; 2015 -1.2; 2016 -0.7; 2017 -0.3

---

### Appendix Table 2. France: Financial System Structure, 2004–11 (selected items)

- Number of commercial banks: 2004 326; 2005 316; 2006 313; 2007 312; 2008 310; 2009 302; 2010 290; 2011 284
- Assets: Banks (billions of euros): 2004 2,862; 2005 3,719; 2006 4,284; 2007 5,107; 2008 5,469; 2009 6,012; 2010 6,328; 2011 6,776
- Total Assets of the Financial Sector (billions of euros): 2004 5,773; 2005 6,851; 2006 7,719; 2007 9,128; 2008 9,600; 2009 9,588; 2010 9,816; 2011 10,309
- Total Assets of the Financial Sector (in percent of GDP): 2004 349; 2005 399; 2006 429; 2007 484; 2008 497; 2009 507; 2010 508; 2011 517

*Source: IMF staff report (chapter "3. France’s sovereign rating downgrade").*

### Appendix Table 3. France: Core Set of Financial Soundness Indicators

### Appendix Table 3. France: Core Set of Financial Soundness Indicators

### Key FSIs (2003–2011)
- Regulatory capital to risk-weighted assets: 2003 11.9, 2004 11.5, 2005 11.3, 2006 10.9, 2007 10.2, 2008 10.5, 2009 12.4, 2010 12.5, 2011 12.2
- Regulatory Tier I capital to risk-weighted assets: 2003 9.0, 2004 8.8, 2005 8.2, 2006 8.2, 2007 7.7, 2008 8.5, 2009 10.2, 2010 10.7, 2011 10.9
- Nonperforming loans net of provisions to capital: 2003 11.6, 2004 9.8, 2005 8.6, 2006 8.6, 2007 6.6, 2008 8.2, 2009 10.8, 2010 10.0, 2011 9.2
- Bank provisions to Nonperforming loans: 2003 n.a., 2004 n.a., 2005 n.a., 2006 170, 2007 158.3, 2008 131.0, 2009 109.5, 2010 112.0, 2011 115.3
- Nonperforming loans to total gross loans: 2003 4.8, 2004 4.2, 2005 3.5, 2006 3.0, 2007 2.7, 2008 2.8, 2009 3.6, 2010 3.5, 2011 3.5

Sectoral distribution of loans to total loans (Deposit-takers), of which:
- Deposit-takers: 2003 34.2, 2004 34.0, 2005 30.1, 2006 30.6, 2007 32.2, 2008 33.6, 2009 34.1, 2010 36.5, 2011 40.2
- Nonfinancial corporation: 2003 18.9, 2004 18.7, 2005 18.8, 2006 18.6, 2007 18.1, 2008 18.3, 2009 17.5, 2010 20.5, 2011 19.2
- Households (including individual firms): 2003 24.5, 2004 24.9, 2005 26.5, 2006 26.6, 2007 24.8, 2008 24.1, 2009 24.5, 2010 30.5, 2011 28.7
- Nonresidents (including financial sectors): 2003 4.3, 2004 4.2, 2005 4.7, 2006 4.2, 2007 4.7, 2008 4.7, 2009 4.6, 2010 6.1, 2011 5.9

Profitability and income composition:
- ROA (aggregated data on a parent-company basis) 2/: 2003 0.4, 2004 0.5, 2005 0.6, 2006 0.6, 2007 0.4, 2008 0.0, 2009 0.4, 2010 0.3, 2011 0.0
- ROA (main groups on a consolidated basis) 3/: 2003 0.39, 2004 0.53, 2005 0.49, 2006 0.57, 2007 0.35, 2008 0.10, 2009 0.30, 2010 0.60, 2011 0.4
- ROE (aggregated data on a parent-company basis) 2/: 2003 8.50, 2004 10.6, 2005 11.8, 2006 14.0, 2007 9.8, 2008 -1.0, 2009 8.2, 2010 7.9, 2011 1.2
- ROE (main groups on a consolidated basis) 3/: 2003 10.0, 2004 12.7, 2005 13.5, 2006 17.2, 2007 13.3, 2008 43.8, 2009 6.4, 2010 11.8, 2011 8.2
- Interest margin to gross income: 2003 35.5, 2004 33.2, 2005 32.4, 2006 28.2, 2007 25.3, 2008 40.4, 2009 34.9, 2010 49.4, 2011 51.5
- Noninterest expenses to gross income: 2003 64.4, 2004 63.9, 2005 64.3, 2006 62.4, 2007 68.4, 2008 84.2, 2009 63.1, 2010 65.7, 2011 67.4

Liquidity indicators:
- Liquid assets to total assets: 2003 21.6, 2004 21.3, 2005 20.5, 2006 19.9, 2007 18.9, 2008 18.3, 2009 18.3, 2010 23.0, 2011 24.1
- Liquid assets to short-term liabilities: 2003 153.7, 2004 155.1, 2005 150.1, 2006 146.7, 2007 150.3, 2008 139.6, 2009 150.1, 2010 144.4, 2011 136.3

Foreign exposure and market positions:
- Net open positions in FX (in millions of euros) 4/: 2003 4,772, 2004 6,669, 2005 527, 2006 55,283, 2007 7,058, 2008 n.a., 2009 n.a., 2010 n.a., 2011 n.a.
- Net open positions in equities to Tier I capital: 2003 3.5, 2004 4.8, 2005 n.a., 2006 n.a., 2007 n.a., 2008 n.a., 2009 n.a., 2010 n.a., 2011 n.a.

- Sources: Banque de France and ACP.
- Notes: 1/ These may be grouped in different peer groups based on control, business lines, or group structure. 2/ All credit institutions' aggregated data on a parent-company basis. 3/ Consolidated data for the seven main banking groups (2005, IFRS). 4/ Impact of the creation of the euro has to be taken into account.

### Main findings on supervision and regulatory framework
- France has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs).
- The French banking system weathered the 2007-2009 crisis better than a number of other countries, due to:
  - benefits of a diversified banking model, and
  - a well-developed regulatory and supervisory structure.
- Recent vulnerabilities have been exposed by developments in the eurozone, funding markets, and markets for sovereign debt; these have revealed weaknesses in risk-management practices.
- The supervisory and regulatory system has been under strain while major changes in international rules on capital and liquidity are being implemented.
- The merger of supervisory agencies into the ACP, as part of the BdF, is expected to enhance effectiveness given the prevalence of the bancassurance model.

### Preconditions and infrastructure supporting supervision
- Legal, accounting, and audit infrastructure:
  - France has a complete system of business laws, consistently enforced.
  - Accounting standards for listed companies and other consolidated accounts follow IFRS as adopted by the European Union.
  - Auditing standards are generally consistent with international auditing standards; a French audit oversight body (H3C) inspects audit firms.
  - H3C has recently revised its inspection approach and needs to enhance coverage, build resources, and develop oversight of audit firms.
- Disclosures and market information:
  - French banks make extensive public financial disclosures under IFRS and Pillar 3 of Basel II.
  - Market analysts generally satisfied with disclosure but noted areas for improvement and inconsistent treatment among banks.
  - Financial literacy in France was noted as lower than in some other major jurisdictions, with implications for consumer protection regulation.
- Crisis cooperation and deposit protection:
  - Corefris provides a national framework for cooperation and coordination between authorities, including in crisis time; it is not a decision-making body.
  - No domestic memorandum of understanding specific to crisis management has been agreed, but the Monetary and Financial Code provides gateways for information sharing.
  - Deposit guarantee scheme objectives: (i) paybox—depositors guaranteed up to €100,000 per credit institution under EU Directive (94/19/EC); and (ii) preventive action—FGD can intervene in a credit institution facing difficulties only at the ACP’s request.
  - The deposit guarantee scheme is funded on a risk based approach; the pay box function is automatic, preventive action is discretionary. ACP and FGD are contemplating whether to draw up an MoU.

### Legislative deficiencies and supervisory powers (CP 1 and related)
- Concerns on independence, governance, and resources of ACP:
  - Role of the MoF in the ACP College and in controlling resourcing for ACP.
  - Legislative limits on ACP headcount.
  - ACP cannot independently set prudential rules or its own assessments on industry.
  - These features raise concerns about potential independence and governance, though no problems observed to date.
- Two serious legislative deficiencies affecting compliance and supervisory effectiveness:
  1. Lack of a complete legislative framework related to regulating Board of Directors responsibilities:
     - Inability to apply a fit and proper test to Board members.
     - ACP practice has limited direct interaction with Boards.
     - Consequences include impaired early intervention, limited ability to suspend or dismiss Board members, and reduced capacity to assess Board oversight of risk.
  2. ACP does not have formal power to approve acquisitions by French banks either in the EEA or abroad:
     - ACP can react after the fact (e.g., higher capital requirements, reinforcement of internal controls, de-consolidation, ring fencing) but lacks ex ante approval power.
     - Recommendation: ACP should have formal approval powers or at least prior notification rights and the power to insist on divestment where necessary for effective consolidated supervision.

### Licensing, structure, and recommended supervisory powers (CPs 2–5 and CP 23)
- Licensing and structure: ACP's licensing processes are detailed, thorough, and diligent; adjustments to the legal framework are recommended in some areas.
- Powers and supervisory interaction recommended:
  - ACP should be granted powers to assess, individually and severally, the suitability of Board members and powers to suspend or dismiss such individuals (CP 23).
  - ACP should make more use of direct contact with the Board to ensure governance and clear communication of supervisory messages.
  - ACP should have formal approval powers, or at minimum prior notification rights, for major acquisitions and cross-border operations by banks, and the complementary power to insist on divestment when cross-border entities impede effective consolidated supervision.
  - A pre-notification process should be put in place for internal group restructurings that currently only require post-notification where control remains within the EEA.
  - Notification requirements should be placed on institutions to inform ACP when they become aware of material information that may negatively affect the suitability of a major shareholder.
  - ACP should be granted the power to withdraw an authorization obtained on the basis of false information (consistent with existing EU legislation), to avoid resource-intensive revocation processes.

