## cr13180 — Summary Compliance with the Basel Core Principles—Detailed Assessments

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### Executive summary and high-level judgment
- 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 relatively better than a number of other countries, aided by a diversified banking model and a well-developed regulatory and supervisory structure.
- Recent developments in the eurozone, funding markets, and sovereign debt markets exposed vulnerabilities and revealed weaknesses in risk management practices; authorities and banks are addressing these vulnerabilities.
- Supervisory and regulatory systems were under strain as major international rule changes were implemented while markets pressured banks on capital and liquidity responses.
- The Autorité de Contrôle Prudentiel (ACP), created via merger and integrated within Banque de France, shows many high-quality initiatives and practices but legislative and regulatory weaknesses limit supervisory tools; supervisory practices should be enhanced in specified areas.

### Institutional, market, and macroeconomic structure
- Aggregate balance sheet of French banks amounts to five times GDP.
- Four of the top five French banks are on the Financial Stability Board (FSB) list of global systemically important financial institutions (SIFIs).
- The top five banks account for 88 percent of banking system assets.
- Banking model features universal banking and banc-assurance; many major banking groups have material insurance operations.
- Mutual banks: regional/local mutual banks control a central body for funding and group‑wide risk management; several expanded materially outside France in the last decade.
- A government-owned postal bank exists (100 percent owned by the government) with limited market funding.

### Recent stress, funding, and capital position
- 2007–2009: diversified earnings and lower structured-product exposure meant losses were manageable; one French bank (a subsidiary of a Belgian bank) failed and is being restructured.
- French banks historically relied more on wholesale funding and short-term funding than average.
- 2011: downgrades of major banks, widening CDS spreads, and reductions in short-term U.S. dollar funding.
- Banks planned aggressive deleveraging to attain Basel III capital ratios ahead of original target, focusing on credit extension and wholesale banking products.
- French banks did not raise capital since 2009 and had capital ratios close to the average of other European banks.
- Banks are building core capital by reducing earnings’ distribution while benefiting from strong retail and commercial earnings.
- Banks faced large funding needs in the first half of 2012.
- Short-term risks highlighted: future funding pressures, resolution of European issues, and severity of the slowdown in the European and French economy underway at the time of the assessment.
- Authorities identified the mortgage sector as a potential concern but did not find clearly higher embedded losses due to conservative mortgage granting practices.

### Institutional changes, EU context, and coordination
- ACP created in 2010 by merging former banking and insurance authorities; added consumer protection mandate.
- Financial Stability Committee (COREFRIS) created and functioning; COREFRIS is a national framework for cooperation and coordination but is not a decision‑making body.
- EU-level regulatory and supervisory developments will alter ACP operations; emerging EU rules have major implications for banks.
- EBA interim capital raising exercise showed French banks needed relatively modest additional capital to meet mid‑year 2012 targets; authorities and banks viewed meeting these targets as eminently achievable without market issuance or state support.

### Preconditions for effective supervision, public infrastructure, and oversight
- Business laws: complete system consistently enforced.
- Accounting: listed companies and consolidated accounts prepared to IFRS as adopted by the European Union.
- Audit oversight: H3C inspects audit firms; rules limiting auditor independence (restrictions on non-audit services) are tougher in France than in other jurisdictions.
- Disclosure: extensive under IFRS and Pillar III; market analysts generally satisfied but noted some inconsistencies.
- Financial literacy: noted as lower than in some other major jurisdictions, with implications for consumer protection.

### Crisis management, recovery, resolution, and deposit protection
- COREFRIS chaired by the Minister of Finance includes presidents of ACP, Financial Markets Authority, and Accounting Rules Authority; facilitates cross‑sector cooperation.
- No domestic Memorandum of Understanding (MoU) specific to crisis management had been agreed; COMOFI provides gateways for information sharing and cooperation.
- ACP requested large banking groups prepare recovery and resolution plans (RRPs); firms were requested to have group‑wide RRPs available by mid‑2012 with practical implementation extending until end‑2012.
- Deposit guarantee scheme:
  - Paybox: depositors guaranteed up to a limit of €100,000 per credit institution (EU Directive 94/19/EC, as amended).
  - Preventive action: French Deposit Guarantee Fund (DGF) can intervene in an institution facing difficulties only at the ACP’s request.
- Deposit guarantee scheme funded on a risk‑based approach; paybox automatic while preventive action discretionary.
- ACP and DGF contemplating whether to draw up an MOU.

### Key legislative deficiencies affecting supervision and governance
- Two serious legislative deficiencies limit compliance and supervisory effectiveness:
  - Lack of a complete legislative framework regulating Board of Directors responsibilities distinct from senior management; ACP cannot apply a fit and proper test to Board members and has limited direct interaction with Boards. Consequences include impaired integrity of fit and proper processes for ownership changes, inability to suspend or dismiss Board members, inability to set Board requirements for oversight and risk governance, and inability to meet with non‑executive Board members collectively to present supervisory findings.
  - ACP lacks formal power to approve acquisitions by French banks in the EEA or abroad. Consequences: ACP reacts ex post (higher capital requirements, reinforcement of controls, de‑consolidation, ring‑fencing) which is less effective than ex ante approval authority.
- Recommendation excerpt: grant ACP powers to assess suitability of Board members (jointly and severally) and powers to suspend or dismiss; grant ACP prior notification or approval powers over major acquisitions and complementary power to insist on divestment if necessary.

### Independence, governance, and resourcing (ACP-specific)
- Concerns noted though no evidence of problems at assessment time:
  - Role of MINEFI in 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.
- Definitions and proposed adjustments:
  - Authorities intended to formalize modalities for MINEFI right to request second deliberation limiting it to significant error of law/manifest error of assessment and systemic consequence cases.
  - Recommendation: provide ACP a formal role in proposing prudential rules and periodic formal and public review of ACP resource needs.

### Prudential regulation and requirements (Capital, Pillar 2, enterprise risk, liquidity)
- Capital/Basel developments and numeric facts:
  - Legal minimum own funds to RWA: 8 percent (Order of February 20, 2007).
  - Reported major banks’ Tier 1 ratios: between 10.5 and 11.5 percent (at assessment time).
  - Reported Core Tier 1 (Basel 2 basis at end‑2011): range 8.5 percent to 10.5 percent.
  - EBA target: 9 percent Core Tier 1 by mid‑2012 for some banks; Basel 2.5 applied as of January 1, 2012 expected to reduce ratios by 25–100 bps depending on bank.
- Material weaknesses identified:
  - Treatment of cross‑holdings in mutual groups: risk‑weighting rather than deduction at sub‑consolidated levels results in double counting; impact ~50 bps overstatement of Tier 1 for affected entities; amounts in the €10–15 billion range for investments.
  - Treatment of bank‑insurance cross‑holdings: inconsistent approaches; impact on Tier 1 can be 50–100 bps; insurance holdings amount material (Eur 1.3 billion to Eur 12 billion for major banks).
  - Assessment for CP 6: Materially Non‑Compliant.
- Pillar 2 and supervisory interaction:
  - Pillar 2 approach well developed and linked to ACP risk rating; ACP imposed Pillar 2 requirements on ~80 institutions covering 97 percent of system risk exposure.
  - Enhanced focus on Core Tier 1 rendered existing Pillar 2 measures based on old targets less effective; recommendation to adapt Pillar 2 consistent with Basel 3/CRD4.
- Enterprise‑wide risk measurement and governance:
  - Regulation 97‑02 and 2010 amendment require a “head of risks”.
  - Risk governance and Board oversight uneven; ICAAP and stress testing practices vary.
  - Recommendation: require banks to enhance and implant ERM processes; clarify ACP expectations for ERM, capital planning and Board risk governance; subject to regular detailed ACP assessment and feedback.
- Liquidity regime:
  - Order of May 5, 2009; standardized one‑month regulatory ratio must exceed 100 percent; advanced approach requires ACP authorization and cannot be below the standard ratio.
  - Templates COEF‑LIQU and MATURITES capture on/off‑balance sheet instruments.
  - ACP intensified liquidity standards for systemic firms; program to extend severe stress tests and refine data for comparability.
  - Assessment for CP 14: Largely Compliant.
  - Recommendation: broaden enhanced liquidity risk regime beyond core systemic groups; ensure general liquidity principles apply to all banks, not only advanced firms.

### Methods of ongoing banking supervision (SREP, on‑site, off‑site)
- SREP and ORAP2:
  - ORAP2 uses 13 indicators (e.g., Quality of credit portfolio; Doubtful loans; Concentration risk; Liquidity risk; Own funds) to derive global rating 1–5.
  - ORAP outputs drive Pillar 2 capital requirements and the annual supervisory synthesis (“lettre de cadrage”).
  - Assessment for SREP: Compliant.
  - Comments: high-quality supervisory understanding but room to improve forward‑looking assessments and articulation on governance and enterprise‑wide risk management.
- On‑site and off‑site supervision:
  - DCP on‑site inspections: around 190 staff; major on‑site reviews commonly take 4–6 months with 4–8 people; for major banks approximately five reviews a year planned.
  - Off‑site departments: 185 staff; divisions responsible for large banks have about 10–15 staff per bank.
  - 2011 on‑site mission mix (first three quarters): 37 percent general missions; 63 percent special focus (market risks 18 percent, AML 16 percent, liquidity risk 11 percent, credit risk 3 percent, other issues 15 percent).
  - On‑site reports follow a “contradictoire” draft comment process; follow‑up via “lettre de suite” and remediation plans.
  - Assessment for supervisory techniques (CP 20): Largely Compliant.
  - Recommendation: improve timeliness and coordination of on‑site and off‑site work, accelerate escalation and Board engagement, and develop focused reviews as complement to comprehensive inspections.

### Accounting, auditors, disclosure, and audit oversight
- Accounting frameworks:
  - Consolidated accounts of listed banks use IFRS; solo accounts use French GAAP.
- Audit oversight:
  - H3C inspects audit firms; ACP must be consulted on auditor appointment/reappointment and may ask auditors for working papers and information (Article L.613-9 Monetary and Financial Code).
  - ACP may ask competent court to relieve auditor duties if independence breached.
  - Independence and restrictions on non‑audit services are tougher in France than many jurisdictions.
- Provisioning and problem assets:
  - IFRS (IAS 39) governs impairment for consolidated accounts; French GAAP classification applies for solo accounts and unlisted consolidated accounts.
  - Coverage ratios (individual + collective provisions as percent of impaired/doubtful loans) in major French banks: 65–75 percent range.
  - Conclusion: provisioning practices generally adequate despite some high‑profile cases in 2010 related to sovereign debt restructuring; ACP and auditor vigilance needs to be heightened during economic downturns.

### Corrective and remedial powers, sanctions, and crisis tools
- ACP remedial toolkit and practices:
  - Formal follow‑up letter required after any on‑site inspection; institutions required to reply within two months.
  - ACP may issue injunctions, administrative police measures (caveat, formal notice, remedial action program), protective measures (special supervision, restrictions, suspension of executives), appointment of provisional administrator (COMOFI Article L.612-34), and sanctions (Sanctions Committee imposes warnings, reprimands, business restrictions, temporary suspensions, dismissals, partial/total withdrawal of authorization).
  - Administrative fine may be imposed not to exceed €100,000,000.
  - ACP may require higher solvency ratios (Pillar 2 injunctions); College decided Pillar 2 requirements for major groups and around 50 other banks/investment firms.
- Assessment: Compliant.
- Comments: sanctions procedures are more judicial in nature and can be protracted; ACP is learning to streamline processes for timely, effective outcomes.

### Consolidated and cross‑border supervision; home‑host cooperation
- Consolidated supervision:
  - ACP applies supervision on a consolidated basis (COMOFI Articles L.511-41-2 and L.533-4-1); chairs colleges for 14 groups and participates in further colleges.
  - ACP can supervise foreign branches and extend on‑site examinations to subsidiaries (Article L.612-26).
  - Limitation: ACP lacks powers to prevent establishment/acquisition of foreign interests or require divestment; remedies like higher capital, ring‑fencing or de‑consolidation are second‑best.
  - Assessment: Compliant.
  - Recommendation: grant ACP prior notification/approval powers for material acquisitions/establishments ex ante and power to require divestment where consolidated supervision impeded.
- Home‑host relationships:
  - Long tradition of information exchange and use of CEBS/EBA templates and college structures; ACP participated in 50 college meetings in 2011.
  - ACP conducts 20 to 30 missions per year in foreign offices and subsidiaries of French banks; crisis‑period more frequent exchanges (e.g., weekly calls with FRBNY since August 2011).
  - Assessment: Compliant.
  - Recommendation: continue deepening home‑host cooperation, maintain robust information flows, and practice college operational arrangements.

### Key resourcing and numeric facts
- Total financial resources of ACP: Eur 163 million in 2010.
- FTEs: 900 at creation of ACP; 974 as of mid‑year 2011; planned ~1,140 at end of 2012.
- Planned FTE off‑site banking supervision: from 186 to 205 (creation to end‑2012).
- Planned FTE on‑site banking supervision: from 163 to 192 (creation to end‑2012).
- Travel budget: €4.2 million.
- Training: average 55 hours per staff/year; junior supervisor initial training up to 140 hours over first two years.
- ACP AML/CTF staffing: approximately 65 people regularly involved at end‑2010.
- Large banks’ regulatory ratios and amounts:
  - Tier 1 ratios reported between 10.5 and 11.5 percent.
  - Core Tier 1 reported range 8.5 percent to 10.5 percent (end‑2011, Basel 2 basis).
  - Mutual group cross‑holdings investments estimated in the €10–15 billion range impacting Tier 1 by ~50 bps.
  - Banc‑insurance holdings for major banks: Eur 1.3 billion to Eur 12 billion (impact on Tier 1 50–100 bps).

### Aggregate Basel Core Principles grading (summary counts)
- Compliant (C) – 19
- Largely compliant (LC) — 8
- Materially noncompliant (MNC) — 3
- Noncompliant (NC) — None
- (Note: CP 1 is divided into six components for analysis.)