*Source: Banque de France and ACP.*

### 82.      French banks have materially increased the quantity and quality of capital in

### _cr12341 - 82.      French banks have materially increased the quantity and quality of capital in

### Capital adequacy, cross‑holdings, and disclosure
- Most major banks have announced their intention to be fully compliant with the new rules (without regard for transition measures), by the beginning of 2013.
- There are targets for the middle of 2012 resulting from the EBA interim capital strengthening exercise.
- Several areas where current capital regulations in France (pursuant to the EU capital rules) fall materially short of the current Basel standard (Basel II.5) at the time of assessment:
  - Treatment of cross-holdings of banks within mutual groups.
  - Treatment of cross-holdings of banks and insurance companies within corporate and mutual groups.
- Effects and risks identified:
  - The treatment of insurance investments of bancassurance conglomerates affects the consolidated Tier1 capital position and results in overstatement of this ratio compared to Basel requirements.
  - Total capital ratios are calculated appropriately, but consolidated Tier1 issues can affect pro-forma current disclosures of Core Tier 1 ratios by banks.
  - Bank cross-holdings issue affects publicly reported capital of some material internationally-active subsidiaries in affected groups, but does not affect consolidated capital of the groups.
  - Possible double counting of capital or counting as capital amounts that may not be available to parts of the group, leading to market and investor misunderstanding.
  - Complexity of intra-group relations and opacity in disclosures exacerbate misunderstanding, though disclosure quality has been improving since the assessment.
- Policy guidance:
  - ACP focuses appropriately on consolidated group capital position, on various sub-measures and on financial relations within groups.
  - Regardless of CRD IV policy outcomes, France should require clearer and full disclosure of the capital treatment in place and related financial interactions within complex groups.

### Pillar 2, capital targets, and supervisory adaptation
- France’s approach to Pillar 2 is well developed, formally linked to ACP risk rating of banks, and used to reinforce incentives for banks to respond to supervisory interventions.
- The focus on new capital measures (Core Tier 1) has rendered existing Pillar 2 measures (based on old capital targets) less effective.
- The move to Basel III/CRD IV necessitates changes; authorities recognize need to:
  - Keep basic principles of the regime but adapt it to new technicalities as soon as possible.

### Enterprise‑wide risk management, governance, and stress testing
- Global and French shortcomings revealed by the crisis include weaknesses in enterprise-wide bank risk measurement and risk-management practices and supervisory oversight.
- Given systemic importance, French banks’ risk-management practices and authorities’ ability to assess them must be held to a very high standard.
- Positive developments and remaining needs:
  - Banks are being pushed by regulation and supervisory intervention to strengthen enterprise-wide risk measurement and risk management.
  - Risk governance oversight needs enhancement, as does ACP’s ability to assess risk governance.
  - Legislative changes allowing regulation and supervisory intervention at the level of banks’ Boards would assist oversight.
  - Banks need to enhance internal capital adequacy assessment processes and enterprise-wide stress testing.
  - ACP should clarify its expectations regarding these processes and use all channels of influence to obtain prompt action where banks resist.

### Credit risk, country/transfer risk, and provisioning
- Credit risk management, large exposure limits, and problem-loan processes are well developed; ACP’s credit risk supervision methodology appears sound.
- ACP actions and recommendations:
  - Added more frequent monitoring of potential risks and planned onsite examinations of residential mortgage portfolios in 2012.
  - ACP needs to ensure banks identify sectors likely to experience most credit stress in the forecast slowdown (which may not be the mortgage sector) and direct resources to ensure adequate risk rating and provisioning.
- Country and transfer risk:
  - Recent experiences showed systems were not as robust as banks desired.
  - Banks have revamped and extended risk management, including limit setting and capital model treatment.
  - ACP has been actively involved in offsite supervision and monitoring; onsite verification of robustness of systems planned for 2012.

### Liquidity regime and internal controls
- ACP operates a high quality and proportionate liquidity regime, intensifying supervisory relationships with systemic banks and onsite specialist reviews.
- Severe stress testing requirements are applied to core firms and will be extended to a wider sample; data requirements are being refined for greater comparability.
- Recommendation:
  - ACP should review liquidity regime for non-advanced banks to ensure general liquidity risk management requirements and principles apply to all banks, not only advanced firms (as specified in the Order of May 2009).
- Internal control and AML/CTF:
  - French requirements for internal control in banks are longstanding and extensive; ACP’s assessment program is robust.
  - France received a positive recent FATF assessment; recommended improvements (primarily for overseas territories and departments) are underway.
  - France makes excellent use of supervisory reporting and benefits from a well-developed credit register run by BdF.

### Supervisory approach, onsite/offsite processes, and remedial powers
- ACP understanding and methodologies:
  - ACP has a thorough understanding of individual banks and the system; operates extensive onsite inspections and high-quality offsite supervision.
  - Risk rating methodologies are not very responsive to changes and not very forward looking; room exists to better define rating criteria and incorporate assessments of risk governance.
  - ACP is at an early stage in assessing quality of risk governance and in integrating insurance and banking risk assessments for an enhanced group view.
- Timeliness and effectiveness:
  - Onsite processes have sometimes taken a long time to conclude and communicate recommendations, reducing intervention effectiveness, partly due to the formal ‘contradictory’ process.
  - ACP needs a more flexible, timely, focused onsite capability to complement existing processes.
  - ACP could reinforce intervention on material issues at senior levels, including Boards; synthesizing inspection and offsite work into crisp findings and priority recommendations is needed.
  - ACP should publish aggregate results from theme reviews to inform and remind banks of expectations and required practices.
- Corrective powers:
  - ACP has a wide range of remedial and corrective tools; powers and sanctions are broader than its predecessor.
  - ACP is distilling practical lessons from early experiences with the sanctions process and plans to analyze recent cases to streamline and improve effectiveness.
  - Readiness to move to a sanctions process is an important dimension in the evolving ACP culture.

### Consolidated and cross‑border supervision, MoUs, and colleges
- Legal and regulatory framework:
  - ACP has a strong legal and regulatory framework based on the EU legislative framework and applies prudential standards at consolidated and sub-consolidated levels to ensure distribution of capital across groups.
  - ACP’s ability to ensure effective global oversight is impeded by lack of powers to prevent establishment or acquisition of foreign interests or to require divestment where information access is constrained.
- Cooperation and colleges:
  - ACP maintains a broad network of MoUs and arrangements with other supervisors, supported by gateways for information exchange and confidentiality provisions.
  - As home jurisdiction to four globally systemically significant banking groups, high-quality home/host relationships are crucial.
  - Supervisory colleges are in major development to achieve substantive group-wide perspectives; ACP has devoted attention and will continue to do so.

### Annex — Selected Basel Core Principle comments (highlights)
- 1.1 Responsibilities and objectives
  - The new financial stability and consumer protection mandate risks lack of clarity but ACP is well placed to ensure priority on safety and soundness. Disclosure by BdF and ACP of financial system and financial institutions conditions and risks could be markedly enhanced.
- 1.2 Independence, accountability and transparency
  - Intention to create an independent authority; aspects such as role of MoF in ACP College and parliamentary limit on ACP headcount have potential to undermine independence, though no evidence of problems to date.
- 1.3 Legal framework
  - ACP cannot publish binding rules without changing laws; consultative processes lack transparency.
- 1.4 Legal powers
  - Room for improvement: inability to apply fit-and-proper tests to directors; lack of assessment of Board suitability as a whole; lack of formal specific requirements on Board composition and duties; inability to suspend or dismiss Board members.
- 3. Licensing criteria
  - French legislation does not permit immediate withdrawal of banking authorization granted on false information.
- 4. Transfer of significant ownership
  - No provision for ACP notification in advance of internal group restructuring where control remains within EU/EEA; inability to review changes in control that do not change ultimate control could pose problems.
- 5. Major acquisitions
  - French legislation does not permit supervisor review of acquisitions by banks; available powers are not a full substitute for formal approval.
- 6. Capital adequacy
  - While capital requirements are in many ways prudent, there are material weaknesses in the definition of capital and related public reporting (notably bancassurance groups and cross-holdings by major mutual bank groups), producing reported Tier 1 capital ratios that may differ from Basel requirements and risk confusion for market participants.
- 7. Risk management
  - Enterprise-wide risk management rules are relatively new; deficiencies in ERM implantation and oversight at Board level in major banks; supervisory assessments of risk governance are not well developed.
- 11. Exposure to related parties
  - Loans at ‘normal’ terms to related parties do not require Board or auditor approval, risking inadequate scrutiny.
- 12. Country and transfer risks
  - Major enhancements have occurred in bank systems; ACP monitoring is extensive but has not fully reviewed the appropriateness and effectiveness of new policies—onsite visits planned in 2012.
- 14. Liquidity risk
  - ACP intensified liquidity standards for core systemic firms; enhancements needed including extending severe stress tests, standardizing data, and applying proportionate liquidity standards to all banks.
- 19. Supervisory approach
  - Supervisors have excellent understanding of banks; risk rating criteria could better assess adequacy of control and risk governance and be more forward-looking.
- 20. Supervisory techniques
  - ACP performs high-quality onsite and offsite supervision but needs greater timeliness and coordination and improved interaction with senior management and Boards; further integration of insurance risk into group risk assessment is warranted.

*Source: _cr12341 - 82.      French banks have materially increased the quantity and quality of capital in*

### Annex Table 2. France: Recommended Action Plan to Improve Compliance

### Annex Table 2. France: Recommended Action Plan to Improve Compliance with the Basel Core Principles

### Recommended supervisory and regulatory actions (BCP-focused)
- BCP 1.4
  - Give ACP powers to assess, jointly and severally, the suitability (integrity and expertise) of Board members as well as the associated powers to suspend or dismiss such individuals (CP 23).
  - Amend core internal control regulation to specify Board responsibilities for oversight and risk governance. (Relevant also for CPs 3,7,8,13,14,15,16,17, and 23).
  - Enhance ACP meetings with independent Board members and enhance ACP assessments of governance and effectiveness.
- BCP 5
  - Grant ACP powers to ensure that it receives prior notification of major acquisitions and is thus able to consider the acquisition (or establishment of new branch or subsidiary) ex ante.
  - ACP should also have powers to require the divestment in an entity where it would prevent the effective supervision of the group for which ACP has responsibility for consolidated supervision.
- BCP 6
  - Once new capital rules have stabilized, confirm a graduated phase out of the current preferential treatment of bancassurance and interbank exposures.
  - Provide guidance to ensure enhanced regular accessible and consistent disclosure to allow market assessment of impact of current treatment together with information on relevant intra-group funding and support mechanisms.
- BCP 1.2
  - Alter (but do not eliminate) participation of MoF in ACP College, limit MoF right of reconsideration to systemically important issues.
  - Provide ACP formal role in proposing prudential rules and issue more ACP guidance on prudential matters.
  - Allow ACP College to set assessment within maximum to be set by legislation.
  - Provide for periodic formal/public review by ACP of its resource needs.
- BCP 1.3
  - Enhance consultative practices in line with EU ‘better regulation practices’.
- BCP 3
  - Grant ACP the power to withdraw an authorization immediately should ACP become aware that the license was granted on the basis of false information.
- BCP 4
  - Ensure, through regulatory changes if necessary, that ACP receives advance notification of internal group restructuring even when control of the overall group remains within the EU/EEA.
  - Impose regulatory requirements for a credit institution to notify ACP in cases where the institution becomes aware of material information which may negatively affect the suitability of a major shareholder.
- BCP 7
  - Require banks to enhance and implant ERM processes.
  - Put in place more guidance or regulation on ACP expectations for ERM, for capital planning related to risk, and for Board risk governance and oversight.
  - Subject these to regular detailed ACP assessment and feedback.
- BCP 12
  - Finalize supervisory work to assess appropriateness and effectiveness of banks’ recently enhanced country/transfer risk process and their process for attributing capital to these risks.
- BCP 14
  - Broaden the program of enhanced liquidity risk regime beyond the core systemic banking groups.
  - Ensure that the general principles of liquidity risk management are applied to all institutions, not only advanced approach firms.
- BCP 20
  - Improve timeliness and coordination of onsite and offsite supervision to enhance early intervention.
  - Further develop capability to conduct focused onsite/offsite reviews to investigate key issues and follow up on implementation by banks of ACP requirements.
  - Based on new powers vis à vis Boards, intervene at that level in a focused way to ensure adequate risk governance.
  - Formally integrate the view of insurance risks into the overall risk assessment and supervisory intervention of bancassurance groups.
- BCP 11
  - Ensure that all lending transactions with related parties above a threshold (whether at normal terms or not) are approved by the Board.

### Authorities’ response to the BCP assessment — key points
- General
  - The French Authorities express appreciation to the IMF and staff for the analysis and exchanges within the context of the BCP assessment and find the FSAP review useful.
  - The Authorities welcome the IMF’s judgment that France has a high level of compliance with the Basel Core Principles (BCP) and high quality supervision and broadly agree with the IMF findings and assessment.
- Planned and ongoing actions
  - Authorities note they are contemplating changes to regulation to strengthen the powers of ACP and works on draft legislation are already engaged (in response to recommendations regarding ACP powers over Boards of supervisees and ACP prior approval of major cross border acquisition).
- Areas of dissent or clarification
  - BCP 1.2 (ACP independence)
    - Authorities firmly dissent on some IMF observations regarding ACP independence and stress ACP is fully independent; the assessment itself emphasizes no evidence of problems has been found.
    - Regarding Ministry of Finance involvement (Directeur General du Trésor or representative) in ACP Board, Authorities state the role and powers are fully set in law, giving no membership status in the Board and Enforcement Committee, but a legal right to ask for a second deliberation in the Board for matters other than sanctions. The request for a second round has no effect on the eventual content of the decision but allows the Board to review decisions within a very short space of time.
    - Authorities believe this arrangement provides a clear framework for ACP and Ministry of Finance cooperation and robust guarantees for independence.
  - BCP 6 (capital adequacy)
    - Mutual groups
      - ACP applies three levels of supervision to mutual groups: individual basis (regional banks), sub-consolidated basis (central body), and consolidated group level.
      - Solo and consolidated supervision are assessed as perfectly compliant with the Basel II requirements.
      - The sub-consolidation supervision allows risk-weighting of investments the central body holds in the regional banks because of the specific capital structure of mutual groups.
      - Regional banks hold 50 percent or more of their central body capital, while the latter holds more than 20 percent of the regional banks capital.
      - Legal arrangements impose a solidarity mechanism by which the central body guarantees regional banks’ operations and ensures their liquidity and solvency.
      - Authorities insist no double-gearing can occur at the consolidated level and no risks are left unaddressed.
    - Disclosure and opacity concerns
      - Authorities contest the IMF statement that market participants may be misled by the “opacity” of some mutual group disclosure, noting ACP evidence that the 2011 financial statements of mutual groups clearly explain their structure and intra-group relations.
    - Banc-insurance groups
      - Some banks deduct their insurance holdings following the preferred approach under Basel II and allowed by the French and EU rules; deductions are from total capital instead of from Tier 1 and Tier 2 equally.
      - Authorities stress this treatment is (1) neutral for the total capital ratio and (2) is only valid until 31 December 2012 on a transitional basis justified by the development of banc-insurance model in Europe.
      - This temporary treatment is fully disclosed by institutions so analysts can measure its impact on ratios.
    - Overall conclusion
      - Authorities underline their main concern is to eliminate any double-gearing at the highest level, whether at the conglomerate level for banc-insurance groups or the consolidated level for mutual groups, and state they succeed in doing so.
      - ACP staff show an “excellent understanding” of all banking groups they supervise including complex ones; Authorities argue these achievements demonstrate an “overall effectiveness sufficiently good” and warrant that “no material risks are left unaddressed,” and therefore BCP 6 should not be assessed as “materially non-compliant.”

### Observance of the IAIS Insurance Core Principles — findings and recommendations
- Context and methodology
  - Assessment carried out as part of the 2012 FSAP Update using the revised ICPs issued in October 2011 (26 core principles).
  - Assessment is based on laws, regulations, and supervisory practices in place at the time; France is predominantly using a Solvency I approach while preparing for Solvency II.
  - ACP has a Solvency II project with eight streams: international issues; internal models; balance sheet impact; IT systems and reporting; transposition to French law; supervisory approach; industry market preparation; and a steering committee chaired by the Secretary General.
- Main findings
  - Solvency approach and resilience
    - Insurance regulation and supervision is predominantly carried out using a Solvency I approach, and the insurance sector remained resilient through the recent global financial crisis.
    - A thorough approach to assessing insurer technical provisions and their coverage by admissible assets, and assessing current and likely future solvency against Solvency I solvency margin requirements, has led to financially sound insurers.
    - Individual French insurers have not needed any government or industry support.
  - ACP independence/perception
    - The independence of ACP, or at least the perception of independence, may be compromised by involvement of Direction Générale du Trésor (DGT) and Direction de la Sécurité Sociale (DSS) representatives in ACP College and Sanctions Committee meetings and by mechanisms for determining industry contributions to ACP funding.
    - Recommendation: consider removing DGT and DSS representatives from ACP meetings to improve perception of independence, with separate coordination arrangements to preserve effective advice and information flows.
    - Recommendation: consider establishing a more transparent mechanism for adjustments to industry contributions to ACP funding to address any future funding constraints transparently and increase perceived independence.
  - Solvency II transition and governance
    - Regulatory requirements and supervisory assessment of insurer financial soundness and governance and risk management will need to change dramatically with Solvency II implementation.
    - Recommendation: early introduction of specific requirements for insurer Boards in areas of risk appetite statements; risk management within appetites; delineation of responsibilities between the Board and key persons in control functions; remuneration policy; and a duty to act in the interests of policyholders.
  - Fit-and-proper assessments and removal powers
    - Assessment of suitability of persons involved in insurance operations is not sufficiently extensive and does not cover enough roles in insurers.
    - Fit-and-proper assessments at licensing, change of control, mergers and acquisitions, and staff movements do not cover all Board members or persons controlling key functions.
    - EU Solvency II Directive requires all persons performing key functions be fit and proper; changes needed with Solvency II implementation.
    - Recommendation: extend ACP power to remove unsuitable persons to cover all such roles; ACP should be more prepared to use removal powers or require insurers to assess and regularly certify suitability.
  - Public disclosure
    - Public disclosure requirements on insurers need improving but are awaiting Solvency II implementation.
    - Current disclosure covers financial statements, including major methodologies and assumptions used.
    - Recommendation: require further detail about the valuation of technical provisions, including assumptions used and the level of uncertainty associated with provisions.
    - Recommendation: require wider information such as risk types; risk exposures and concentrations; risk-management policies, systems, and procedures; corporate governance framework; and sensitivity results from stress testing.