### Selected prioritized Recommended Action Plan (selected points)
- CP 1.4 Legal Powers:
  - Give ACP powers to assess, jointly and severally, the suitability (integrity and expertise) of Board members and powers to suspend or dismiss such individuals.
  - Amend internal control regulation to specify Board responsibilities for oversight and risk governance.
  - Enhance ACP meetings with independent Board members and ACP assessments of governance and effectiveness.
- CP 5 Major Acquisitions:
  - Grant ACP powers to receive prior notification of major acquisitions and to consider acquisitions or establishment of branches/subsidiaries ex ante.
  - Give ACP powers to require divestment where necessary to prevent ineffective supervision of the consolidated group.
- CP 6 Capital adequacy:
  - Once new capital rules stabilize, confirm a graduated phase‑out of preferential treatment of banc‑insurance and inter‑bank exposures.
  - Provide guidance for enhanced, accessible and consistent disclosure on current treatments and intra‑group funding/support mechanisms.
- CP 1.2 Independence:
  - Alter (but not eliminate) MINEFI participation in ACP college; limit MINEFI right of reconsideration to systemically important issues.
  - Provide ACP formal role in proposing prudential rules and allow ACP college to set assessment within legislative maximum.
  - Provide periodic formal and public review of ACP resource needs.
- CP 7 Risk management:
  - Require banks to enhance and implant ERM processes; provide guidance on ACP expectations for ERM, capital planning and Board oversight; subject to regular detailed ACP assessment and feedback.
- CP 14 Liquidity Risk:
  - Broaden enhanced liquidity regime beyond core systemic groups; ensure general liquidity risk management principles apply to all institutions.
- CP 20 Supervisory techniques:
  - Improve timeliness and coordination of on‑site and off‑site supervision for early intervention.
  - Develop capability for focused reviews and follow up implementation by banks.
  - Integrate insurance risk views into overall risk assessment for banc‑assurance groups.
- CP 11 Related‑party exposures:
  - Ensure all lending transactions with related parties above a threshold are approved by the Board.

### Conclusion on provisioning and vigilance
- Conclusion: provisioning practices are generally adequate, despite questions raised by a few high‑profile cases in 2010 related to provisioning for sovereign debt restructuring; assessors reviewed these cases with banks, auditors and authorities.
- Ongoing need: ACP and auditors must heighten vigilance, especially as economic downturns increase pressure on loan classification and provisioning practices.

*Source: _cr13180 — Compliance with the Basel Core Principles—Detailed Assessments (IMF staff report excerpt)*

### 1.  Summary Compliance with the Basel Core Principles—Detailed Assessments ................17

### 1.  Summary Compliance with the Basel Core Principles—Detailed Assessments

### Executive summary and high-level judgment
- 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 relatively better than a number of other countries, aided by a diversified banking model and a well-developed regulatory and supervisory structure.
- Recent developments in the eurozone, funding markets, and sovereign debt markets have exposed vulnerabilities that are being addressed by banks and the authorities; certain weaknesses in risk management practices were revealed.
- Supervisory and regulatory systems have been under strain, in part because major changes in international rules are being implemented while markets pressure banks on capital and liquidity responses.
- The assessors observed many high-quality initiatives and practices in the supervisory authority (ACP), but identified legislative and regulatory weaknesses that limit supervisory tools and noted areas where supervisory practices should be enhanced.
- The merger creating the Autorité de Contrôle Prudentiel (ACP) within the Banque de France is expected to contribute to enhanced effectiveness, given the prevalence of the banc-assurance model.

### Assessment scope, methodology, and grading
- The assessment was completed as part of an IMF Financial Sector Assessment Program (FSAP) undertaken during 2012 and reflects the regulatory and supervisory framework in place as of completion of the assessment.
- France agreed to be assessed according to the Core Principles (CP) Methodology issued by the Basel Committee on Banking Supervision in October 2006.
- The assessment used essential and additional assessment criteria: essential criteria (EC) are the elements on which full compliance is gauged; additional criteria (AC) are suggested best practices and are commented on but not reflected in grading.
- Compliance is judged qualitatively with a four-part grading system: compliant; largely compliant; materially noncompliant; and noncompliant. For completeness, five categories are noted: compliant; largely compliant; materially noncompliant; noncompliant; and non-applicable (the latter not used).
- Definitions used:
  - "Compliant": all essential criteria are met without significant deficiencies.
  - "Largely compliant": only minor shortcomings not raising serious concerns about achieving the objective and clear intent to reach full compliance within a prescribed period.
  - "Materially noncompliant": severe shortcomings despite formal rules and procedures; evidence supervision has not been effective.
  - "Noncompliant": not substantially implemented; several essential criteria not complied with; supervision manifestly ineffective.
- The assessment team comprised Nick Le Pan and Katharine Seal.

### Institutional, market, and macroeconomic structure
- Aggregate balance sheet of French banks amounts to five times GDP.
- Four of the top five French banks are on the Financial Stability Board (FSB) list of global systemically important financial institutions (SIFIs).
- The sector is relatively concentrated: the top five banks account for 88 percent of banking system assets.
- The French banking model is based on universal banking with prevalent banc-assurance structures; many major banking groups have material insurance operations.
- Mutual banks have a substantial presence among large entities and are structured with regional/local mutual banks controlling a central body for funding and group-wide risk management; several expanded materially outside France in the last decade.
- Several major French banks have a global presence and material investment banking operations, though these have been reduced since the crisis and with tighter capital and liquidity rules.
- There is a government-owned bank attached to the postal system (100 percent owned by the government) with limited market funding.

### Recent stress and banks’ funding/capital position
- During 2007–2009 French banks’ diversified earnings mix and lower exposure to structured products meant losses were manageable (noting one French bank that was a subsidiary of a Belgian bank failed and continues to be restructured).
- French banks historically have had higher wholesale funding and greater reliance on short-term funding than average.
- In 2011 there were downgrades of a number of major banks, widening CDS spreads, and reductions in short-term U.S. dollar funding.
- Pressure to attain Basel III capital ratios ahead of the original target led banks to plan aggressive deleveraging focused on credit extension and wholesale banking products that use the most funding.
- French banks did not raise capital since 2009 and had capital ratios close to the average of other European banks.
- Banks are building core capital by reducing earnings’ distribution while benefiting from strong retail and commercial earnings.
- Banks face large funding needs in the first half of 2012.
- Short-term risks include future funding pressures, resolution of European issues, and the severity of the slowdown in the European and French economy underway at the time of the assessment.
- Authorities identified the mortgage sector as a potential concern, but there did not appear to be clearly higher imbedded losses in that sector because of conservative mortgage market and bank mortgage granting practices.

### Recent institutional changes and EU context
- The ACP was created in 2010 through a merger of former banking and insurance authorities, with an additional mandate for consumer protection.
- A Financial Stability Committee was created and is functioning.
- EU-level regulatory and supervisory developments will alter ACP operations; emerging EU rules have major implications for banks as elsewhere.
- The European Banking Authority (EBA) interim capital raising exercise showed French banks needed relatively modest amounts of additional capital to meet mid-year 2012 targets; French authorities and banks viewed meeting these targets as eminently achievable without market issuance or state support.

### Preconditions for effective supervision, public infrastructure, and oversight
- France has a complete system of business laws, consistently enforced.
- Accounting standards for listed companies and consolidated accounts have been prepared to International Financial Reporting Standards (IFRS), as adopted by the European Union, for some time.
- Auditing standards are generally consistent with international auditing standards; a French audit oversight body (H3C) inspects audit firms.
- Rules limiting auditor independence issues (e.g., restrictions on non-audit services) are tougher in France than in other jurisdictions.
- H3C has recently revised its inspection approach to inspect audit firms directly; it will need to enhance coverage, build resources, and develop oversight of audit firms.
- French banks and listed companies make extensive disclosure under IFRS and bank regulations (Pillar III of Basel II); market analysts indicated general satisfaction with disclosure but noted a few areas for improvement and inconsistent treatment among banks making peer comparison difficult.
- Financial literacy in France was noted as lower than in some other major jurisdictions, with implications for consumer protection regulation going forward.

### Coordination, crisis management, recovery and resolution, and deposit protection
- The ACP’s establishment was complemented by creation of the Systemic Risk Board, Conseil de Régulation Financière et du Risque Systémique (COREFRIS), chaired by the Minister of Finance and including presidents of ACP, Financial Markets Authority, and Accounting Rules Authority; COREFRIS is a national framework for cooperation and coordination but is not a decision-making body.
- No domestic Memorandum of Understanding (MoU) specific to crisis management had been agreed; COMOFI provides gateways for information sharing and cooperation.
- Structural relationships (e.g., the governor of BdF as ACP chairman and treasury representation on the ACP college) facilitate coordination; central banking (lender of last resort) and prudential supervision are separate at staff level but coordinated at decisional level.
- In line with FSB SIFI Recommendations, the ACP has asked large banking groups to prepare recovery and resolution plans (RRPs). Firms were requested to have group-wide RRPs available by mid-2012. Practical implementation of the plans will extend until end 2012.
- France has a deposit guarantee scheme with two complementary objectives:
  - Paybox: According to EU Directive (94/19/EC of the European Parliament and of the Council of May 30, 1994 on deposit-guarantee schemes, as amended) depositors are guaranteed up to a limit of €100,000 per credit institution.
  - Preventive action: The French Deposit Guarantee Fund (DGF) 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 to mitigate moral hazard; the paybox function is automatic while preventive action remains discretionary.
- The ACP and the DGF are contemplating whether to draw up an MOU.

### Key observations and recommended supervisory priorities (derived from findings)
- Strengthen legislation and regulation to provide supervisors the full range of tools necessary for effective supervision.
- Enhance supervisory practices in selected areas so supervisors can better leverage available tools and increase effectiveness.
- Continue work on group-wide recovery and resolution planning with large banking groups, ensuring practical implementation through end 2012.
- Enhance audit oversight capacity (H3C) to expand inspection coverage and resource capacity.
- Monitor banks’ funding needs in the first half of 2012 and manage risks related to wholesale and short-term funding exposure.
- Address areas of disclosure inconsistency across banks to improve peer comparison and market discipline.
- Consider arrangements (e.g., MoU) to clarify crisis-management cooperation among relevant authorities while preserving necessary decision-making responsibilities of each authority.

*cr13180 - 1.  Summary Compliance with the Basel Core Principles—Detailed Assessments*

### 22.      As a newly-created integrated regulator, ACP is starting to benefit from

### _cr13180 - 22.      As a newly-created integrated regulator, ACP is starting to benefit from

### Overview and key judgments
- As a newly-created integrated regulator, ACP is starting to benefit from synergies in the supervision of banks and insurers, but has more to do to fully realize these benefits.  
- One predecessor, the Commission Bancaire, already benefitted from being part of the BdF, and those benefits are likely to become more important as many countries add systemic considerations into micro-prudential supervision.  
- A consumer protection mandate has been added to the legislative mission of the new organization; ACP has used material additional resources in starting up this task. It will be important going forward not to let consumer protection crowd out the essential micro-prudential contribution of ACP to financial stability.

### Independence, governance, and resourcing concerns
- Certain aspects of the new structure raise concerns about potential independence, sound governance, and access to adequate resources for the supervisor, though there is no evidence of problems to date.  
- Issues concern:
  - the role of the MINEFI in the College (decision making body) of the ACP and in controlling resourcing for the ACP,  
  - legislative limits on ACP headcount, and  
  - the fact that ACP cannot independently set any prudential rules or its own assessments on industry.  
- The assessment stresses that MINEFI should have information on individual institution issues potentially important for financial stability and market developments and a major role in decisions that affect financial stability, but notes there are ways to achieve these aims without the ministry attending all ACP College discussions and decisions or forcing reconsideration of any issue.  
- Recommendation: The ACP could be given a more formalized role in recommending prudential rules.

### Legislative deficiencies affecting core principles
- Two serious legislative deficiencies affect full compliance with a number of the core principles and hamper supervisory effectiveness:
  - Lack of a complete legislative framework related to regulating the responsibilities of the Board of Directors (as distinct from senior management), including inability to apply a fit and proper test to Board members; ACP practice has only a limited direct interaction with the decision making body in banks (i.e., the Board). Consequences include:
    - integrity of the fit and proper process on changes of ownership in banks is impaired,  
    - inability to suspend or dismiss Board members (individually or collectively),  
    - ACP’s inability to set separate requirements for Board responsibilities in oversight and risk governance, and  
    - inability of ACP to meet with nonexecutive members of the Board together to present supervisory findings and ensure the Board is overseeing necessary improvements by management.  
    - Result: possibility of effective early intervention by the ACP is impaired on major prudential concerns affecting an individual bank’s strategy; ability of ACP to assess whether the Board has sound knowledge of the business and risks of a bank is impaired.
  - ACP does not have the formal power to approve acquisitions by French banks, either in the European Economic Area (EEA) or abroad. Consequences and observations:
    - ACP would likely react to an unacceptably-risky acquisition after the fact with additional restrictions and required capital buffers, but this is not as effective as having prior approval authority.  
    - The legislative deficiencies are covered further in the text according to the relevant core principle under consideration.

### Information sharing and cooperation
- Mechanisms are in place for information sharing and cooperation among the authorities. France benefits from close links between officials from various authorities.