*Source: Annex Table 2 and accompanying sections from the IMF assessment document.*

### Annex Table 3. France: Summary of Observance of the Insurance Core

### Annex Table 3. France: Summary of Observance of the Insurance Core Principles

### Key findings on supervisory framework and powers
- ICP1: "There is a clearly defined authority responsible for insurance supervision, with appropriate statutory objectives and adequately broad powers."
- ICP2: "ACP is an independent administrative authority (with financial autonomy) though it does not have legal personality. Two government officials attend College and the non-deliberative part of Sanction Committee meetings. They have no vote on the College but can request a second deliberation (except on sanctions). While there is no explicit requirement that the reasons for dismissing College members be publicly disclosed, the reasons are provided to the dismissed member, who can appeal the dismissal; an arbitrary dismissal is virtually impossible. ACP is financed by contributions from supervised institutions specified in law and collected by BdF, which can also provide additional funds to ACP. The Parliament sets the range of the rates for industry contributions and sets a total limit on ACP headcount."
- ICP3: "ACP has the legal authority and power to obtain information from insurance undertakings under its supervision and to exchange supervisory information with relevant authorities."
- ICP4: "Insurance entities cannot conduct insurance business without an authority to do so from ACP. Insurance and reinsurance entities regularly authorized by an EEA supervisory authority and having their headquarters in the EEA are also authorized to conduct insurance business in France directly or via their branches. A non-EEA entity wanting to undertake insurance business in France via a branch must be specifically authorised by ACP to do so. Fit and proper requirements are applied only to the chair of the Board and to some of the first layer of senior management of the applying entity."
- ICP5: "Suitability of persons is assessed at the time of application for authorization to undertake insurance business. When there is a change in senior personnel of an insurer, ACP has no direct authority to object to such a change. There is no suitability assessment of key persons responsible for control functions, or of members of the Board(s) other than the chair. The ACP has powers to require the removal of unsuitable persons, but only those for which it can assess suitability. In instances where the ACP considers an insurance entity has an unsuitable person in a senior or key role, it would approach the entity and request removal or change. In such situations, the ACP would look to use other powers and sanctions it has to achieve a change in personnel."
- ICP6: "ACP must be notified whenever a party—acting alone or in concert with others—acquires, extends, reduces, or ceases to hold (directly or indirectly) shares in an insurance undertaking. These requirements apply also to insurance holding companies having their head office located in France, as well as mixed financial holding companies having their head office located in France and which belong to a financial conglomerate whose surveillance is coordinated by ACP. The above notification must be prior to any change, and ACP must authorize such increases in shareholdings. When shareholdings are being reduced, ACP checks that the change does not jeopardize the insurance undertakings licence conditions. For cases involving intermediate or ultimate owners outside France, ACP has the power to—and does—exchange information with EU/EEA authorities; but it only exchanges information with authorities outside the EU/EEA when it has a formal MoU."
- ICP7: "Provisions are in place to deal with the responsibilities of Boards, but these are high-level requirements for all companies, aimed at having Boards determine the direction of the company’s business and oversee their implementation. Companies are also required to have an audit committee. Most insurers are required to have a risk committee to deal with risk-management policies, procedures, and systems. Insurers are required to produce annually a Board-approved internal control report, a Board-approved solvency report and a Board-approved reinsurance policy statement. However, Boards are not required to set insurer risk appetites, to define roles and responsibilities between the Board and senior management, or to act in the interests of policyholders."
- ICP8: "The Monetary and Financial Code requires most insurers to have a Risk Management Committee; insurers are also required to have an internal control function and to produce an annual internal control report. However, there is no specific requirement for insurers to have a dedicated internal audit function or an actuarial function."
- ICP9: "Data collections and supervisory reviews are comprehensive and reasonably detailed. Much of this will change as the reporting requirements under Solvency II are finalized and implemented across Europe. The way supervisors will be required to assess an insurer’s solvency will also change fundamentally and be much more complex. These changes will require significant retraining of supervisory staff and possibly the need to recruit some staff more experienced in the economic valuation approaches underlying Solvency II."
- ICP10: "A wide range of preventive and corrective measures are available and appear to be used."
- ICP11: "The supervisor has adequate powers to enforce corrective actions and impose sanctions where needed. These powers are used in practice."
- ICP12: "Appropriate winding-up and exit provisions exist, and limited policyholder compensation arrangements exist. However, there have been very few cases where they have needed to be used."
- ICP13: "Board-approved annual reinsurance policy statements are required. Reinsurance is appropriately considered in supervisory reviews."
- ICP14: "Solvency II requirements will alter the landscape in a significant manner. For all practical purposes, assets will be valued at their market values. Likewise, the discounting of liabilities will be carried out on the basis of “best estimate” assumptions with a safety margin. Accounts prepared under Solvency II are expected to demonstrate greater volatility than has been seen under Solvency I practices."
- ICP15: "The investment activities of insurance companies are subject to both qualitative and quantitative limitations. The qualitative requirements in the Insurance Code deal with the nature of assets, currency issues, and location. The Code also defines a list of eligible assets and quantitative limits. Limits are imposed on the composition of assets that may be counted towards coverage of technical provisions (the “Coverage” test). In practice, current company holdings are far below regulatory limits."
- ICP16: "Risk management considerations currently applied are primarily written in the context of existing French practice. The requirement changes and practices expected with Solvency II implementation will be considerable and impact substantially to improve insurer risk management, but also the work of ACP supervisors in assessing insurer compliance with the requirements."
- ICP17: "Insurers are required to issue a Solvency Report, which is submitted to the ACP and to the external auditor. The Solvency Report must show that technical provisions are calculated in a way that ensures that they are sufficient to meet commitments to policyholders and cedents; explain the investment policy of the insurer; and analyze how the insurer will meet all its commitments in the mid- and long-run. Insurers must assess their financial risks, in particular by stress-testing the potential impact on their balance sheet of changes in interest rates and in stock prices. The methodology of these assessments is determined by ACP and results must be submitted to ACP on a quarterly basis. The advent of Solvency II will mean important changes for the supervision of insurance companies in France. The new approach will involve new methods for establishment of values for assets and liabilities, and new techniques for determining the prescribed solvency margin. In all likelihood, the new system will involve solvency control levels which trigger different degrees of intervention by the supervisor."
- ICP18: "Insurance intermediaries are required to register each year. Inspectors from Banque de France collaborate with ACP officials in supervision of the distribution of insurance products."
- ICP19: "Insurers and intermediaries must comply with general rules protecting consumers, and with specific rules that apply to insurance activities."
- ICP20: "General public disclosure requirements are in place. Information disclosed to the public does not include the entire package of disclosure contemplated by ICP 20 (though it is more comprehensive on some aspects). Disclosure requirements pursuant to Solvency II will be more extensive."
- ICP21: "Fraud in insurance is covered by the generic provisions of the Code penal, which also deals with fraud arising from insurance. Solvency II will introduce the need for companies to report on “Operational Risk,” which is generally presumed to include risk of fraud."
- ICP22: "A recent FATF assessment concluded that France is largely compliant with FATF recommendations."
- ICP23: "Adequate and effective supervision exists for legal entities and on a group-wide basis."
- ICP24: "Although macroprudential surveillance is a relatively new area, the ACP has made good progress in establishing such surveillance."
- ICP25: "The ACP cooperates with other authorities, both within and outside the EC, in particular by actively participating in supervisory colleges."
- ICP26: "The ACP operates according to the EU/EEA and EIOPA requirements and guidelines for crisis management."

### Recommended Action Plan to Improve Observance (selected recommendations)
- ICP2: "It is recommended that consideration be given to removing government representatives from ACP meetings. This would remove the potential for one means of governmental influence on ACP decisions and would substantially improve the perception that ACP is independent. Separate coordination arrangements between ACP on the one hand, and the government on the other hand, could be established to ensure effective advice, knowledge about crucial supervisory decisions, and the reasonings behind proposed regulatory changes still occurs. Consideration could also be given to establishing a more transparent mechanism for adjustments to the industry contributions to the funding of ACP. While it has not been a problem to date, such a mechanism would allow ACP to have any future situation of funding constraints dealt with transparently, and thus increase the perception of ACP’s independence."
- ICP3: "Consideration should be given to allowing ACP to exchange information with authorities outside the EU/EEA, even if there is no formal agreement is in place."
- ICP5: "It is recommended that the ACP power to require removal of unsuitable persons be extended to all insurer Board members and all key persons in control functions, but it is noted that this is expected to occur via the transposition of final Solvency II requirements into French law. The ACP should also consider being more proactive in advising other authorities about unsuitable persons."
- ICP7: "It is recommended that enforceable requirements be introduced for insurer Boards to: Determine and document their actual risk appetite, and their strategy for keeping their risks within this stated appetite; Clearly define the roles and responsibilities allocated to the Board, senior management, and key persons in control functions; Have an appropriate number and mix of individuals to ensure adequate knowledge, skills, and expertise; Act in the interests of policyholders; and Adopt an effective remuneration policy, which does not induce excessive or inappropriate risk taking. It is noted that many of these are likely to be required via the implementation of Solvency II requirements."
- ICP8: "Requirements for insurers to have internal audit and actuarial functions should be introduced. It is noted that they will be required via the Solvency II directive. Consideration should also be given to specifically requiring insurers to retain responsibility for any material function that is outsourced and producing ACP guidelines on the issues, which should be included in outsourcing agreements."
- ICP9: "It is recommended that there be significant retraining of supervisory staff in the economic valuation approaches underlying Solvency II, the revised Solvency II reporting requirements, and Solvency II ORSA requirements. Consideration should be given to establishing within the ACP a quality-control function aimed at achieving greater consistency of supervisory assessments, and establishing a clear ACP policy or approach aimed at achieving greater consistency in aligning the supervisory response to the seriousness of the supervisory assessment."
- ICP14: "It is recommended that ACP develop the necessary tools to be used in the supervision of insurance companies such that the valuation of assets and liabilities conforms to Solvency II expectations. For example, for life insurance business, this will imply replacing the current practice of computing policy liabilities using original pricing assumptions with an approach that fixes assumptions based on current estimates plus a margin over current estimates (MOCE)."
- ICP16: "It is recommended that ACP develop expertise in the area of ERM as it will be expected to develop standards and provide guidance to insurance companies in the application of ERM techniques to the measurement of solvency."
- ICP17: "It is recommended that ACP, in preparing for the implementation of Solvency II, provide training to staff that will be expected to cope with new measures for assessing the adequacy of capital. It will also be necessary to develop a framework of regulatory responses that will involve solvency control levels, which trigger different degrees of intervention by the supervisor."
- ICP20: "It is recommended that ACP take a more active approach to obliging insurance companies to disclose relevant, comprehensive, and adequate information on a timely basis in order to give policyholders and market participants a clear view of their business activities. Perhaps this could be accomplished by providing public access to specific company data on a website."
- ICP24: "It is recommended that ACP continue to develop macroprudential surveillance approaches from a multi-disciplinary and cross-sectoral perspective to identify trends and developments in all sectors of the economy that might negatively impact the risk profile of insurers."

### Authorities’ response to the assessment
- Paragraph 116: "The French authorities welcome the IMF review of the French regulatory and supervisory insurance framework. The FSAP has been a useful exercise and has further enhanced the 'peer review culture' in ACP’s departments. ACP expresses its most sincere appreciation and thanks the IMF and its knowledgeable and experienced assessors for the dedication, time and resources committed to the assessment."
- Paragraph 117: "The French authorities broadly agree with the IMF assessment. In the view of the French authorities, it has to be underlined that this assessment has been made on the basis of the newly revised ICP (dated October 2011) which made the exercise of observation much more demanding than before. These ICP partly echo Solvency II requirements and approach, still to enter into force. By construction, some ICP currently regarded as 'partly observed' or 'largely observed' would probably have been deemed 'observed' if Solvency II was already in place."
- Paragraph 118: "Besides, there are a few differences of views between IMF and the French authorities. These are as follows."
- Paragraph 119 (on ICP2 independence): "On ACP independence (ICP 2), while stressing that the clear intention of the authorities is to create an independent supervisory authority, soundly governed and adequately resourced, the IMF raises some concerns. The Authorities believe that the ACP is indeed fully independent and the assessment itself emphasises that no evidence of problems has been found. Regarding the involvement of the Ministry of Finance (through the Directeur général du Trésor or his representative) within ACP Board, it should be noted that the role and powers of the representative of the Ministry of Finance are fully set in the law, which gives no membership status in the Board and Enforcement Committee. This provides for transparency about the position of the Ministry of Finance, to the full knowledge of all stakeholders. The only right attributed by law is to ask for a second deliberation in the Board for matters other than sanctions. The request for a second round of deliberations has no effect on the eventual content of the decision but gives the Board an opportunity to review its decision, within a very short space of time, so as to consider all its consequences and to ensure it is reasonably undisputable. The Authorities believe this arrangement provides a clear framework for ACP and Ministry of Finance effective and timely cooperation, bringing valuable benefits and providing for robust guarantees for the independence of the regulators also in comparison to other examples at the international level."
- Paragraph 120 (on ICP7 corporate governance): "On ICP 7 about effective corporate governance framework, we share most of the views of the IMF. However, it should be noted that provisions are already in place, which define roles and responsibilities of the insurer’s governing bodies."

*Annex Table 3. France: Summary of Observance of the Insurance Core Principles — source document content.*

### 121.      French authorities have already taken steps to deal with the shortfalls detected

### _cr12341 - 121.      French authorities have already taken steps to deal with the shortfalls detected

### Assessment scope and context
- An assessment of the level of implementation of the IOSCO Principles in the French securities market was conducted from January 10 to 27, 2011 as part of the FSAP.
- An initial IOSCO assessment was concluded in 2005.
- IOSCO approved a new set of Principles in 2010 and a revised Methodology on September 30, 2011; France is among the first jurisdictions evaluated against the revised Methodology.
- Principle 38 is not assessed due to the existence of a separate standard for securities settlement systems.
- French authorities have already taken steps to deal with the shortfalls detected by IMF. Most of them will be addressed through the transposition and implementation of the Solvency II regime in French regulation.

### Institutional structure and governance
- Regulatory model:
  - The current regulatory structure is a variation of the twin peaks model.
  - ACP: prudential supervision of ISPs and market infrastructure providers, including regulated markets, MTFs, and CCPs.
  - AMF: markets supervisor and conduct supervision of all participants in the securities market (ISPs, PMCs, FIAs, market infrastructure providers); prudential supervision over PMCs and the funds they administer.
  - H3C: oversight of external auditors of public interest entities and non-public interest entities.
- Governance and powers:
  - Both AMF and ACP are governed by a Board; a separate enforcement committee imposes sanctions.
  - A representative from the MoF attends Boards and enforcement committees with no voting rights but can request a second deliberation in Board decisions.
  - AMF can draft its own regulations, subject to “homologation” by the MoF; ACP does not have this drafting power.
  - Authorization of exchanges remains with MoF based on AMF recommendation.
- Accountability and cooperation:
  - Authorization requirements established by law and available on websites; AMF follows a consultation process; individual decisions are subject to judicial review.
  - AMF and ACP prepare annual reports; budgets are overseen by the Cour des Comptes.
  - Regular monthly meetings between AMF and ACP; Pôle Commun (created by law in 2010) coordinates monitoring of investment vehicles and distributors; bilateral MoU with H3C; Corefris (MoF, AMF, ACP, ANC, BdF) introduced in 2010 to identify systemic risks.
- Market operators and SROs:
  - No self regulatory organizations (SROs). Mandatory membership in an association is required for all ISPs and FIAs but associations lack supervisory/enforcement powers; market operators are subject to AMF oversight but are not considered SROs.

### Preconditions and cross-border/European issues
- Legal and market infrastructure:
  - General preconditions for effective securities regulation appear mainly in place.
  - Commercial law and corporate governance standards up-to-date; insolvency framework updated in 2006 (Loi de Sauvegarde des Entreprises) introducing safeguard proceedings, mandat ad hoc procedures, and conciliation proceedings.
- Market distortions and European level concerns:
  - Tax incentives on certain insurance products might create distortions affecting efficient markets.
  - Level-playing field issues at the European level: stricter standards in France for asset management (safeguard of assets, rules on diversification, approval of marketing material for highly complex products); definitions of investment advice vis-à-vis suitability requirements; differences in supervisory practices among EU regulators.
  - The current review of MiFID provides an opportunity to address market fragmentation challenges that resulted from MiFID implementation.

### Main findings — supervisory and enforcement capacity
- Overall implementation:
  - France exhibits a high level of implementation of the IOSCO principles. The legal framework is robust and provides AMF and ACP with broad licensing, supervisory, investigative, and enforcement powers within their competences.
  - Robust arrangements exist for cooperation between AMF and ACP, and oversight arrangements for NYSE Euronext portals and related trading platforms are in place.
  - AMF has robust market surveillance systems and has been active in enforcement of market abuse provisions.
- Resource and capacity shortfalls:
  - AMF should dedicate more resources to onsite work (including inspections) of investment services providers, notably financial investment advisors.
  - ACP should make greater use of stronger enforcement measures including sanctions whenever necessary; more frequent reporting of capital adequacy would enhance ACP’s supervisory approach and early warning mechanism.
  - H3C’s effectiveness in supervising auditors’ oversight is severely constrained due to limited human resources; increasing staffing levels is an urgent priority.
  - H3C lacks direct enforcement powers; giving H3C greater direct enforcement powers would enhance auditors’ oversight effectiveness.
  - Current legislative limits to AMF and H3C headcount could affect supervisors’ ability to command sufficient resources.
- Governance risks to independence:
  - Participation of the treasury in AMF Board deliberations (no voting right but ability to request a second deliberation) and treasury participation in the AMF enforcement committee (except during deliberations) could potentially undermine independence.
  - Industry representatives—including some on active duty—sit on AMF and H3C Boards, creating potential conflicts with commercial interests; arrangements exist to address conflicts of interest, but alternative mechanisms should be established to retain market expertise while protecting independence.
  - Limited direct representation of retail investors at Board level should be addressed given current governance models.
- Supervisory practice observations:
  - AMF and ACP have developed offsite monitoring systems for ISPs including risk scoring frameworks.
  - ACP has developed a risk scoring system for prudential supervision of ISPs supported by reporting obligations, including on capital adequacy; however, frequency of capital adequacy reporting is limited and ISPs are not obliged to notify when capital falls below defined thresholds.
  - ACP conducts full scale onsite inspections on ISPs.
  - AMF’s number of onsite inspections and sanctions aimed at ISPs, especially FIAs, is relatively low—attributable to inspection capacity constraints rather than unwillingness to sanction.
  - Criminal enforcement faces challenges.
- Specific sectoral findings:
  - Issuers: Prospectus requirement for issuers of public offerings or admitted to trading on a regulated market; extensive periodic and ongoing disclosure for issuers admitted to regulated markets; OMTFs requirements align with IOSCO but are lower than regulated markets; notification of substantial holdings and transactions by “insiders” applies to issuers on regulated markets and OMTFs (different thresholds); such protections do not apply to issuers only in MTFs (which operate in practice for institutional/professional investors).
  - Auditors/CRAs/analysts: Auditors are subject to oversight by H3C; H3C’s supervisory approach is reasonable but resource-constrained and lacks enforcement powers. CRAs underwent thorough registration by colleges of European supervisors and are under ESMA ongoing supervision. Sell-side and “independent analysts” research subject to robust disclosure framework.
  - Collective investment schemes: Authorization requirements for PMCs include capital, fit-and-proper, organizational requirements. Disclosure requirements for CIS include prospectus and periodic information. Assets must be segregated and held by a depositary with a strict liability framework. Clear rules on valuation; AMF guidance on illiquid assets; suspensions of redemptions must be notified.
  - Securities intermediaries: Authorization requirements include capital, fit-and-proper, and organizational requirements; fit-and-proper requirements apply only to the two senior managers in line with EU Directives. Supervision includes offsite reporting and onsite inspections. AMF made significant progress on investor and consumer protection, including the highly complex products doctrine; scope of this doctrine should be increased. AMF should increase capacity to supervise large groups of FIAs and ISPs.