### Licensing and structure (CPs 2–5)
- In the main, licensing and structure are given appropriate treatment under France’s regulatory regime. The ACP process and procedures surrounding the licensing function are detailed, thorough, and diligent.  
- Recommended legal-framework adjustments:
  - ACP should be granted powers to assess, individually and severally, the suitability of Board members, and associated powers to suspend or dismiss such individuals (CP23).  
  - ACP should make more use of direct contact with the Board to ensure governance is appropriate and supervisory messages are directly communicated. International experience indicates approval, dismissal, and unrestricted communication with the Board are core to supervisory effectiveness.
  - Acquisitions by banks are not subject to approval by ACP unless the target institution is also authorized by the ACP. Consequences:
    - ACP does not have systematic power to review major acquisitions or the establishment of cross-border operations ex ante.  
    - ACP has acted assertively ex post (higher capital requirements, reinforcement of internal controls, de-consolidation, ring fencing), but these are second best options and cannot prevent or impose necessary conditions on a major cross-border acquisition.  
    - Recommendation: ACP should have formal approval powers or, at least, prior notification rights to consider ex ante compatibility with effective oversight of the group. ACP should also be granted the complementary power to insist on divestment of a cross-border entity that impedes effective consolidated supervision of the group.
  - Change of control is specified in French law and requires notification and approval of supervisory authorities, but an exemption for internal group restructuring within the EEA requires only post-notification. Recommendation:
    - A pre-notification process should be put in place so ACP is not identifying remedial supervisory practices after the fact.  
    - Notification requirements should be placed on institutions to notify ACP when material information arises that may negatively affect the suitability of a major shareholder.
  - ACP does not have the power to withdraw an authorization granted on the basis of false information. While ACP has powers that may lead to an equivalent outcome, launching a revocation process absorbs greater supervisory resources. Recommendation:
    - Grant ACP direct power to withdraw an authorization that was falsely obtained (in conformity with provisions in existing EU legislation).

### Prudential regulation and requirements (CPs 6–18)
- Capital and Basel/CRD developments:
  - French banks have materially increased their capital, and the proportion that is high quality Core Tier 1, in anticipation of the introduction of the Basel 3/CRD4 regulations. 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 2.5, which was in place at the time and is the basis for the assessment):
    - Treatment of cross-holdings of banks within mutual groups, and cross-holdings of banks and insurance companies within corporate and mutual groups, for capital purposes.  
    - Treatment of insurance investments of bank-insurance conglomerates affects the consolidated Tier1 capital position and results in overstatement of this ratio compared to Basel requirements (however, total capital ratios are calculated appropriately). Effects include potential double counting of capital or counting amounts that may not be available, leading to market and investor misunderstanding.
  - ACP’s focus: consolidated group capital position, sub-measures, and financial relations within groups; excellent understanding of the situation. Recommendation:
    - France should require clearer and full disclosure of the capital treatment in place and the related financial interactions within complex groups.
- Pillar 2 and supervisory interaction:
  - France’s approach to Pillar 2 has been well developed, formally linked to ACP risk rating of banks, and part of its system to intervene to reinforce incentives for banks to respond to supervisory interventions.  
  - The enhanced focus by banks on new capital measures (Core Tier 1) has rendered existing Pillar 2 measures, based on old capital targets, less effective. Move to Basel 3/CRD4 necessitates changes; authorities recognize need to adapt while keeping basic principles.
- Enterprise-wide risk measurement and governance:
  - Global shortcomings in enterprise-wide bank risk measurement and risk management were revealed in the crisis and recent market, sovereign, and liquidity pressures; supervisory oversight has not always been as effective as desired. This is true in French banks, although extent and impact have been less than in some other markets.
  - Given systemic importance, size, and complexity of the French banking system, bank risk management practices and authorities’ ability to assess them must be held to a very high standard. Observations and recommendations:
    - Banks in France 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 Board level would assist.  
    - French banks need to enhance internal capital adequacy assessment process and related enterprise-wide stress testing; ACP should clarify its expectations.
    - ACP has an excellent understanding of major banks and possible stress events. When exercising early intervention where banks resist, ACP needs to use all channels of influence to get prompt action to support financial stability.
- Credit risk, provisioning, and sector focus:
  - Credit risk management, large exposure limits, and processes to deal with problem loans and provisioning are well developed. ACP methodology for credit risk supervision appears sound.
  - ACP decided, via COREFRIS, to add more frequent monitoring and perform on-site examinations of various banks’ residential mortgage portfolios in 2012. Recommendation:
    - ACP needs to ensure banks identify sectors likely to experience most credit stress in the forecasted economic slowdown (which may not be the mortgage sector) and focus resources to ensure risk rating and provisioning are adequate for those exposures.
- Country and transfer risk:
  - Recent experiences revealed country and transfer risk systems were not as robust as banks desired. Banks have revamped and extended risk management and governance including limit setting and accounting for this risk in capital models. ACP has been actively involved in off-site supervision and monitoring; on-site verification of robustness of banks’ systems will occur in 2012.
- Liquidity regime:
  - ACP operates a high quality and proportionate liquidity regime and continues to extend and refine its approach. Measures include intensifying supervisory relationships with systemic banks and specialist on-site reviews; severe stress testing is already applied to core firms and will be extended; data requirements are being refined for greater comparability between firms.
  - Recommendation: ACP should review its existing liquidity regime with respect to non-advanced banks to ensure general requirements and principles of liquidity risk management apply to all banks and not only advanced firms, as specified in the current Order of May 2009 on liquidity regulation.
- Internal control and AML/CTF:
  - French requirements for internal control in banks are longstanding and extensive; ACP program to assess implementation is robust. France’s approach to AML/CTF received a positive recent FATF assessment; recommended improvements (primarily dealing with French overseas territories and departments) are underway. France makes excellent use of supervisory reporting and benefits from a well-developed credit register run by the Banque de France.

### Methods of ongoing banking supervision (CPs 19–21)
- ACP has a thorough understanding of individual banks and the banking system, focusing on safety and soundness. They operate an extensive, detailed, and in-depth program of on-site inspections and a high-quality off-site supervisory process monitoring major banks’ financial situation and risk management and control practices.
- Observations and areas for improvement:
  - ACP risk-rating methodologies are not very responsive to changes in bank conditions and are not very forward looking; there is room to better define rating criteria to assist supervisors in judging quality of risk management.  
  - ACP is at an early stage in assessing the quality of risk governance and feeding it into overall assessments, in part hampered by inability to interact directly with Boards.  
  - There is room to more systematically and formally bring together insurance and banking risk assessments for an enhanced overall view of banking groups.
  - On-site process issues: comprehensiveness sometimes meant long time to reach conclusions and communicate supervisory recommendations, reducing effectiveness. The formal ‘contradictory’ part (right of challenge and reply from the bank) can stand in the way of timely intervention when inspection is not intended as basis for formal enforcement.
  - Recommendation: Build on recent developments to put in place a more flexible, timely, focused on-site capability as a complement to existing processes.
  - ACP could reinforce intervention on material issues at senior levels, including more Board-level intervention. This requires synthesizing and distilling inspection, off-site work, and rating details into crisp overall findings and priority recommendations. ACP should publish aggregate results from theme reviews to inform and remind banks (not just the largest) about expectations and required practices.

### Accounting and disclosure (CP 22)
- Audit independence rules and restrictions on non-audit services are more restrictive in France than in many other countries. ACP uses its authority to approve auditors’ appointment effectively. ACP does not generally use auditors in supervisory or prudential practices, preferring to use its own staff and resources. ACP has productive relations with auditors when ensuring auditors focus on issues like valuations.

### Corrective and remedial powers of supervisors (CP 23)
- ACP has a wide range of tools for remedial and corrective measures; assessors saw evidence they are used in practice. Powers and sanctions process granted to ACP are broader than for its predecessor, the Commission Bancaire. ACP is at early stages of familiarizing itself with a different approach and recognizes the need to distill practical lessons from first experiences of the sanctions process. ACP has a concrete plan to analyze recent cases and adapt practices to be streamlined and effective. The readiness to move to a sanctions process is an important dimension in the new ACP culture; ACP is encouraged to build upon this while achieving a timely, effective, and conclusive process.

### Consolidated and cross-border banking supervision (CPs 24–25)
- [Content unit ends prior to detailed text on CPs 24–25 in supplied excerpt.]

*Source: _cr13180 - 22.      As a newly-created integrated regulator, ACP is starting to benefit from*

### 43.      The ACP has a strong legal and regulatory framework, based on the EU

### _cr13180 - 43.      The ACP has a strong legal and regulatory framework, based on the EU

### Overview of supervisor framework and limitations
- The ACP’s legal and regulatory framework is based on the EU legislative framework and is applied in practice to ensure application of prudential standards at consolidated and (as appropriate) sub-consolidated level to ensure adequate distribution of capital across-the-group.
- The ACP lacks powers to prevent the establishment or acquisition of foreign interests or to require divestment of such establishments, even where obstacles exist to the supervisor and/or the group’s management obtaining sufficient information for their tasks.
- The ACP has a broad network of MoUs and arrangements with other home or host supervisors supported by gateways for information exchange and confidentiality provisions.
- France is the home jurisdiction to four globally systemically significant banking groups, increasing the premium on quality of home/host relationships and supervisory colleges.

### Summary findings from the Basel Core Principles detailed assessment
- Aggregate grading counts:
  - Compliant (C) – 19
  - Largely compliant (LC) — 8
  - Materially noncompliant (MNC) — 3
  - Noncompliant (NC) — None
  - (Note: CP 1 is divided into six components for this analysis.)
- Notable Core Principle gradings and salient comments:
  - CP 1.1 Responsibilities and objectives — C
    - New financial stability and consumer protection mandate risks lack of clarity; ACP well placed to ensure priority on safety and soundness; disclosure by BdF and ACP could be markedly enhanced.
  - CP 1.2 Independence, accountability and transparency — LC
    - Intention to create independent authority; role of MINEFI in ACP college and financing arrangements and parliamentary limit on ACP headcount could undermine independence; no evidence of problems to date.
  - CP 1.3 Legal framework — LC
    - ACP cannot publish binding rules without changing laws; consultative processes lack transparency.
  - CP 1.4 Legal powers — MNC
    - Improvements needed in legislative requirements related to Boards’ responsibilities and ACP powers over Boards; no ability to apply fit and proper test to Directors; lack of ability to suspend or dismiss Board members, jointly or severally.
  - CP 3 Licensing criteria — LC
    - French legislation does not permit immediate withdrawal of banking authorization when granted on false information.
  - CP 4 Transfer of significant ownership — LC
    - No provision for ACP to be notified in advance of internal group restructuring where control remains within EU/EEA.
  - CP 5 Major acquisitions — MNC
    - French legislation does not permit the supervisor to review acquisitions by banks; acquisitions of EU financial institutions require approval from target’s national supervisor as prescribed by EU law; existing powers are not a full substitute for formal approval.
  - CP 6 Capital adequacy — MNC
    - Material weaknesses in definition of capital and related public reporting vis a vis current Basel 2/2.5 requirements, especially for banc-assurance groups and cross-holdings of banks by certain major internationally-active publicly traded entities within some major mutual bank groups; reported Tier 1 ratios may be less than applicable Basel requirement; potential recognition of capital not available to banking part or double counting; assessors do not take position on policy desirability in move to Basel 3 and CRD4; ACP fully understands issues and can meet its prudential mandate.
  - CP 7 Risk management — LC
    - Enterprise-wide risk management rules are relatively new; deficiencies in ERM implantation in major banks and in supervisory assessments of risk governance.
  - CP 12 Country and transfer risks — LC
    - Major enhancements in bank systems; ACP monitoring extensive but has not fully reviewed appropriateness and effectiveness; on-site visits planned in 2012.
  - CP 14 Liquidity risk — LC
    - ACP intensified liquidity standards for core systemic firms; program of continuing enhancements needs completion, including extension of severe stress tests and greater standardization; apply proportionate liquidity standards to all banks, not only advanced firms.
  - Other CPs graded C (e.g., CP 2 Permissible activities; CP 8 Credit risk; CP 9 Problem assets; CPs 10, 11, 13, 15–19, 21–25).

### Key technical points and exact figures cited in authorities’ response
- Mutual group structure details cited by authorities:
  - Regional banks hold 50 percent or more of their central body capital.
  - The central body holds more than 20 percent of the regional banks capital.
- Banc-insurance transitional treatment:
  - Transitional deduction treatment valid until December 31, 2012 on a transitional basis.
- Authorities’ core positions:
  - Authorities broadly agree with IMF findings and assessment and welcome judgment that France has a high level of compliance with BCP and high quality supervision.
  - Authorities dissent on two observations: independence of the ACP (BCP 1.2) and capital adequacy (BCP 6).
  - On independence: role and powers of Ministry of Finance representative are fully set in law; representative has no membership status in the Board and Enforcement Committee; only right is to ask for a second deliberation in the Board for matters other than sanctions; request for reconsideration has no effect on eventual content of decision.
  - On mutual groups: ACP applies three levels of supervision — individual (regional banks), sub-consolidated (central body), and consolidated group level; solo and consolidated supervision assessed as perfectly compliant with Basel 2 requirements; no double-gearing can occur at consolidated level.
  - On disclosure: authorities assert that 2011 financial statements of mutual groups clearly explain structure and intra-group relations and disagree with IMF statement on opacity.
  - On banc-insurance: some banks deduct insurance holdings from total capital as allowed in current EU rules; treatment is neutral for total capital ratio and disclosed by institutions.