### Practical methodology and inputs used
- The assessors reviewed:
  - A self-assessment prepared by AMF with contribution of ACP.
  - Relevant laws, reports, and supervisory files.
  - Meetings with AMF, ACP, H3C, MoF, Ministry of Justice and the Judiciary, ESMA, market participants, and other stakeholders.
  - Findings of the Basel Core Principles assessment for ACP vis-à-vis Principles 1–5 of the IOSCO Methodology.
- The IOSCO methodology requires evaluation of both legal/regulatory frameworks and their implementation in practice, including inspection programs, cycle/scope/quality of inspections, prioritization, and follow-up including enforcement.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12341.pdf*

### 147.     Principles for secondary markets. Requirements for the authorization of regulated

### Principles for secondary markets. Requirements for the authorization of regulated markets and MTFs are robust.

### Market infrastructure and ongoing supervision
- Requirements for the authorization of regulated markets and MTFs are robust, including capital requirements, fit and proper, and organizational requirements.
- AMF and ACP have established arrangements for ongoing supervision of operators of regulated markets and MTFs.
- The bulk of supervisory resources are dedicated to the supervision of Euronext.
- The college of regulators established for the joint supervision of Euronext by all the relevant authorities appears to be working well.

### Market surveillance, integrity, and enforcement
- AMF has established a robust automated system for market surveillance.
- AMF conducts an important number of investigations every year, and administrative sanctions have been imposed for market abuse infractions.
- Processes are lengthy; criminal enforcement has been limited and very few convictions have been secured.
- As in other countries in Europe, market fragmentation has had an effect on pre-trade and post-trade transparency since the implementation of MiFID.

### Clearing, central counterparties, and crisis preparedness
- LCH Clearnet S.A. monitors positions daily, and a comprehensive system of intraday margin applies.
- Default procedures are in place and are clear.
- The college of LCH Clearnet has developed a framework for crisis management, which includes periodic simulations.
- A system of mandatory reporting of short-selling is in place; a system of disclosure of short selling is in place.

### Governance, independence, and resources of regulators
- The responsibilities of AMF and ACP are clearly defined by law; there are robust arrangements for cooperation.
- Governance concerns: Board structures raise concerns due to (i) the participation of a representative of the MoF who can ask for second deliberation (except on matters concerning sanctions), and (ii) participation of industry representatives with limited retail investors’ representation.
- AMF and ACP work under a strong framework of accountability and transparency; these entities are self-funded.
- Recent legislative initiatives have put a cap on the number of human resources.
- AMF has made considerable progress boosting investor protection and creating a risk culture; inspection capacity of AMF is limited in relation to the large population it supervises.
- ACP has sufficient capacity but the mindset could benefit from a change towards willingness to enforce where appropriate.
- Governance issues and issues related to powers and resources of the H3C are described in Principle 19.

### Information sharing and international cooperation
- AMF, ACP, and BdF are required to cooperate with each other; AMF, ACP, and H3C are authorized to provide information to each other.
- AMF and ACP are authorized to cooperate with foreign authorities; there are no limits to the type of information that can be provided.
- AMF is signatory of the IOSCO MoU and cooperates extensively with foreign regulators; international cooperation is primarily conducted through AMF and response time is reasonable.
- AMF and ACP can provide assistance to foreign regulators to obtain information that is not in their files; AMF has opened investigations, taken testimony, and received court orders on behalf of foreign regulators.

### Disclosure, issuers, and investor protection
- Issuers of public offering are required to submit a prospectus.
- There are extensive periodic and ongoing reporting requirements for issuers admitted to regulated markets.
- An adapted regime applies to issuers admitted in an OMTF. Disclosure requirements do not apply to securities listed on MTFs only, in line with EU legislation; such MTFs operate in practice as markets for institutional and professional investors.
- Company Law establishes a basic framework for investor protection; additional protections for minority shareholders exist for issuers admitted to trading in regulated markets and to a large extent for OMTFs (tender obligations, notification of substantial holdings and transactions by insiders).
- IFRS apply to issuers admitted to a regulated market. Issuers admitted to an OMTF can choose between French GAAP and IFRS. Few differences remain between French GAAP and IFRS, the main one in connection with financial instruments.

### Auditors, audit oversight, and credit rating agencies
- The H3C conducts onsite reviews of audit firms with public interest entity engagements (except those with one PIE engagement which have been delegated to the Compagnie Nationale des Commissaires aux Comptes, under the supervision of H3C).
- The supervisory program developed by the H3C is reasonable; however, additional resources would be key for the implementation of such program.
- The H3C lacks direct enforcement powers as it has to go through the prosecutor.
- The current governance structure of the H3C raises concerns, in particular due to the participation of active auditors in the Board (albeit a minority). The current legislative limits to headcount are also a source of concern.
- CRAs registered in France were subject to registration by a college of European supervisors; under the EU regulatory framework supervisory powers over CRAs have been transferred to ESMA. ESMA has conducted initial onsite inspections on the larger CRAs. Obtaining the remaining human resources planned is key to effective on-going supervision.
- French auditing standards apply and are broadly consistent with ISA; H3C oversees compliance with them.
- Auditors are subject to strict rules on independence, overseen by H3C and by audit committees for issuers admitted to trading in a regulated market.

### Collective investment schemes, hedge funds, and custodial protection
- Authorization requirements for PMCs are robust, and include capital, fit and proper, and organizational requirements. AMF has an active supervisory program including offsite and onsite monitoring.
- There are robust rules on segregation of assets; assets of CIS must be held by a depositary whose liability regime is very strict.
- Depositaries can be related entities but additional safeguards are in place including special reports from the statutory auditor of the depositary and robust supervision.
- The segregation and protection of clients’ assets have received extra attention because of the crisis and the failures of Lehman and Madoff; French investors did not suffer any losses from incorrect segregation or protection by French regulated entities.
- Disclosure requirements for CIS are robust and include a prospectus and periodic reporting. The doctrine of high-complex products is an example of the priority given by AMF to investor protection issues.
- There are clear provisions for valuation of assets, including on valuation of illiquid assets; rules on subscriptions and redemptions must be included in the prospectus. Suspensions of redemptions must be notified to AMF.
- Hedge funds are regulated like other CIS in France and are subject to registration or authorization requirements; hedge fund managers are subject to requirements and regulatory supervision as stringent as those of other CIS managers.

### Market intermediaries, prudential standards, and failure procedures
- Robust authorization requirements exist for ISPs, including capital, fit and proper, and organizational requirements; fit and proper requirements apply only to the two senior managers, in line with EU Directives.
- ISPs are subject to minimum capital requirements and requirements adjusted by risks.
- ISPs are subject to periodic reporting of their financial situation, including annual audited financial statements and semi-annual results. More frequent reporting applies to larger ISPs. Capital adequacy is generally reported on a semiannual basis, and occasionally on a quarterly basis for only a segment of the larger ISPs. More frequent reporting can be demanded on an ad-hoc basis.
- ACP conducts onsite inspections of ISPs. However, onsite inspections of ISPs and FIAs appear limited and, as a result, so are enforcement actions.
- ACP does not have in place plans to deal with the failure of ISP; however, its risk scoring system functions as an early warning tool. ACP has powers to deal with the failure of an intermediary, including transferring of clients’ assets, and there is an investor compensation scheme in place.
- ACP is engaged in the development of recovery and resolution plans for systemically important institutions. AMF is in the process of developing a toolkit to deal with the failure of a PMC.

*Summary implementation of the IOSCO Objectives and Principles of Securities Regulation as presented in Annex Table 5 of the source document.*

### Annex Table 6. France: Recommended Action Plan to Improve Implementation

### Annex Table 6. France: Recommended Action Plan to Improve Implementation of the IOSCO Principles

### Recommended actions by principle (selected highlights)
- Principle 1
  - French authorities should continue to work toward harmonizing approaches to (a) common institutions engaging in business across sectors; and to (b) commonly offered financial products.
  - Authorities could consider whether the single Ombudsperson used for securities could be extended to financial services more generally.
- Principle 2
  - Consider possible governance changes:
    - (i) increase the formal distance between the representative of the Ministry of Finance (MoF) while creating more informal mechanisms to ensure the MoF can continue to gather first-hand experience on how the markets function;
    - (ii) restrict membership of Board and sanctions committee to former members of industry who no longer have a vested interest;
    - (iii) ensure Boards and sanctions committee become more balanced by including more members representing retail investors and consumers;
    - (iv) increase the limitations on the type of topics in which former industry members can participate.
- Principle 3
  - AMF could benefit from increasing the capacity of its inspection unit so as to step up supervision and enforcement at ISP as well as FIAs.
  - H3C is already planning to increase its capacity in the next two years; if possible, accelerate this process.
  - ACP could consider setting up a program redefining its supervisory philosophy and changing the supervisory mindset of the organization to enhance its enforcement orientation.
- Principle 6
  - AMF should continue on its path of contributing to an effective systemic-risk framework and risk culture for the financial services oversight authorities.
- Principle 7
  - AMF could determine how the risk processes can be adapted so as to increase their capacity to review sufficiently and systematically the perimeter of regulation.
- Principle 8
  - AMF could consider whether a further exploration of the risk areas mentioned by the respondents in the assessment would be beneficial.
- Principle 12
  - AMF and ACP could consider whether and how a lighter version of the sanctions procedure could be designed that includes sufficient safeguards yet requires less manhours to operate and takes less time to complete.
  - Such a procedure ought to be designed with the smaller/objective infringements in mind and with full respect of the rights of defence; could usefully be based on examples observed in practice in certain countries.
- Principle 14
  - ACP should establish mechanisms to monitor that cooperation with foreign regulators is provided diligently.
- Principles 16–17
  - Assessors encourage authorities to determine whether additional safeguards are necessary in connection with Marche Libre and Alternativa, for example, by more directly prohibiting access of retail investors to these markets.
- Principle 19
  - H3C should follow through with its plan to expand its inspection team, accelerating it if possible.
  - All auditors who audit listed companies, whether on a regulated market or an MTF, should be included in the PIE concept.
  - H3C should seek to establish cooperation arrangements with the Public Prosecutor in order to ensure that cases are brought diligently to the regional chambers.
  - H3C should be given more direct enforcement powers.
- Principle 20
  - Authorities encouraged to find mechanisms to ensure a similar level of oversight in relation to auditors’ selection and independence for issuers admitted to trading in OMTFs as that required for issuers admitted to trading in a regulated market.
- Principle 21
  - Consider adoption of the quality control standard of the International Standards on Auditing as part of the French auditing standards.
- Principle 23
  - AMF should consider including remuneration of sell side analysts as part of its supervisory efforts in connection with compensation.
- Principle 30
  - ACP should consider implementing capital adequacy reporting on a more frequent basis, and consider whether its onsite inspection program can be made more risk based.
- Principle 31
  - See recommendation on principle 3.
- Principle 32
  - ACP should determine specific triggers at which additional reporting (in terms of scope and frequency) to ACP has to be commenced.
  - In addition to current work on recovery and resolution plans for systemically important institutions, ACP could consider conducting crisis management exercises.
  - AMF should finalize the development of its crisis management toolkit in connection with PMCs.
- Principle 33
  - AMF and ACP should continue to take all necessary actions to ensure the information technology reliability of Euronext.
- Principle 34
  - AMF should continue to monitor that Euronext keeps sufficient resources dedicated to market integrity issues.
  - AMF should request that Euronext implements a disclosure policy in connection with enforcement actions.
  - AMF should re-evaluate arrangements and resources dedicated to the oversight of the operators of MTF that are not managed by Euronext in tandem with the increase in activities in such platforms.
- Principle 35
  - AMF is encouraged to continue to work with other European regulators, in particular via ESMA, with the objective of:
    - (i) limiting the negative impact of waivers on pre-trade transparency, and addressing potential imprecisions in definitions to avoid diverging interpretations amongst national regulators;
    - (ii) achieving a single and exhaustive European consolidated tape in the equity markets;
    - (iii) consolidating audit trails on orders in the EU allowing national regulators to monitor equity markets.
- Principle 36
  - Market abuse provisions should be extended to all MTFs.
  - AMF is encouraged to work through ESMA in implementing order reporting requirements across Europe.
  - A unique client identification number can also be pursued in the context of the implementation of MiFID II.
  - AMF and the Public Prosecutors are encouraged to work in addressing challenges to criminal enforcement, as described in this report.
- Principle 37
  - A large trades report (“commitments of traders”), which includes information on clients’ positions, should be implemented in connection with the derivatives markets.

### Authorities’ response to the assessment (paragraphs 148–153)
- General
  - The French Authorities express appreciation to the IMF and its staff for the thorough analysis of the French financial sector and informative exchanges within the IOSCO assessment.
  - The FSAP remains the key vehicle for effective implementation of IOSCO international regulatory standards and confirms the added value of the robust IOSCO assessment Methodology as reinforced after the financial crisis.
- Assessment outcome
  - Authorities welcome the IMF’s judgement stating that France exhibits a high level of compliance with the IOSCO standards.
  - Since the last FSAP in 2004, France has reinforced its system in several aspects as identified by the IMF.
  - The conclusions of this second FSAP will be beneficial to further improve the French regulatory and supervisory approach and inform future European legislative and regulatory framework developments.
- On changes in grading
  - France notes it was among the first jurisdictions subject to a more thorough FSAP, assessing regulatory framework and effective supervision.
  - This evaluation is based on the revised IOSCO standards reinforced since 2004, which explains why certain grades may now be set at a lower level than at the time of the first assessment; this should not be interpreted as a decrease in the level of regulation or supervision in France.
- Concern on AMF independence
  - Authorities raise one important concern regarding the IOSCO assessment related to the independence of the AMF.
  - Key points on AMF governance and independence:
    - AMF disposes of full regulatory and supervisory powers and its statutory independence is ensured through its statute as “autorité publique indépendante” defining, among others, also a budgetary independence.
    - Many other market authorities do not benefit from the same safeguards; some are placed under the direct supervision of the Ministry of Finance.
    - The AMF Chairman has a non revocable and non renewable mandate of five years.
    - No failures have been identified with the current system, which has been in place for several years.
    - AMF’s decisions are taken in a collegial manner within the AMF Board and the distinct Enforcement Committee.
    - Board and Enforcement Committee include representatives nominated by institutions independent from the executive power and private sector representatives (issuers, investors and intermediaries) nominated by the Minister of Finance on the basis of expertise and experience.
    - The composition is defined to bring together views of the public sector (judges, public authorities such as the Banque de France or the Autorité des normes comptables) as well as those of market intermediaries, investors and issuers to reach a balanced outcome.
    - The role and powers of the representative of the Ministry of Finance are set in law, which gives no membership status in the AMF Board and Enforcement Committee; the only legal right is to ask for a second deliberation in the Board for matters other than sanctions.
    - The request for a second round of deliberations has no effect on the eventual content of the decision but gives the Board an opportunity to review its decision within a very short space of time.
  - Authorities state that clear and formal ways of exchange between regulators and Ministries, set by law, provide transparency and efficient coordination on issues related to financial stability, financing of the economy, and European and international negotiations.
- Looking forward
  - The AMF will monitor future FSAPs to learn from other countries’ experiences within the context of consistent implementation of international standards.

### Annex IV: Implementation of the CPSS-IOSCO recommendations for central counterparties — assessment of LCH.Clearnet SA (paragraphs 154–165 and onwards)
- Information and methodology used (Rec. 154–155)
  - Assessment undertaken as part of the FSAP for France.
  - Information used: relevant laws, bylaws, regulations, rules and procedures governing the systems; LCH.Clearnet SA self-assessment against the European System of Central Banks and the Committee of European Securities Regulators Recommendations conducted by BdF.
  - Extensive discussions held with ACP, AMF, BdF, LCH.Clearnet SA senior management and staff, and representatives for participants in the system.
- Institutional and market structure (Rec. 156–159)
  - Since December 2003, LCH.Clearnet SA is fully owned by the holding company LCH.Clearnet Group Ltd.
  - The holding company oversees two wholly-owned subsidiaries: (i) LCH.Clearnet Limited; and (ii) LCH.Clearnet SA (“Banque Centrale de Compensation SA”), which became an independent legal entity at the time of the merger.
  - Shareholders of the holding company are mainly its users with 83 percent of total shares; the remaining part is owned by NYSE Euronext, and London Metal Exchange.
  - LCH.Clearnet SA is incorporated in France, licensed as a credit institution, has branches in Amsterdam and Brussels and a representative office in Portugal, and has developed cross-border activities in Italy, Luxembourg, Germany, and Spain.
  - LCH.Clearnet SA operates a link with CC&G.
  - Products cleared include: listed cash products (cash equities, convertible equities, and bonds listed on the NYSE Euronext markets); listed derivatives products (equity and commodity derivatives listed on the NYSE Euronext markets); fixed-income products (government debt securities traded on electronic trading platforms); and OTC product (credit derivative swaps-CDS).
  - Two major developments:
    - The Board initiated a “Transformation Plan” aimed at creating “One Firm” by consolidating and rationalizing some operations of both French and U.K. subsidiaries to promote horizontal multi-asset class clearing and enhance risk and collateral management capabilities within LCH.Clearnet Group Ltd.
    - In March 2012, the LSE Group offered a bid to acquire at least 50 percent and up to 60 percent of LCH.Clearnet Group Ltd share capital; the transaction is expected to be completed by the fourth quarter of 2012, subject to regulatory approvals, including competition clearance.
- Regulatory structure (Rec. 160–162)
  - LCH.Clearnet SA is incorporated in France and operates under French law; a clearing house in France must have a credit institution statute and be licensed and supervised by ACP.
  - As a clearing entity, it is regulated by the securities regulator, AMF, which approves its operating rules; as a clearing and settlement system for financial instruments, LCH.Clearnet SA is overseen by BdF.
  - LCH.Clearnet SA is subject to regulation and oversight of Dutch, Belgian, and Portuguese competent authorities for clearing services provided to NYSE Euronext Amsterdam, NYSE Euronext Brussels and NYSE Euronext Lisbon.
  - MoUs have been signed between the relevant authorities and a college has been set up for coordination.
  - LCH.Clearnet SA is licensed as a Recognized Overseas Clearing House (ROCH) by the U.K. Financial Service Authority; an MoU is signed between France, Belgium, the Netherlands, Portugal, and United Kingdom for exchange of information at the LCH.Clearnet Group Ltd level.
- Main findings
  - Legal framework (Rec. 1, para. 163)
    - Activities are governed by a consistent and solid set of laws, regulations, and rules supporting enforcement of transactions, netting procedures, and protection of customer assets.
    - Adequate rules exist for addressing a participant default, including effective use of collateral.
    - Implementation of the settlement finality and collateral directives provides solid protection in France and other EEA countries.
  - Participation requirements (Rec. 2, para. 164)
    - Access and exit criteria are well defined and publicly disclosed; participation requirements are objective and clearly stated on the website.
    - Access is not limited on grounds other than risks; only regulated credit institutions and investment firms are eligible to become clearing members.
    - Participants should meet financial resources and operational reliability; compliance is monitored regularly.
  - Financial risk management (Rec. 3–6, para. 165)
    - LCH.Clearnet SA has a comprehensive risk management framework.
    - Monitors participants’ exposures at least once a day and conducts intraday margin calls.
    - Employs several tools to limit exposures from defaulting participants: high level of required capital, margin requirements, and contributions to the clearing fund.
    - Can require additional financial resources from participants when unusual price levels are detected.
    - Recently developed dedicated risk-management procedures to handle sovereign debt.
    - Recommended improvement: LCH.Clearnet SA should measure its exposure continuously throughout the business day; i.e., an exposure is calculated continuously intraday once positions, participants, or product prices have changed.
- Custody and investment risks (Rec. 7)
  - (Content on Rec. 7 begins after the supplied excerpt and is not included here.)