### Recommended Action Plan (selected prioritized recommendations from Table 2)
- CP 1.4 Legal Powers
  - Give the 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 (CP23).
  - Amend core internal control regulation to specify Board responsibilities for oversight and risk governance.
  - Enhance ACP meetings with independent Board members and enhance ACP assessments of governance and effectiveness.
- CP 5 Major Acquisitions
  - Grant the ACP powers to receive prior notification of major acquisitions and to consider the acquisition (or establishment of new branch or subsidiary) ex ante.
  - Give ACP powers to require divestment where necessary to prevent ineffective supervision of the consolidated group.
- CP 6 Capital adequacy
  - Once new capital rules have stabilized, confirm a graduated phase-out of the current preferential treatment of bank-insurance and inter-bank 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.
- CP 1.2 Independence, accountability and transparency
  - Alter (but do not eliminate) participation of MINEFI in ACP college; limit MINEFI right of reconsideration to systemically important issues.
  - Provide ACP a 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 and public review by the ACP of its resource needs.
- CP 1.3 Legal Framework
  - Enhance consultative practices in line with EU ‘better regulation practices’.
- CP 3 Licensing criteria
  - Grant the ACP the power to withdraw an authorization immediately if it was granted on the basis of false information.
- CP 4 Transfer of significant ownership
  - Ensure ACP receives advance notification of internal group re-structuring even when control of the overall group remains with the EU/EEA.
  - Impose regulatory requirements for notification where material information may negatively affect the suitability of a major shareholder.
- CP 7 Risk management
  - Require banks to enhance and implant ERM processes and provide guidance on ACP expectations for ERM, capital planning related to risk, and Board risk governance and oversight; subject to regular detailed ACP assessment and feedback.
- CP 12 Country and transfer risks
  - Finalize supervisory work to assess appropriateness and effectiveness of banks’ recently-enhanced country/transfer risk processes and capital attribution.
- CP 14 Liquidity Risk
  - Broaden enhanced liquidity risk regime beyond core systemic groups; ensure general principles of liquidity risk management apply to all institutions, not only advanced approach firms.
- CP 20 Supervisory techniques
  - Improve timeliness and coordination of on-site and off-site supervision to enhance early intervention.
  - Further develop capability to conduct focused reviews and follow up on implementation by banks.
  - Formally integrate view of insurance risks into overall risk assessment and supervisory intervention for banc-assurance groups.
- CP 11 Exposure to related parties
  - Ensure all lending transactions with related parties above a threshold are approved by the Board.

*Source: _cr13180 - 43.      The ACP has a strong legal and regulatory framework, based on the EU*

### 46.      Table 3 below offers the detailed Principle-by-Principle assessment. It provides a

### Table 3. France: Detailed Assessment of Compliance with the Basel Core Principles

### Principle 1 — Objectives, autonomy, powers, and resources
- Description and structure
  - Responsibilities and objectives set out in Articles L611-1 to L615-2 (notably L612-1) of the Monetary and Financial Code (COMOFI).
  - Supervisory framework: Ministry of Finance (MINEFI) as regulation authority; Autorité de Contrôle Prudentiel (ACP) as licensing and supervision authority (closely connected to Banque de France); two consultative bodies CCSF and CCLRF; DGF insures depositors.
  - ACP missions: preserve financial stability and protect clients; legislative mandate includes ongoing surveillance of solvability and liquidity but does not explicitly refer to early intervention.
  - Systemic risk council COREFRIS created in 2010 to exchange cross‑sector information; no independent powers of action.
- Governance and independence
  - ACP is an “independent administrative authority” with a College (19 members) and a Sanctions Commission (6 members); Governor of Banque de France chairs the College.
  - MINEFI senior official attends College sessions without vote but has right to request formal reconsideration of College decisions (power added in 2010); this right not used in practice at time of assessment.
  - Secretary General appointed by MINEFI on proposal of the Chairman; no fixed term specified.
- Resources and staffing (numeric)
  - Total financial resources: Eur 163 million in 2010.
  - FTEs: 900 at creation of ACP; 974 as of mid-year 2011; planned ~1,140 at end of 2012.
  - Planned FTE off-site banking supervision: from 186 to 205 (creation to end‑2012).
  - Planned FTE on-site banking supervision: from 163 to 192 (creation to end‑2012).
  - Travel budget: €4.2 million.
  - Training: average 55 hours per staff/year; junior supervisor initial training up to 140 hours over first two years.
- Legal framework, rule‑making and consultation
  - ACP has exclusive authority to issue and withdraw banking licenses (COMOFI Articles L612-21, L612-22; L511-15).
  - ACP cannot issue binding regulations (regulatory powers reserved to MINEFI). ACP may issue Instructions and Recommendations; can require institutions to take prudential measures (Article L511-41-3).
  - Consultative practice primarily via CCAP and CCLRF; consultation with industry exists but could be strengthened.
- Legal powers, board access and supervision of boards
  - ACP has broad information‑gathering powers (COMOFI Articles L612-24); however, practice historically limited ACP meetings with Boards without management presence.
  - ACP can issue injunctions, administrative and disciplinary sanctions (Articles L612-30 to L612-42). Examples: 10 individual injunctions in 2010; 7 disciplinary procedures opened in 2010; 3 in 2011; provisional administrators appointed in two institutions in 2010.
- Legal protection and confidentiality
  - No explicit statutory staff protection; staff protected under general administrative law (state liability for serious fault, Conseil d’Etat case cited).
  - Professional secrecy applies to exchanged information; COMOFI Articles L632-3.
- Assessment results and key concerns (from text)
  - Principle 1(1) Responsibilities and objectives — Assessment: Compliant.
  - Principle 1(2) Independence, accountability and transparency — Assessment: Largely Compliant.
    - Key concerns: presence of treasury at deliberations; power to request reconsideration; lack of legislative limits on dismissal reasons for SG/Deputy SG; parliamentary headcount cap; ACP cannot set prudential rules independently; ACP salary policy set by BdF.
    - Recent authorities’ intention: formalize modalities for MINEFI right to request second deliberation (limited to significant error of law/manifest error of assessment and systemic consequence cases).
  - Principle 1(3) Legal framework (licensing powers) — Assessment: Largely Compliant.
    - Key limitation: ACP cannot issue regulations; recommendation to establish formal legal process for ACP to propose regulatory matters and to strengthen consultation/transparency.
  - Principle 1(4) Legal powers (access to boards, fit & proper, dismissal powers) — Assessment: Materially Non Compliant.
    - Material deficiencies identified: restricted ACP access to Boards; ACP cannot assess suitability of full Board; cannot assess Board collective skills/role in risk management; cannot dismiss Board members; ACP practice has not used full powers to meet Boards.
    - Recommendation: comprehensive review of ACP rights/practices vis‑à‑vis Boards; legislative/domestic action needed if EU developments insufficient.
  - Principle 1(5) Legal protection — Assessment: Compliant.
  - Principle 1(6) Cooperation — Assessment: Compliant.

### Principle 2 — Permissible activities
- Key points
  - French national definition of “credit institution” broader than EU: Article L. 511-1 defines as entities whose customary business is carrying out banking transactions; customary activities (Article L. 311-1) include receiving funds, credit transactions, means of payment.
  - Approximately 650 credit institutions in France; roughly one half are deposit‑taking institutions.
  - Criminal prohibition on misleading use of business names implying credit institution status (Article L. 511-8; sanctions Article L. 571-3).
  - List of licensed banks/branches published annually and daily register available on ACP website.
- Assessment: Compliant.
- Comment: Wide perimeter provides benefits but challenges ACP resource prioritization and reputational risk; potential future effect from EU CRD recast.

### Principle 3 — Licensing criteria
- Legal and procedural framework
  - Licensing authority: ACP (post‑reform).
  - Licensing criteria in Monetary and Financial Code Articles L. 511-10 to L. 511-13: minimum capital, at least two senior managers with competence, business plan, suitability of investors, capacity to meet development objectives compatible with banking system functioning.
  - Authorization Questionnaire collects management, organization, strategy, origin of capital, beneficial ownership (shareholdings >10%).
  - Minimum capital thresholds: EUR 5 million for deposit‑taking banks; lower thresholds EUR 2.2 million to EUR 1 million for other categories (Regulation 92‑14).
- Limitations and practices
  - ACP cannot conduct fit and proper assessment of Directors other than CEO and deputy (Regulation 96‑16).
  - ACP cannot immediately withdraw authorization granted on false information — must launch revocation procedure (though de facto grounds exist).
- Assessment: Largely Compliant.
- Recommendations:
  - Grant ACP power to withdraw authorization immediately if granted on false/misleading information (CRD Article 17(b) noted).
  - Strengthen ACP ability to assess suitability of Directors (see CP1(4)).

### Principle 4 — Transfer of significant ownership
- Legal rules and thresholds
  - Transposition of Directive 2007/44/EC via Regulation 96‑16: notification/approval required for acquisitions/increases/decreases triggering thresholds (half, third, fifth, tenth of voting rights) and other control events.
  - ACP has 60 working days to oppose (can suspend once for max 30 days for additional info).
  - Filing requirement for holders of ≥10%; ACP can require info on holders between 0.5% and 10%.
- Limitations
  - Exemption for internal group restructuring within EEA (notification suffices).
  - ACP cannot modify/reverse a change of control that took place without required notifications; may apply to courts to suspend voting rights (Article L. 611-2).
- Assessment: Largely Compliant.
- Recommendations:
  - ACP should have power to seek reversal of transactions completed without required notification/approval.
  - Broaden timely notification obligations where material information affects suitability of major shareholders.

### Principle 5 — Major acquisitions
- Key points
  - Acquisitions by banks subject to ACP approval only if the target is a domestic supervised institution (Regulation 96‑16).
  - Acquisitions of insurance targets notified via Financial Conglomerates Directive implementation.
  - Limits on non-bank participations: generally no more than 15% of bank’s own funds per participation; aggregate not exceed 60% of own funds; ACP may authorize exceedance but excess deducted from own funds (Regulation 90‑06).
  - No general requirement to obtain ACP prior approval for acquisitions/investments by French banks in non‑French jurisdictions.
  - Where acquisition judged unsound, ACP can use injunction powers post‑event (Article L. 511-41-3); cannot require divestment except via administration/liquidation.
- Assessment: Materially Non‑compliant.
- Concerns and recommendations
  - Lack of ex ante supervisory power to review and prohibit or condition material acquisitions (including cross‑border) that may impede consolidated supervision.
  - Recommendation: introduce prior authorization requirements for material acquisitions/establishment of foreign operations to enable ex ante assessment of prudential impact.

### Principle 6 — Capital adequacy
- Framework and numeric facts
  - Legal basis: Article L.511-40 (assets exceed liabilities by at least minimum capital); minimum capital for deposit‑taking banks: Eur 5 million.
  - Solvency rules implemented by Order of February 20, 2007 (Basel II transposition). Minimum own funds to RWA: 8 percent.
  - Four major French banks are global SIFIs and will face higher capital requirements.
  - Reported major banks’ Tier 1 ratios: between 10.5 and 11.5 percent (at assessment time).
  - Reported Core Tier 1 (Basel 2 basis at end‑2011): range 8.5 percent to 10.5 percent.
  - EBA temporary exercise → EBA target 9 percent Core Tier 1 by mid‑2012 for some banks; Basel 2.5 applied as of January 1, 2012 expected to reduce ratios by 25–100 bps depending on bank.
- Key practices and powers
  - ACP may require Pillar 2 add‑ons and has imposed Pillar 2 requirements on ~80 institutions covering 97 percent of system risk exposure; Pillar 2 requirements have legal force.
  - ACP approval required prior to issuance for hybrid instruments to count in Tier 1; ACP can oppose reimbursement if it would breach minimum capital;
  - Advanced internal approaches approved for major banks; ACP conducts on‑site/off‑site model approval and validation.
- Weaknesses identified (material)
  - Treatment of cross‑holdings in mutual groups: risk‑weighting rather than deduction at certain sub‑consolidated levels results in double counting; impact ~50 bps overstatement of Tier 1 for affected entities (amounts in €10–15 billion range for investments).
  - Treatment of bank‑insurance cross‑holdings: inconsistent approaches; some banks deduct under Basel 1 style (from total capital) rather than half from Tier 1 and half from Tier 2 per Basel 2; impact on Tier 1 can be 50–100 bps and insurance holdings amount material (Eur 1.3 billion to Eur 12 billion for major banks).
  - These treatments result in material overstatement of reported Tier 1/Core Tier 1 ratios versus Basel 2/2.5.
- Assessment: Materially Non‑Compliant.
- Recommendations and supervisory actions
  - Revamp Pillar 2 approach in light of Basel 3/CRD4 and Core Tier 1 focus.
  - Improve transparency and disclosure on intra‑group cross‑holdings and the consolidated position for mutual groups and banc‑assurance groups.
  - Ensure ACP continues to monitor and enforce appropriate treatment of cross‑holdings and to require higher quality capital where necessary.

### Principle 7 — Risk management process
- Regulatory basis and coverage
  - Regulation 97‑02 (February 1997, principles‑based) is main rule on internal control and risk management (covers credit, market, interest‑rate, settlement, liquidity, operational, AML/CTF).
  - 2010 amendment required banks to have a “head of risks” responsible for group‑wide risk oversight.
- Supervisory observations
  - Risk governance and Board oversight uneven across major banks; Board involvement in formal approval of risk appetite, strategy and limits varies considerably.
  - ACP SREP uses ORAP methodology to produce risk ratings; supervisory feedback to Boards on governance/risk oversight limited.
  - ICAAP and stress testing practices vary: some banks have fully integrated processes; others need material improvements; EBA stress tests have driven capital planning.
- Assessment: Largely Compliant.
- Recommendations
  - Strengthen ACP supervision of risk governance and Board effectiveness; consider thematic supervisory review focused on Board oversight and ERM.
  - Encourage banks to reorient ICAAP as internal strategic tool (not only supervisory input) and to integrate enterprise‑wide stress testing.

### Principle 8 — Credit risk
- Framework and supervisory practice
  - Credit risk rules embedded in credit risk portion of Regulation 97‑02; require underwriting standards, credit administration, concentration controls, periodic reviews.
  - Quarterly updates required for counterparties with unpaid/doubtful debts; quarterly reviews for large transactions and provisioning.
  - Major banks: decisions require at least two persons; independent credit file analysis unit required.
  - ACP conducts quarterly off‑site meetings with CROs/CFOs; internal control annual reports reviewed; on‑site inspections and thematic reviews planned (mortgage review in 2012).
- Assessment: Compliant.
- Recommendation
  - ACP and Banque de France should prioritize supervisory coverage of sectors most affected by economic slowdown and ensure timely thematic reviews (mortgage and corporate portfolios).