*Source: Annex Table 6 and accompanying sections from the IMF assessment document provided in the source PDF.*

### 166.     Cash and securities are kept safe in central bank account and national and

### _cr12341 - 166.     Cash and securities are kept safe in central bank account and national and international central securities depositories. LCH.Clearnet SA has an account in TARGET-2.LCH.Clearnet SA investment policy is conservative by investing in highly rated government instruments. It ensures that its overall credit exposure to any individual issuer remains within acceptable concentration limits by the daily monitoring procedures.

### Operational risk (Rec. 8)
- Business continuity arrangements are well developed and cover all aspects of its operation and communication networks.
- As a credit institution, LCH.Clearnet SA has implemented the Basel II Operational Risk Framework.
- Operational risk management is an ongoing process based on a formalized methodology.
- Monitoring of operational risks and loss events is performed through a dedicated tool.
- Contingency plans and back-up facilities are regularly tested and maintained to ensure resilience.
- A simulation exercise with market participants should be carried out annually.
- The relevant authorities should formalize the assessment of the operational risk, including onsite inspections, of the insourcing company that develops and manages the largest part of LCH.Clearnet SA activities.

### Money settlements (Rec. 9)
- LCH.Clearnet SA uses both central bank money and a private settlement bank for cash processing (margin and settlement).
- Central bank money is used for most euro payments, about 85 percent for the cash equity segment and 100 percent for other asset segments.
- Euroclear Bank is used for about 10 percent of the volume of NYSE Euronext markets.
- Clearstream Luxembourg is used for the settlement of transactions on Bourse de Luxembourg, although the amount is very low.
- Commercial bank money is used for settlement of margins in British pound and U.S. dollars, which are very negligible.
- Recommended action: Once the volume of non-euro payments in commercial bank money increases, LCH.Clearnet SA should carry out an assessment of the finality of these payments.

### Physical deliveries (Rec. 10)
- LCH.Clearnet SA clearly identifies and manages its obligation for physical delivery.
- Deliveries of securities are carried out in book-entry form (dematerialized and immobilized), and delivery obligations are fulfilled via book transfer.
- Comprehensive rules and instructions have been developed for the delivery of commodity contracts.

### Risks in links between central counterparties (Rec. 11)
- LCH.Clearnet SA has a link to CC&G for clearing Italian government bonds.
- Specific rules and risk methodology are in place aimed at minimizing risk exposures to CC&G.
- Both CCPs collect margins from each other based on a methodology applied to their members, but they do not contribute to the other’s clearing fund to minimize contagion risk that may result from members’ default.
- The link is subject to the regulation and oversight of relevant French and Italian competent authorities.
- Both CCPs are designated payment systems according to Article 10 of the Settlement Finality Directive, providing legal protection to finality and collaterals.
- Recommended actions:
  - LCH.Clearnet should collect adequate level of additional margin from CC&G as contribution to the default fund is not made.
  - LCH.Clearnet SA should ensure that the collateral provided to CC&G is safely invested by minimizing credit and liquidity risks.

### Efficiency (Rec. 12)
- LCH.Clearnet SA reviews pricing and service levels, as well as capacity levels regularly.
- Periodic benchmarking studies with comparable European CCPs are performed to assess costs and fees.
- An ongoing profit-and-loss analysis is conducted.

### Governance (Rec. 13)
- LCH.Clearnet SA is a wholly owned subsidiary of LCH.Clearnet Group Ltd.
- Governance arrangements and composition of the Boards are clear and publicly available on its website.
- The Board includes four independent Board members and is accountable to the shareholders.
- There is no formal selection criteria or procedure used to choose the “user representative” on the Board.
- Procedures to identify and mitigate conflicts of interests should be further enhanced.
- A transformation plan is being implemented to streamline operations of both subsidiaries based on product lines, with some functionalities concentrated at the group level.
- It is crucial that the new organization does not compromise that LCH.Clearnet SA retains the necessary level of independence to meet regulatory obligations as a distinct legal entity.
- Recommended actions:
  - LCH.Clearnet Group should adjust its criteria for the independence of the non-executive Board to be in line with the U.K. Code on Corporate Governance, including criteria 2 and criteria 5.
  - At LCH.Clearnet SA and Group Ltd, qualification and criteria to select Board members should be disclosed to ensure appropriate skills and incentives.
  - LCH.Clearnet should formalize the selection criteria used to choose the “user representative” on the Board.
  - LCH.Clearnet SA should provide clarity on its remuneration policy.
  - LCH.Clearnet at Group and SA levels should review their structure, identify possible conflicts of interests, and enable prompt actions from independent directors and the chairman of each Board.
  - Ensure the transformation plan does not erode decision making at LCH.Clearnet SA with adverse impact on managing risks and meeting local market needs.

### Transparency (Rec. 14)
- LCH.Clearnet SA discloses to clearing members and other market participants its rules, procedures, and policies on its website, covering governance, rights and obligations of participants, procedures and tools for handling risks, and fees.
- Important notices and information are posted on the website.
- LCH.Clearnet SA has not completed and disclosed a comprehensive self-assessment following the RCCPs assessment methodology.
- Recommended action: LCH.Clearnet SA should complete and disclose the answers to the key questions set out in the CPSS/IOSCO report on RCCP, and review the answers at least once a year or when major changes occur.

### Regulation and oversight (Rec. 15)
- Objectives and responsibilities of the regulators of LCH.Clearnet SA are well defined and transparent.
- Supervision and oversight are comprehensive and effective.
- LCH.Clearnet SA is regulated and supervised by several domestic and foreign authorities.
- Cooperation and coordination between these authorities are governed by French law and, where necessary, formalized in several MoUs.
- A general discussion indicates LCH.Clearnet SA will, in principle, be able to meet the newly revised CPSS/IOSCO principles and adjust to new requirements as needed.
- Recommended actions:
  - BdF should be empowered to issue regulation and undertake measures to effectively enforce its oversight responsibility.
  - ACP and AMF should produce a policy note clearly defining and publicly disclosing their respective objectives, roles and responsibilities with regard to the soundness and efficiency of LCH.Clearnet SA.
  - To increase transparency and accountability, BdF, AMF, and ACP should produce a joint policy note clearly defining and publicly disclosing their respective objectives, roles and responsibilities with regard to the soundness and efficiency of LCH.Clearnet SA.

### Annex Table — Selected Recommended Action Plan highlights
- Recommendation 2 (Participation requirements):
  - Given LCH.Clearnet SA’s unique position, an applicant should have the possibility to appeal to a third party (cf. competent authority) rather than addressing a court to solve litigation linked to refusal of membership.
- Recommendation 3 (Risk management):
  - LCH.Clearnet SA should measure its exposure continuously throughout the business day, i.e., exposure is calculated continuously intraday once the positions, the participants, or the prices of the products have changed.
  - For fixed income instruments, LCH.Clearnet SA should use intraday prices for the calculation of its exposures.
  - Triggers for additional intraday margin calls for exchange traded equities should be formalized with specific procedures and policies.
  - LCH.Clearnet SA should develop a mechanism that allows the calculation of margin call for CDS on the same day prices rather than the prices of previous day.
- Recommendation 4 (Margin requirements):
  - Improvements are still needed in automation, trailing and accuracy in parameters’ calculation.
  - To enhance transparency and reduce uncertainty, LCH.Clearnet SA should formalize its policy to address wrong way risk.
  - LCH.Clearnet SA should commission an independent review of its risk models for all its products and not only for CDS.
  - Intraday margin call should also be applied on cash equity.
- Recommendation 6 (Default procedures):
  - LCH.Clearnet SA should introduce a mechanism to allow segregation between the clearing member’s proprietary assets and its clients’ assets when the segment is developed for CDS contracts.
  - LCH.Clearnet SA should introduce an operational segregation mechanism for all fixed income products.
- Recommendation 8 (Operational risk):
  - An external audit of the business continuity plan should be carried out annually.
  - LCH.Clearnet SA should formalize the external audit of the operational risk of the outsourced activities.
  - Relevant authorities should formalize the assessment of the operational risk of the insourcing companies, including onsite inspection.
  - The business continuity plan should be tested regularly with participants.
  - A feasibility study, including cost assessment, should be undertaken by LCH.Clearnet SA to reduce the recovery time objective from four hours to preferably less than one hour.

*Source: IMF staff assessment content unit _cr12341 (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12341.pdf_