### Principle 9 — Problem assets, provisions and reserves
- Accounting and provisioning framework
  - IFRS used for consolidated accounts of listed banks; French GAAP for solo accounts and consolidated accounts of unlisted banks.
  - Provisioning: IFRS (IAS 39) governs impairment; French GAAP classification into sound, doubtful, compromised with overdue period thresholds (three months, six months for property loans, nine months for loans to local authorities).
- Supervisory practice and metrics (numeric)
  - Coverage ratios (individual + collective provisions as percent of impaired/doubtful loans) in major French banks: 65–75 percent range.
  - ACP monitors provisioning via off‑site returns and on‑site reviews; can require additional provisions or reduce regulatory capital for unrecorded provisions.
- Assessment: Compliant.
- Supervisory actions and recommendations
  - ACP inspects provisioning and loan classification; continued attention to legacy assets and structured product portfolios warranted where material.
  - Use FIBEN, Central Credit Register and audit coordination to validate provisioning adequacy.

*Source: Table 3. France: Detailed Assessment of Compliance with the Basel Core Principles (excerpt).*

### conclusion that provisioning practices are generally adequate, despite the questions

### _cr13180 - conclusion that provisioning practices are generally adequate, despite the questions

### Overview conclusion on provisioning
- Conclusion that provisioning practices are generally adequate, despite the questions raised by a few high-profile cases in 2010 related to adequacy of provisioning for sovereign debt restructuring, which assessors reviewed with banks, auditors and authorities.
- The degree of ACP and auditor vigilance needs to be heightened, especially as the economic downturn leads to potential pressure on loan classification and provisioning practices.

### Principle 10 — Large exposure limits
- Supervisory expectation: supervisors must be satisfied that banks have policies and processes to identify and manage concentrations and set prudential limits to restrict exposures to single counterparties or groups of connected counterparties.
- EC1: French regulation on large exposures (LE) is the transposition of the European Capital Requirement Directive - CRD, incorporated into French regulation by various regulations and ministerial orders. Guidelines issued by the CEBS/EBA are also used by French supervisors.
- EC1 (connected clients/counterparties): Article 3 of Regulation 93-05 defines a group of “connected clients/counterparties” as natural and legal persons interconnected such that financial problems of one would probably cause repayment difficulties for others. Presumptions include common or joint control, de facto common management, or dependence on a common source of important financing.
- ACP may authorize a credit institution to treat such persons/entities as not constituting a group of “connected clients/counterparties” if evidence shows sufficient independence; use of this exemption power is uncommon.
- EC2 (exposure): “exposure” means any asset or off-balance sheet item subject to credit risk, or for trading book items position risk, settlement risk or counterparty risk. Exposures exclude investments deducted from capital and various short term exposures related to clearing and settlement of payments, FX, and securities transactions.
- EC2 (limits): Article 1 of Regulation 93-05 sets the limit as 25 percent of the bank’s own funds on a client or group of connected counterparties (with higher limits for very small credit institutions).
- Practice: While the legal limit is 25 percent, in practice Pillar 2 has been used to limit exposures to a client or group of connected counterparties to 10 percent of capital. A specific report is sent to the ACP.
- EC3: Regulation requires centralized tracking of exposures to permit timely identification and aggregation of connected lending; on-site processes review adequacy.
- EC4: Regulation 97-02 requires banks to put in place adequate monitoring procedures for large exposures, actively involving top-management. There is no specific requirement that material concentrations above specified thresholds be reviewed and periodically reported to the Board of Directors, though on-site and off-site processes review this and for major banks the regular off-site process obtains information going to the Board.
- EC5: ACP obtains detailed loan-portfolio information quarterly. ACP has access to comprehensive Banque de France databases covering capital links, management and Board functions, and outstanding loan balances. ACP built an information system for flexible exploitation of these databases for on-site inspections. Various remedial powers exist and are used where concentrations present significant risks (see CP23).
- AC1 (definitions and small-bank carve-outs): ‘Large exposure’ refers to exposure equal to or exceeding 10 percent of the capital of the credit institution. Exposures refer to all net risk-weighted assets or net risk-weighted off-balance-sheet items. CRD provisions allow minor deviations for smaller banks: for those with capital below Euro150m the limit for exposures to credit institutions or groups that include a credit institution is 100 percent of capital, with reducing limits between Euro150m and Euro 600m, beyond which the 25 percent limits apply.
- Assessment: Compliant.
- Comments: The decision to eliminate the overall limit on how large the total of large exposures can be relative to a bank’s capital may expose certain entities to excessive concentration. It is important to continue to actively monitor this.

### Principle 11 — Exposures to related parties
- Supervisory expectation: supervisors must require that banks extend exposures to related companies and individuals on an arm’s length basis; such exposures are effectively monitored; appropriate steps are taken to control or mitigate risks; and write-offs follow standard policies and processes.
- EC1 (definitions): Commercial Code (L 225-38) establishes persons deemed to be related parties, including general manager, assistant general managers, Directors, shareholders holding a fraction of the voting rights greater than 10 percent or, in case of a corporate shareholder, the company which controls it (Article L. 233-3). Definition also captures familial relationships (spouse, parents, children).
- Note on loopholes: natural persons holding less than 10 percent of voting rights would not be captured by this definition; however attention is paid to transactions where there may be common links from management of two companies, and such transactions are subject to the same Board approval approach as defined related parties.
- EC1 (financial connectedness): Article 3 of Regulation 93-05 deems interconnected natural and legal persons that would likely experience repayment difficulties together to constitute a single beneficiary, capturing financial connectedness of related parties.
- EC2 (normal conditions): Commercial Code (L225-43) permits agreements with related parties where transactions take place under “normal conditions” consistent with the normal operations of the institution. “Normal conditions” means not exceptional in amount or purpose; price, guarantees, obligations, duration, and penalties are estimated according to conditions usually applied in the company.
- EC2 (non-normal transactions): Transactions not consistent with firm’s normal business or market conditions are not prohibited but require a specific authorization regime under the Commercial Code. Assessment of criteria occurs when loan is granted by comparison to similar loan portfolios and common market conditions (Article 21 regulation 97-02). Article L225-42 allows cancellation of transactions prejudicial to the firm.
- EC3 (Board consent and notification): Transactions with related parties must be subject to prior Board consent where non-normal (L225-39) and must in any case be notified to the Board (L225-38). No materiality threshold for notifications. Interested party must inform Board immediately; interested party shall not participate in the vote and their shares shall not be taken into account in quorum (L. 225-40 et L. 225-88). Chairman advises auditors and submits agreements to general meeting; auditors present a special report.
- EC3 (cancellation): Agreements made without prior Board authorization may be cancelled within three years; if concealed, cancellation period starts when it came to light.
- EC4: Article 21 of Regulation 97-02 requires analysis to be carried out by an independent function where nature or scale so require. For loans/commitments to principal managers or shareholders (Article 6ter of Regulation 90-02), institutions must examine nature and conditions, notably in light of Articles L. 225-38 to L. 225-43 and equivalent transactions.
- EC5 (deductions): Article 6 of Regulation 90-02 requires deduction from regulatory own funds of all commitments to shareholders or linked staff exceeding 3 percent of own funds. Commitments may include asset items and off-balance sheet commitments to senior managers or principal shareholders, including guarantees. Deductions are calculated by applying Articles 4, 5, 6 and 7 of Regulation 93-05 on supervising large exposures (globalization, risk mitigation, risk weighting).
- EC5 (exceptions to deduction): Not all transactions are subject to deduction. Exclusions include:
  - a) transactions with principal shareholders rated better than 4 on Banque de France rating scale or investment grade as in Appendix I to the Regulation;
  - b) transactions with senior managers or principal shareholders explicitly guaranteed in favor of the institution by a company with rating in paragraph a);
  - c) transactions between institutions affiliated to same central body (Article L. 511-30 Monetary and Financial Code);
  - d) commitments relating to legal entities over which the institution exercises exclusive control per Regulation 2000-03;
  - e) commitments relating to legal entities over which the institution exercises joint control if shared with persons other than principal shareholders;
  - f) the share of exposure to a single beneficiary within Article 3 of Regulation 93-05 not exceeding 3 percent of own funds.
- EC6: Article 21 of Regulation 97-02 and Art 11-8 assign the risk function responsibility for independent monitoring and timely reporting to senior management and Board. Agreements covered by L. 225-40 and L. 225-89 must be submitted to Board and then to general meeting; statutory auditors present a special report disclosed and sent to ACP (Instruction 93-01, Article 8).
- EC6 (internal control report): Annual internal control report submitted to ACP and provided to the Board, Audit Committee, and statutory auditors must include an appendix listing transactions with principal managers and shareholders (Articles 42(1)(g) and 44 of regulation 97-02). ACP guidance requires the appendix to provide:
  - characteristics of commitments for which a deduction has been made: identity of beneficiaries, type of beneficiary, type of commitment, gross amount, deductions (if any), risk weight, date of assignment and expiry date;
  - nature of commitments to principal shareholders and senior managers for which a deduction has not been made.
- EC7: ACP obtains and reviews information in (i) the special report of statutory auditors; and (ii) the annual report on internal control.
- Assessment: Compliant.
- Comments: French law addresses potential conflicts of interest by Directors, managers and owners. Although Commercial Code permits potential loopholes (transactions with shareholders with fewer than 10 percent voting rights), the requirement to deduct related party transactions that in aggregate exceed 3 percent of own funds provides both a cap and deterrent. Loans at ‘normal’ terms to related parties do not require Board or auditor approval and so may not get adequate scrutiny, creating reputation risk in case of problems.

### Principle 12 — Country and transfer risks
- Supervisory expectation: supervisors must ensure banks have adequate policies and processes for identifying, measuring, monitoring and controlling country risk and transfer risk in international lending and investment activities, and for maintaining adequate provisions and reserves.
- EC1: Regulation 97-02 requires banks to maintain Management Information Systems allowing proper identification, monitoring and controlling of on- and off-balance sheet risks on a given borrower or group of related borrowers, including sovereign(s). Credit institutions are required to submit regular reports on consolidated country risk exposure. Frequency was annual (semi-annual for large banking groups) until end of 2011 and will become quarterly in 2012. Since beginning of 2011, the 4 largest banking groups have been requested to submit a monthly report on their consolidated exposures on a selection of European countries.
- Historical exposure: Major French banks and many global banks were materially exposed to country/transfer risk in the recent past. Assessors discussed events with ACP, banks, auditors, and rating agencies. Major banks discussed have revamped their country risk systems in light of recent events.
- EC2/EC4: ACP off-site process and internal control reporting covers large international groups' internal control systems for country risk. ACP conducts ad hoc cross-firm analyses and stress-tests to assess resilience of French banks to deterioration in emerging countries and to evaluate potential crisis impact. Starting recently off-site teams are reviewing banks’ internal stress tests on country risk and other country risk information at regular quarterly meetings with banks. ACP reviews banks’ internal management risk committee assessments dedicated to country risk.
- Supervisory actions: Banks’ exposures and procedures are reviewed through active off-site monitoring and discussions; supervisory intervention has recently occurred. In 2012 dedicated on-site inspections were scheduled to review geographical exposures and procedures of groups, but program was not completed at time of assessment. These reviews will assess whether IRB modeling of sovereign risk is acceptable.
- EC3 (provisions and accounting): Country risk provisions are not prescribed by regulations; credit institutions set level of provisions in audited financial statements. Changes in 2008 in IFRS permitted reclassification of exposures out of available for sale (fair value) into held to maturity. Some French banks did this in 2008 with sovereign and other exposures; a few did major reclassifications in 2010 and 2011.
- ACP intervention: ACP can consider appropriate level of provisions and did intervene in Q3 2011 with respect to certain sovereign exposures after provisioning levels were questioned in market and by international bodies.
- Complexity in 2011: Determining appropriate provisioning was complicated by market developments leading some banks to conclude fair values were not reliably possible. In France this was compounded by banks’ previous undertaking not to sell Greek sovereign portfolios at the request of the Minister of Finance and the Economy.
- Assessment: Largely Compliant.
- Comments:
  - Banks and supervisor in many countries did not fully understand potential for country and transfer risk.
  - Pursuant to the CRD French banks often had zero risk weight to sovereign risk exposures; CRD/ Basel 2 approaches meant very low capital requirements for sovereign risk (STD method imposed no capital requirements for sovereign risk above AA- and IRB required very low capital).
  - Starting in 2011 intra-European exposures have been considered as risky and led to an increase of provisioning above 70 percent in certain cases.
  - Major enhancements in systems for country/transfer risk management and provisioning have occurred in banks, and ACP monitoring is extensive, but ACP has not fully reviewed whether new policies and practices are appropriate and effective. ACP will complete this work in 2012.

*Source: _cr13180 - conclusion that provisioning practices are generally adequate, despite the questions — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13180.pdf*

### 2007. This text is closely modeled on the content of the relevant EU legislation (in

### Content unit: _cr13180 - 2007. This text is closely modeled on the content of the relevant EU legislation (in

### Market risk supervision, internal models and model reviews
- Regulatory framework and references:
  - Text closely modeled on Capital Requirements Directive 2006/49/EC; Ministerial order (February 20, 2007) and Regulation 97-02 (February 21, 1997) set qualitative and quantitative criteria for internal models and internal control.
- Requirements and practices:
  - Criteria for trading book inclusion, prudent valuation rules for positions marked to market or marked to model, and inclusion of trading book positions in large exposure assessments.
  - Daily measurement of market risks and daily assessment of market risk capital adequacy; daily recording of foreign-exchange and trading book transactions; granular system of limits.
  - Internal models use subject to ACP approval.
- Supervisory programs and resources:
  - Compliance tested through off-site and on-site supervision.
  - Major-firm model approval and periodic thematic reviews; horizontal reviews into “rogue trading” and focused interventions on commodities trading or correlation products.
  - A major model review might take up to six months; other reviews could be one to two months.
  - On-site unit has twenty persons, supplemented by other off-site teams and general inspectors; complement of thirty-five quantitative experts.
  - For major systemic institutions there are around three to five persons focusing on market risk within responsible units.
- Governance, limits and valuation:
  - Regulation 97-02 establishes requirement for visible internal limits, set and reviewed by the executive and decision-making bodies at least once a year.
  - Ministerial order requires documented trading policy approved by executive body; position limits set and monitored; positions reported to executive body.
  - Banks must actively monitor positions against market information, assess marketability/hedge-ability, and determine valuation adjustments or reserves for less liquid positions.
- Stress testing and recovery planning:
  - Banks using internal models must have rigorous and comprehensive stress tests, quantitative and qualitative, tailored to trading activity.
  - Stress-test conclusions to be reviewed by the executive body and incorporated into risk policies and limits; vulnerabilities must be remedied promptly.
  - In 2010 and 2011, large banks required to prepare recovery plans as recommended by the FSB.
- Independent verification and model testing:
  - Independent price verification required; when daily marking by dealers occurs, independent verification at least monthly (or more frequently as warranted).
  - Independent units at large banks responsible for calculating daily NPL on market activities; valuation models independently tested.
- Assessment:
  - Assessment: Compliant.
  - Comments note high-quality ACP market risk supervision, exemplary technical standards for model reviews, and recent emphasis on off-site analytical capacity and recruitment of market professionals.

### Liquidity risk framework and supervision (Principle 14)
- Regulatory texts and core principle:
  - Order of May 5, 2009 (identification, measurement, management and control of liquidity risk) in effect since June 30, 2010; Regulation 97-02 provides rules including liquidity risk.
  - Core management principle: institutions must ensure sufficient liquidity to honor commitments as they fall due, including under stressed assumptions.
- Two-tier approach:
  - Standardized approach (solo basis, includes foreign branches) includes:
    - i) one-month regulatory ratio: numerator (liquid assets or liquidable assets per discount assumptions) to denominator (liabilities and commitments per adjustment criteria) must exceed 100 percent;
    - ii) cash forecast on at least a weekly basis (seven-day cash flow projections in euro and other currencies; based on contractual maturities);
    - iii) stock-take of liquidity sources immediately available;
    - iv) information on unsecured financing costs;
    - v) qualitative requirements via the internal control report;
    - vi) reporting of off-balance sheet elements with contractual maturity date.
  - Advanced approach (for credit institutions with specialized risk profile) based on internal methodologies requiring ACP authorization; advanced ratio cannot be below standard ratio; standard ratio acts as minimum basis.
- Templates and scope:
  - Templates COEF-LIQU (calculation of standardized regulatory ratio) and MATURITES (maturity ladder) include on- and off-balance sheet instruments.
  - Standardized approach considers commitments due to be drawn under contractual terms, statistical drawdown of commitments, permanent credit facilities, financing commitments in favor of ad hoc entities.
- EU guidance referenced:
  - CEBS Liquidity Identity Card (June 2009); Guidelines on Liquidity Buffers & Survival Periods (December 2009); Guidelines on Liquidity Cost benefit allocation (October 2010).
- Governance and reporting:
  - Regulation 97-02 (Article 38) places governance responsibility on management and Board; Article 31 requires policies and procedures adapted to size, nature and complexity, forward-looking monitoring and contingency plans.
  - Institutions must transmit criteria and limits used to manage liquidity risk to the ACP; executive Board must inform the ACP of any significant breaches (Article 38).
- Supervisory practice and data:
  - ACP enhanced oversight since 2008; ORAP2 assessments used within SREP; ad-hoc internal data from large groups include liquidity ratios and funding structure details by term, counterparty, instrument, currency.
  - In periods of stress ACP may require weekly or daily reporting; daily calls with major banks’ treasuries have taken place since summer 2010.
  - Regular “entretiens de surveillance rapprochée” (closed thematic meetings) and thematic on-site reviews (e.g., 2011 on Basel liquidity requirements LCR/NSFR).
- Currency and funding monitoring:
  - Ad hoc data requests include detailed U.S. dollar assets and liabilities focusing on short-term liabilities and collateral; other currencies (sterling, Swiss francs, Japanese yen) reported periodically.
  - Standard institutions must distinguish euro flows from other currencies in one-week cash forecasts (Article 22 of the 2009-05 Order).
  - Advanced banks must define limits related to monitoring high-quality unencumbered assets and liquidity gaps in significant currencies.
- Contingency planning and stress testing:
  - Contingency plans required (Regulation 97-02 Art 31; Order 2009-05 Articles 52–53): stress tests to inform internal limits, liquid asset stocks, diversification of funding, and contingency plans.
  - ACP requires large groups to test “ultimate” scenario of total market close down; plans to roll out stress testing to wider groups.
- Operational controls:
  - MATURITIES report and stress testing required for significant foreign-currency activity; stress testing required for U.S. dollar exposures.
- Assessment:
  - Assessment: Largely Compliant.
  - Comments: Significant regulatory revisions in 2009 implemented mid-2010; improved liquidity data and supervisory contact; priorities include standardization of higher frequency data, extension of stress testing beyond systemic group, review of Order of 2009 to ensure commensurate good practice across firms, and enhanced contact with Banque de France.

### Operational risk (Principle 15)
- Regulatory basis and scope:
  - Regulation 97-02 (Arts 17 and 32) requires policies/processes to identify, assess, monitor and mitigate operational risk; provisions applied proportionately.
  - Order of February 20, 2007 implements EU CRD/Basel 2 provisions; annex IV of that Order details operational risk definition including legal risk.
- Core supervisory elements:
  - Risk and result measuring systems (Article 17); reporting institutions to re-evaluate measurement systems regularly (Article 32-1).
  - Executive body and decision-making body responsible for compliance with 97-02 (Article 38).
  - Operational risk supervision through on-site and off-site programs; annual internal control report is a substantial input to ORAP2.
- Business continuity and IT:
  - Business continuity plans required (Regulation 97-02 Art 14-I) with regular assessment of resources and coherence under a master plan.
  - ACP reviews BC plans annually using internal control report information covering objectives, architecture, responsibilities, IT backup, tests, audits, incident management (e.g., H1N1 pandemic).
  - IT security and system development assessed via internal control report and on-site IT inspections; in 2011 large-scale on-site missions evaluated IT policies, processes, systems.
- Reporting and loss data:
  - Operational risk discussed quarterly with large banks’ risk departments; COREP templates and OPR CA templates used for operational risk reporting including top ten losses and loss events.
  - Alert mechanisms for significant incidents per 97-02; reporting to ACP required.
- Outsourcing and legal risk:
  - Outsourcing governed by Article 37 of 97-02; stringent provisions for outsourced essential services; outsourcing included in ORAP2 review.
  - Legal risk included in operational risk definition (Order of February 20, 2007 Article 4-1 (c)).
- Assessment:
  - Assessment: Compliant.
  - Comments: Operational risk framework applied group-wide; ACP evaluates on consolidated basis, with solo assessments where relevant.

### Interest rate risk in the banking book (IRRBB) (Principle 16)
- Governance and measurement:
  - Executive and decision-making bodies responsible under Regulation 97-02 Article 38.
  - Reporting institutions must set up risk monitoring and control systems for overall interest-rate risk (Article 32), with visible internal limits and consolidated assessment.
  - Validation of models and assumptions required regularly (Article 30); limits set and reviewed at least once a year (Article 33).
- Stress testing and supervisory information:
  - Firms required to assess risks from substantial changes in market parameters and communicate internal stress scenarios annually (Article 30).
  - ACP expects stress testing programs per Pillar 2 methodology; analyzes breadth of scenarios, assumptions, results and use in policies.
- ACP information powers and standard shocks:
  - Article 30 requires institutions to inform ACP of impact on own funds of sudden interest-rate changes based on ACP-determined assumptions.
  - ACP obtains results including effect on current net banking income of a uniform 200 basis point shock over one year and—where appropriate—effect on capital of a uniform 200 basis point shock; annex 1 of internal control report proposes methodology similar to BCBS for institutions without own methodology.
- Measurement systems and governance independence:
  - Article 28 requires systems to assess positions/flows, interest-rate risk factors and impacts on earnings and own funds.
  - Risk function independence required (Regulation 97-02 Article 7) including segregation of initiation and validation units.
- Assessment:
  - Assessment: Compliant.

### Internal control, audit and governance (Principle 17)
- Regulatory architecture:
  - Regulation 97-02 defines executive body (senior managers) and decision-making body (Board) responsibilities; periodic and permanent control concepts.
  - Internal control system components include operations control, accounting organization, risk measurement, risk monitoring, documentation, and monitoring of cash/securities flows.
  - Article 7-1 requires segregation of duties and separate reporting lines; Article 11 requires appointment of an officer responsible for coherence and effectiveness of controls and notification to ACP.
- Internal audit and reporting:
  - Periodic control (internal audit) must be independent with adequate resources; annual internal control report required (Article 42), including per-risk descriptions, actions, lessons learned and corrective measures; report and extract of minutes to ACP by April 30 following year-end.
  - Internal control incidents above thresholds must be reported to ACP; since 2009 self-assessments using Senior Supervisors Group methodology requested.
- Boards, audit committees and external auditors:
  - ACP cannot require Board composition changes; ACP can suspend executive body members under general authorities where solvency/liquidity or customer interests at risk.
  - Audit Committee required by Commercial Code; prevents executive body members from being Audit Committee members.
  - Audit committees and internal audit interactions occur; internal auditor may report directly to Audit Committee on failures to implement corrective measures.
- Assessment:
  - Assessment: Compliant.
  - Comments note strong regulatory and supervisory framework; inability of ACP to regulate Board composition affects certain compliance aspects (cross-reference CP1(4)).

### Anti-money laundering and countering the financing of terrorism (AML/CTF) (Principle 18)
- Legal and supervisory responsibilities:
  - ACP administers AML/CTF provisions of the Monetary and Financial Code and includes AML/CTF in licensing, on-site and off-site inspection programs.
  - Code Articles L. 561-32/38 require banks to have systems for assessing and managing ML/TF risks; Regulation 97-02 imposes KYC requirements; reporting obligations to TRACFIN and ACP.
- Customer due diligence and record retention:
  - Article L.561-5 requires customer identification with conclusive documents (Article R. 561-5 I); beneficial owner identification required.
  - ACP issued nonbinding guidelines (October 2011) regarding beneficial owners; nonbinding guidelines (January 2010) on politically exposed persons.
  - Article L. 561-12 requires retention for five years from account closing or termination of relationship of identity documents and five years after execution for transaction documents subject to strengthened scrutiny.
- Correspondent banking:
  - Article L. 561-10-1 and R. 561-21 require enhanced due diligence for correspondent relationships outside EU/EEA or not equivalent, including senior management approval, information on respondent institution, assessment of AML/CTF controls, agreement provisions, and payable-through account safeguards.
- Supervision and resources:
  - ACP conducts on-site and off-site AML/CTF inspections; annual internal control report includes AML/CTF program information.
  - At end of 2010, ACP had approximately 65 people regularly involved in AML/CTF activity.
  - Supervisory priorities set annually by ACP College; thematic review planned each year (2012 theme: private banking).
- Reporting thresholds and cooperation:
  - Significant incidents thresholds: fraud exceeding 0.5 percent of institution’s tier 1 capital and amount no less than EUR 10,000 presumed significant; executive body must communicate significant incidents without delay to ACP.
  - Article L561-22 protects good-faith reporters to TRACFIN and ACP from suit.
  - ACP informs public prosecutors when on-site inspection reveals facts potentially justifying criminal prosecution; ACP may inform TRACFIN of discovered facts relevant to ML/TF.
  - Domestic and foreign supervisory cooperation authorized (Article L.631-1; Article L.632-1); protocol between ACP and TRACFIN exists.
- Assessment:
  - Assessment: Compliant.
  - Comments: Good cooperation with TRACFIN; targeted focus on overseas territories and planned additional on-site work.

### Supervisory approach and SREP (Principle 19)
- SREP structure:
  - Supervisory Review and Evaluation Process (SREP) uses ORAP2 methodology: systematic review of main risks, dialogue with supervised entity to share RAS, and final risk profile assessment possibly leading to corrective actions and Pillar 2 measures.
  - For European cross-border groups, process follows CRD 2 and CEBS Guidelines with harmonized CEBS templates for joint risk assessment.
- System-wide and cross-sector analysis:
  - Trends and risks summarized in a bi-annual report; ACP contributes to Banque de France bi-annual Financial Risk Assessment.
  - Off-site departments perform cross-sector analyses and draw on BIS, EBA, ESRB, IMF and private sources.
  - Integration with insurance supervision remains a work in progress following creation of ACP.
- ORAP2 risk assessment methodology:
  - Thirteen indicators: 1) Quality of credit portfolio; 2) Doubtful (non performing) loans and provisions; 3) Concentration risk; 4) Operational risk; 5) Organization of internal control; 6) Anti-Money Laundering policy; 7) Safeguarding of client assets; 8) Strategy and Organization; 9) Market risk; 10) Liquidity risk and level of transformation; 11) Interest rate risk in the banking book; 12) Earnings and profitability; 13) Own funds.
  - Individual indicators assess materiality and adequacy of internal control separately; global rating 1 (best) to 5 (worst) derived from these with expert judgment and peer analysis.
  - ORAP outputs drive Pillar 2 capital requirements and the annual supervisory synthesis (“lettre de cadrage”).
- Information systems and databases:
  - SURFI (Système Unifié de Reporting Financier) collects regulatory reporting (COREP, FINREP).
  - ORAP2 software issues quarterly lists of entities to assess, produces quarterly high-level quantitative analysis and qualitative analysis underpinning ratings.
  - On-line SIGAL tool for inspectors analyzes accounting statements and prudential reports and allows connected-borrower scans.
  - Access to Banque de France databases: SCR (loans > 75 000 Euro) and FIBEN (firms with revenues > 750 000 Euro, covering 250,000 firms).
- Forward-looking elements and consistency:
  - Some forward-looking elements in ORAP, but not as explicit as in other jurisdictions; criteria for qualitative judgments can be general and sometimes based on yes/no questionnaire inputs.
- Assessment:
  - Assessment: Compliant.
  - Comments: High-quality supervisory understanding; room to improve forward-looking assessments, integration of insurance entity risks, clearer qualitative rating criteria and stronger articulation of key governance and enterprise-wide risk management issues.

### Supervisory techniques, on-site and off-site work (Principle 20)
- Organization and staffing:
  - Off-site supervision performed by two ACP departments totaling 185 staff, approximately split between the two; divisions responsible for large banks have about 10–15 staff per bank.
  - On-site inspections by Délégation au Contrôle sur Place (DCP) with around 190 staff; within DCP, specialists for quantitative risk management and IT infrastructures.
- On-site program and cycles:
  - Major on-site reviews commonly take 4–6 months with 4–8 people.
  - For major banks approximately five reviews a year planned; general on-sites for smaller banks.
  - In 2011, 37 percent of on-site missions were general; 63 percent had a special focus: market risks 18 percent, AML 16 percent, liquidity risk 11 percent, credit risk 3 percent, other issues 15 percent.
- Coordination, reporting and follow-up:
  - On-site reports issued by lead inspector; banks have right to comment on draft (“contradictoire”).
  - Off-site teams develop final recommendations and “lettre de suite” follow-up remediation action plans; letters signed by ACP Secretary General or Banque de France Governor and sent to bank CEO and Board and external auditors.
  - Exchanges of personnel between on-site and off-site teams are frequent.
- Hybrid and focused techniques:
  - Enquetes sur place (ESP): 1–2 day in-depth meetings between off-site teams and banks on specific topics.
  - Development of mini-on-site reviews and more focused off-site inspections as timely alternatives to full on-site missions.
- Volume and engagement data (first three quarters of 2011):
  - Off-site departments held 852 meetings with supervised firms (not including conference calls), conducted nine on-site visits (one- to two-day), organized/attended 45 supervisory college meetings, and devised follow-up actions based on analysis of 82 on-site reports.
- Assessment:
  - Assessment: Largely Compliant.
  - Comments: High-quality on-site and off-site work; weaknesses include long durations of detailed on-site reviews leading to delays in supervisory action, need for more timely escalation of material findings, and improved ACP engagement with Boards to secure timely remediation and stronger supervisory impact. Need for better integration of insurance entity assessments into group risk assessments.

### Supervisory reporting (Principle 21)
- Legal powers and templates:
  - Article L612-24 CMF authorizes ACP to specify documents/data to be submitted, their form and filing deadlines.
  - Reporting uses 55 templates including on/off-balance sheet, profit and loss, liquidity, large exposure, market risk; extensive use of FINREP and COREP.
- Frequency and ad-hoc data:
  - Frequency depends on status and risk profile; major banks generally report quarterly; some templates semi-annual or annual; monetary statistics monthly for largest institutions.
  - Ad hoc data requests common, including daily calls and weekly liquidity reports since August 2011.
- Controls, validation and enforcement:
  - ORAP2 includes controls and automatic anomaly detection; off-site teams discuss potentially anomalous data with banks for correction and resubmission.
  - ACP entitled to summon and require information from group entities and affiliates; electronic secure signature of an executive Director required for reporting; penalties for misreporting per Article L612-25 CMF.
  - ACP can call upon competent persons (rarely used) such as external experts for inspections (Art. L612-23 CMF).
- Assessment:
  - Assessment: Compliant.
  - Comments: Well-developed reporting system, extensive use of banks’ internal reports, and capacity for ad-hoc high-frequency data collection.

### Accounting and disclosure (Principle 22)
- Accounting frameworks and audit:
  - Article 13 of Regulation 97-02 requires exhaustive, high-standard valuation and accounting information.
  - Consolidated accounts of listed companies prepared according to IFRS; other consolidated accounts may use IFRS by option; solo accounts use French GAAP per ANC.
  - External auditing by at least two auditors (“Commissaires aux comptes”) for most credit institutions; single auditor allowed for institutions below EUR 450 million assets.
- Valuation and supervisory interaction:
  - ACP has not issued additional valuation guidance beyond IFRS; 2010 thematic on-site review of valuation practices for complex instruments raised issues followed up off-site.
  - Annual financial statements audited; quarterly statements for major banks subject to audit review engagement.
- Auditor appointment and oversight:
  - ACP must be consulted on auditor appointment/reappointment of entities under supervision (Article L.612-43); ACP can indicate disagreement though cannot approve or remove auditors.
  - Auditors required to inform ACP promptly of facts/decisions that could materially impact supervised entities (statutory reporting duties referenced).
- Disclosure requirements:
  - Listed banks must publish annual, half-yearly and quarterly reports; other credit institutions above certain thresholds publish quarterly statements.
  - Pillar 3 disclosures commonly included; ACP participated in 2010/2011 EBA Pillar 3 reviews and notes areas for improvement.
- System-level reporting:
  - ACP publishes annual analysis of French banking system including population, aggregate income statement and balance sheet data, and some aggregate prudential data (own funds, capital requirements, liquidity).
- Assessment:
  - Assessment: Compliant.
  - Comments: Accounting and audit frameworks are robust though differences between IFRS and French GAAP and past high-profile cases have raised concerns about implementation consistency; ACP engages auditors and monitors valuation and disclosure quality.

### Key supervisory assessments and cross-cutting observations
- Market risk: Assessment Compliant; ACP has exemplary model review technical standards; recruitment of market professionals improved off-site capacity.
- Liquidity risk: Assessment Largely Compliant; major regulatory enhancements in 2009; priorities include expanding stress testing and standardizing high-frequency data.
- Operational risk: Assessment Compliant; comprehensive regulatory framework and supervision.
- IRRBB: Assessment Compliant; supervisory access to 200 basis point shock impacts and requirement to report both earnings and economic value perspectives.
- Internal control/audit: Assessment Compliant; strong regulatory framework and detailed internal control reporting (annual internal control reports due by April 30).
- AML/CTF: Assessment Compliant; ACP integrates AML/CTF into supervision and cooperates with TRACFIN; approximately 65 staff involved in AML/CTF at end-2010.
- Supervisory approach and techniques: SREP via ORAP2 rated Compliant; supervisory techniques Largely Compliant due to timing and Board engagement limitations.
- Reporting and accounting: Supervisory reporting and accounting/disclosure assessed Compliant; SURFI, ORAP2, SIGAL, SCR and FIBEN are core information assets.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13180.pdf*

### 1.   Constitute a breach of the laws or regulations applicable to them and have a

### _cr13180 - 1.   Constitute a breach of the laws or regulations applicable to them and have a

### Key findings

- 1.   Constitute a breach of the laws or regulations applicable to them and have a significant impact on their financial situation, solvency, profits or assets;
- 2.   Jeopardize its continued exploitation;

*Source: _cr13180 - 1.   Constitute a breach of the laws or regulations applicable to them and have a (PDF chapter/section).*

### 3.   Give rise to the issuing of reservations or to a refusal to certify its accounts.

### _cr13180 - 3.   Give rise to the issuing of reservations or to a refusal to certify its accounts.

### Auditors, independence, disclosure, and ACP interactions
- AC3: Code de Commerce (art. L.822-14) — Individual auditors and signing members of auditing firms are prohibited from auditing the accounts of legal entities which make public issues for more than six consecutive financial years.
- ACP powers regarding auditors:
  - If ACP has knowledge of a breach of the code by an auditor of a credit institution, or considers independence conditions are not met, the ACP may ask the competent court to relieve the auditor of duties.
  - ACP may report the offence to the relevant disciplinary authority and may provide any information that authority might require.
- AC4: Banks have internal disclosure policies and committees which review financial statements and other publications (such as press releases and investor presentations) that are based on financial statement information.
- AC5: Article L. 613-9 of the Monetary and Financial Code — the ACP may ask the auditors of credit institutions for any information concerning the business and financial situation of the entity that they audit and the work they have carried out within the scope of that assignment. This includes audit working papers. The ACP may send written observations to the auditors, who are then required to provide written answers.
- Statutory auditors are released from professional secrecy and liability in relation to the ACP.
- Assessment: Compliant
- Comment: Despite the inability to formally approve appointment of auditors, ACP has used the requirement for pre-notification to achieve the same result. "ACP should be given the formal approval authority." (comment text preserved).

### Corrective and remedial powers of supervisors (Principle 2.3)
- Principle summary: Supervisors must have an adequate range of supervisory tools to bring about timely corrective actions, including the ability, where appropriate, to revoke the banking license or to recommend its revocation.
- Description of ACP formal process and follow-up:
  - ACP issues formal follow-up letter at conclusion of on-site inspection (COMOFI Art L 612-27) to Board of Directors, Executive Board and Supervisory Board; may be communicated to statutory auditor.
  - Institutions required to reply within a formal timeframe (two months) indicating how they will address concerns.
  - Follow-up of recommendation made by: i) analysis of answers; ii) regular or specific meetings; iii) on-site visits.
  - For the 5 largest banking groups, an annual letter is sent by the Secretary General to the Executive Board presenting the annual assessment and requiring attention regarding risks.
  - Frequency of on-site examinations determined by supervisory cycle; examples given: 3, 5, or 10-year cycles.
  - ACP is instituting very short (several days), focused examinations and may use an emergency procedure by issuing a formal statement.
  - ACP participates in deciding orderly resolution of problem bank situations (closure, restructuring, merger).
- EC2: ACP may appoint a provisional administrator (COMOFI Article L. 612-34). Full administrative powers transferred to provisional administrator. DGF may guarantee payment of his fees on proposal from ACP. Article R. 613-14 — prior ACP opinion required before initiating legal proceedings in France. Law governs division of responsibilities between ACP provisional administrator and court-appointed administrator/receiver.
- EC3 and EC4: Range of protective and corrective instruments (discretionary, not strictly staged):
  - Follow-up letter (formal legal requirement after any on-site inspection).
  - An injunction (to propose measures to comply with regulations; used for specific prudential objectives such as a Pillar 2 adjustment). Injunction is not a public document but creates an obligation; non-compliance triggers remedial action program or sanction.
  - Administrative police measures (Articles L. 612-30 to L. 612-34 of COMOFI), including:
    - A caveat (warning).
    - A formal notice.
    - A remedial action program.
    - Protective measures (placing under special supervision; restriction/temporary ban on certain operations; suspension/restriction/temporary ban on free disposal of all or part of assets; order to suspend or limit payment of surrender values, arbitrage facility, payment of contract advances or opt-out facility; restriction/ban on paying a dividend to shareholders or remuneration of company shares; suspension of one or more executive managers).
    - Appointment of a provisional administrator (broad grounds; College decision; President of ACP can appoint in extreme urgency; used in 2008 financial crisis).
  - Sanctions procedure (see EC6).
  - Reference to public prosecutor for criminal prosecution.
  - Receivership or liquidation proceedings (EC2).
- EC5: Article L. 511-41-3 of the COMOFI — ACP may require higher solvency ratios than legal minimums (Pillar 2 injunctions). ACP has full discretion; no binding published policy. College decided Pillar 2 requirements necessary for all major groups and main subsidiaries and for around 50 other banks or investment firms. ACP annual report for 2010 (page 38) shows ACP pronounced 10 new injunctions in respect of higher minimum capital requirements to be applied on a solo basis (3 for 2011).
  - If a credit institution fails to meet requirements or trends indicate risk of shortfalls, ACP may require protective measures (COMOFI, art. L. 612-33) or corrective action (COMOFI, art. L. 612-32).
- EC6: Sanctions procedure:
  - Decision to impose sanction rests with Sanctions Committee (SC), separate from College of the ACP.
  - College must decide to open proceedings; President of College sends formal notice and notifies President of SC.
  - SC conducts disciplinary proceedings and issues penalties; no membership overlap between SC and College (COMOFI Art L 612-9).
  - Sanctions listed under Article L. 612-39 COMOFI:
    1) warning;
    2) reprimand;
    3) prohibition on conducting certain transactions, and any other restriction on the conduct of its business;
    4) temporary suspension of one or several managers (but not Director, unless the CEO sits on the Board) or, in the case of a payment institution providing mixed services, of the person registered as in charge of the management of payment services activities, with or without appointment of a provisional administrator;
    5) compulsory dismissal of one or several managers (but not Director, unless the CEO sits on the Board), or, in the case of a payment institution providing mixed services, of the person registered as in charge of the management of payment services activities, with or without appointment of a provisional administrator;
    6) partial withdrawal of authorization or approval; and
    7) total withdrawal of authorization or approval or striking from the list of authorized persons, with or without appointment of a provisional administrator.
  - Sanctions mentioned in 3) and 4) above may not exceed a period of 10 years.
  - Administrative fine may be imposed not to exceed €100,000,000, instead of or in addition to those sanctions.
  - In accordance with principle of proportionality, SC can issue one or more penalties depending on seriousness.
  - Penalties apply to supervised organizations; proceedings directed at a legal entity can lead to sanctions concerning managers (temporary suspension or compulsory dismissal).
  - Sanctions may be accompanied by daily fines; decision must be published in journals or other publications designated by SC; SC may decide against publication in exceptional circumstances.
- AC1–AC3:
  - AC1: French legal framework does not formally provide safeguards/requirements to prevent prudential supervisor delaying action unduly; ACP may be held liable in cases of undue delay.
  - AC2: ACP has wide range of possibilities to limit activities (see EC2, EC3, EC4).
  - AC3: Article L. 631-1 of COMOFI — ACP may exchange information with AMF and Banque de France subject to professional secrecy. Law n°2010-1249 of October 22, 2010 established COREFRIS chaired by Minister of the Economy; composed of Governor of Bank of France (also chairman of ACP), Vice-President of ACP, President of AMF, President of ANC and three qualified members; mission to ensure cooperation between institutions.
- Assessment: Compliant
- Comments:
  - ACP enjoys a wide range of remedial and sanctioning powers, augmented with creation of ACP; experience still at early stage.
  - Sanctions procedures are much closer to a judiciary process and there is a learning curve; sanctions process might take a year and scope for improvements exists.
  - Internal College expectation to take more proactive approach to pursuing sanction procedures.
  - Risks to effectiveness include timely identification and prompt intervention; coordination with other supervisory authorities (AMF and foreign authorities) is important; COREFRIS may be too senior for operational coordination; ACP should work with AMF to identify robust procedures for information sharing.

### Consolidated supervision (Principle 2.4)
- Principle summary: Supervisors must supervise the banking group on a consolidated basis, adequately monitoring and applying prudential norms to all aspects of the business conducted by the group worldwide.
- EC1: COMOFI Articles L.511-41-2 and L.533-4-1 — ACP applies supervision on a consolidated basis. ACP obtains full information on overall structure of supervised groups and understands operations. ACP has established colleges of supervisors for 14 groups (including SIFIs) and participates in a further 21 colleges where it is not consolidating supervisor.
- EC2: COMOFI empowers ACP to supervise entire activities of banking groups (directly, foreign branches, subsidiaries/affiliates). Regulations:
  - Regulation 2000-03 obliges supervised institutions to comply with prudential standards on a consolidated basis (capital adequacy, participation rules, large exposures, ICAAP).
  - Regulation 97-02 imposes risk management and internal controls on a consolidated basis.
  - Regulation 2003-03 (Art 3) subjects Financial Holding Companies to consolidated supervision for capital requirements, large exposures and market risk. Definition: Financial Holding Company (Art L517-1 COMOFI) and exemptions noted.
  - On-site examinations may be extended to subsidiaries, legal persons controlling the group, and any entity in the group (Article L.612-26 COMOFI). Seven foreign branches covered by 2011 on-site exam program.
  - ACP chaired 11 physical meetings of supervisory colleges in 2010.
- EC3: ACP supervisory approach evaluates all material activities including non-banking activities; Regulation 86-21 limits non-banking activities; Regulation 90-06 limits participations. ACP monitors intra-group transactions and applies risk assessment to non-banking activities.
- EC4: COMOFI (Arts L.511-41-3 and L.621-24) gives ACP power to impose prudential standards, remedial actions and reporting on a consolidated basis. ACP used this power in 2009-2010 for 4 large banking groups and major domestic subsidiaries. ACP, as consolidating supervisor, can decide consolidated capital adequacy in cases of disagreement.
- EC5: Article L.613-20-2 COMOFI provides for establishment of colleges; ACP determines membership of non-EU/EEA taking into account relevance and equivalence of confidentiality. College tasks: exchange information, work sharing, joint risk assessments, coordinated decisions. EU/EBA templates used. ACP determined written arrangements for operational functioning of 14 colleges. 17 written bilateral cooperation arrangements with non-EU/EEA supervisory authorities exist.
- EC6: COMOFI Article L.612-33 empowers ACP to limit or forbid performance of certain activities when capital adequacy or liquidity threatened. Remedial powers (Article L.612-39) include forbidding/limiting activities.
  - ACP lacks powers to prevent or require divestment/closure of foreign branch or subsidiary; must seek to exclude entities from consolidation or establish ring fencing. ACP may require actions via injunctions (COMOFI Article L612.32) to mitigate risks and reinforce internal control, and may consider branch/subsidiary situation when assessing group risk profile and Pillar 2 requirements.
- EC7–EC10: Expectations on groups and ACP practice:
  - Regulation 97-02 requires group management to ensure group entities comply with internal governance and controls, ensure mutual consistency of policies and processes, and produce information for consolidated oversight.
  - Colleges of supervisors assess corporate and internal governance jointly.
  - Regulation 97-02 applies on a consolidated basis including holding company; addresses information requirements, quarterly data on operational limits, evaluation and development of internal controls, remedial action, and oversight of foreign operations.
  - When local regulation impedes transmission of information, Regulation 2000-03 allows ACP to exclude non-domestic entity from scope of consolidation for prudential rules compliance. Firms obliged to inform ACP when local regulation hinders implementation of French rules; ACP may apply remedial measures or sanctions; ACP may require action under COMOFI Article L612.32.
  - ACP does not have power to require closing of foreign offices; may limit or temporarily forbid activities (Article L.612-33) and use remedial powers (Article L.612-39).
  - For non-EU/EEA branches/subsidiaries, supervisory measures likely involve cooperation with host authorities per written arrangements.
  - Principle of proportionality implemented through supervisory review; "core colleges" set up for largest cross-border groups; heightened attention when operations are in jurisdictions with fundamentally different supervisory regimes.
- AC1–AC3:
  - AC1: ACP can review activities of corporate parent companies and affiliates; on-site exams may extend to legal persons controlling the group (Article L.612-26). Regulation 96-16 requires prior authorization by ACP for acquisition of defined levels of equity interests and notification of senior management changes (Article 9). Code Art L. 500-1 restricts director appointments based on prior convictions.
  - AC2: No explicit assessment of EU/EEA jurisdictions due to EU single market legislation; COMOFI Article L.632-7 empowers ACP to conclude bilateral cooperation arrangements with non-EU/EEA supervisory authorities subject to professional secrecy and equivalence.
  - AC3: Article L.632-12 COMOFI — on-site examinations can be performed in establishments in another EU/EEA country; ACP may delegate or conduct joint assessments. Article L.632-13 allows bilateral arrangements with non EU/EEA authorities to extend on-site examinations to foreign branches and subsidiaries.
  - ACP conducts 20 to 30 missions per year in foreign offices and subsidiaries of French banks.
- Assessment: Compliant
- Comments:
  - ACP has strong legal and regulatory framework applied in practice to ensure application of prudential standards at consolidated and sub-consolidated level.
  - Limitations: ACP's ability for effective global oversight is impeded by lack of powers to prevent establishment/acquisition of foreign interests or to require divestment; higher capital, strengthened internal controls, de-consolidation or ring-fencing are pragmatic but limited. Recommendation: powers to receive prior notification to consider ex ante acquisitions/establishments and complementary power to insist on divestment of cross-border entity where it impedes effective consolidated supervision.

### Home-host relationships (Principle 2.5)
- Principle summary: Cross-border consolidated supervision requires cooperation and information exchange between home supervisors and host banking supervisors. Local operations of foreign banks must be conducted to the same standards as domestic institutions.
- EC1: Nature/frequency of exchanges depends on arrangement type, materiality of foreign operations, market or bank-specific conditions, and supervisors' needs. ACP has long tradition of information exchange and builds working relationships via day-to-day activities and participation in international groups. CEBS peer reviews (2009–2010) concluded satisfactory exchanges within ACP-organized colleges.
- EC2: ACP conducts regular (in general annual) reviews of banks’ foreign entities. ACP can enter any agreement to mutually share information with peers abroad, subject to professional secrecy. Harmonized multilateral MoUs signed with EU/EEA host supervisors. ACP is consolidating supervisor for 14 colleges; participates in 50 college meetings in 2011 including organized ones. Crisis management groups for largest banks held in Paris. So far a total of 19 MoUs have been concluded with non EEA authorities; when cooperation agreements reached they are publicized on ACP website.
- EC3: ACP follows BIS standards and EBA guidelines (EBA GL 34 and GL 39). Since 2009 ACP uses CEBS/EBA uniform templates (e.g., "liquidity ID card", "mapping templates"). Frequency of college meetings proportionate; for major banks where ACP is home supervisor, college meetings held three times a year in Paris. Bank-dedicated college websites used for information sharing. During 2007–2008 crisis and subsequent tensions in U.S. dollar funding markets, ACP had more frequent exchanges including weekly conference calls with FRBNY since August 2011, ad hoc calls, and regular liquidity updates on college websites. November 2011: series of individual meetings in Paris with large banks and FRBNY.
  - ACP does not systematically share key supervisory documents (e.g., follow-up letters, annual internal control reports) with host supervisors but communicates relevant issues drawn from these reports; SREP (ORAP2) uses internal control reports as key input which is reflected in ACP’s written assessment shared within supervisory college.
- EC4: ACP maintains ongoing dialogue (emails, correspondence, conference calls) with home supervisors, especially supervisors of large banking groups operating in France. Off-site supervisors verify rules applying to foreign institutions. ACP informs home supervisors of major changes in local entities, non-compliance, or risk management controls; copy of follow-up letter sent to home supervisors when significant issues arise. As host supervisor, ACP participates in 21 colleges as host and has actively participated in Joint Risk Assessment and capital Decisions processes led by home supervisors of other EU jurisdictions.
- EC5: Incorporated subsidiaries are legally French entities and must be subject to same regulatory and supervisory treatment as other French supervised institutions. ACP frequently organizes on-site supervision of branches of non-EEA banks, and after on-site inspections, a copy of follow-up letter is systematically transmitted to home supervisors. Within EEA, responsibility for cross-border branches rests with home state supervisor except in relation to liquidity and anti-money laundering requirements.
- EC6: When assessing an application for authorization, ACP notifies the home supervisor, asks for confirmation that the new undertaking will be supervised on a consolidated basis and invites comment. For EU/EEA home supervisors, prior consultation is undertaken on the basis of Article 15 of Directive 2006/48 of June 14.
- Assessment: Compliant
- Comments:
  - ACP has long-standing cooperative arrangements and uses templates and college structures to support home-host cooperation.
  - Continued emphasis on mutual trust, proportionality of exchanges, and operational arrangements (including MoUs and college action plans) underpin ACP practice.

*Source: _cr13180 - 3.   Give rise to the issuing of reservations or to a refusal to certify its accounts.*

### 2006. Moreover, bilateral agreements concluded since 1992 between the French

### Cross-border supervision, home–host cooperation, and ACP practices

### Legal and institutional framework for information exchange
- Bilateral agreements concluded since 1992 between the French authorities and their relevant EU/EEA partners facilitate the ability to exchange information including "all significant information about the owner of the institution and the overall share ownership structure."
- For non-EEA countries, prior consultation is undertaken in conformity with the Sound Practices issued by the Basel Committee.
- In the case of an incoming branch or subsidiary, the ACP formally requests a notice of non--objection from the home state supervisor provided that the relationship between the home and host authority has been formalized through the agreement of a MoU which would clarify arrangements including:
  - "5. During the process of authorization of a Cross-border Institution the authorities agree to proceed in the following way:
    (a) The Host Authority shall inform the Home Authority upon receipt of all applications for authorization in its jurisdiction and obtain the Home Authority’s prior opinion before the authorization is granted;
    (b) The Home Authority shall specify to the Host Authority whether the Supervised Institution that made the application, must also obtain its approval in order to perform the activity for which it is seeking authorization;
    (c) At the request of the Host Authority, the Home Authority shall supply the Host Authority with any relevant information about the Supervised Institution regarding its compliance with laws to which the institution is subject including its compliance with national legislation and any information relating to the degree of the fitness and properness, reputation and experience of prospective senior managers of a Cross-border Institution."

### On-site cooperation and supervisory missions
- ACP routinely conducts on-site missions in offices and subsidiaries of French banks located in foreign countries: "20 to 30 missions per year."
- Missions sometimes include joint work with host authorities.
- Objectives of such missions include assessing groups' safety, soundness, and compliance with KYC requirements, and are often part of missions dedicated to global business lines or support functions.
- Local supervisors are informed well in advance of the ACP’s intention to conduct on-site work in their jurisdictions and are debriefed afterwards.
- Interactions with local authorities are "generally very easy," including in countries where home–host relationships are more recent or less codified (e.g., in the absence of an MoU).

### Policies on shell banks and enforcement information sharing
- ACP takes action to avoid the presence of shell banks in its jurisdiction; when entities have no activities, ACP encourages them to apply for a withdrawal of their license.
- ACP MoUs typically clarify that authorities "will share any relevant information to assist each other in the performance of their respective functions and inform each other of administrative penalties imposed or any other formal enforcement action taken on a cross-border Institution."
- Article L.632-14 of Monetary and Financial Code provides for the application of a sanction on the basis of an on-site inspection.

### Handling of third-party information and consultation practices
- Critical information received from a bank’s local supervisor is systematically discussed by the ACP with the institution’s head-office first to establish context and give the bank an opportunity to react.
- Resulting practice: "the ACP will not take supervisory action upon a bank based on information transmitted by a third party that it would not have verified and double-checked first."
- For EEA banking groups it is mandatory for the ACP to consult, at least, for prudential major actions (such as Pillar 2 decisions, or internal model approvals).
- For other topics, exchanges occur bilaterally or in college even without a formal Directive requirement.
- There is no general obligation on the ACP to consult with supervisory authorities outside the EU/EEA; in practice cooperation depends on the presence of a bilateral MoU. Consequently, the ACP may be less likely to consult a non-EU home supervisor before determining on a Pillar 2 requirement for a French subsidiary, though it would be usual to inform counterparts in the case of problems identified in a firm.

### Supervisory college communications
- The communications strategy is generally defined within the supervisory college and is essentially addressed to the bank (not the general public).
- According to EBA guidelines, it is the home supervisor’s responsibility to inform the bank’s management about the joint risk assessment and decision achieved by the college.

### Assessment, significance, and recommendations
Findings:
- Assessment: Compliant.
- France is the home state for "four globally systemic financial institutions."
- France is a relatively well developed financial centre attracting internationally active firms whose activities can impact the stability of the French financial system.
- Long-established home/host relationships exist with key supervisory counterparties; many interactions now fall under frameworks prescribed in the European Directives.
- The legislative framework has introduced joint activity and joint decision making; EU/EEA authorities are in early stages of embedding the structures and practices.

Policy implications and recommendations (implied by assessment):
- Continue deepening and practicing supervisory home–host relationships, both collegiate and bilateral, to support more penetrating and robust whole group supervision.
- Maintain and strengthen information flows that underpin college meetings and joint assessment decisions.
- Given persisting global financial fragilities and vulnerabilities, France’s contribution in driving effective home–host cooperation is critical to systemic stability.

*Source: IMF staff report text (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13180.pdf_