draft a

8/12/2019 draft A

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8/12/2019 draft A


2 | T h e R e g u l a t i o n o f F i n a n c i a l S e r v i c e s i n F r a n c e

INTRODUCTION

Investment banking in Europe originated in France.

France was one of the first countries to undertake major over-hauls of their postwar modes of

financial sector regulation in the !"#$s and mid-!"%$s&' it being one of the most interventionist.

France is among the few countries that have retained multiple' autonomous regulators with

differentiated functions and an important regulator( role for their central banks.

In France' selective credit regulation' consisting mostl( of selective credit rediscounting' was

instituted in the !")$s and !"*$s precisel( as a wa( of reconciling the preference of

governments for a loose credit polic( with the imperatives of currenc( convertibilit(. These

changes were accompanied b( the attribution of new supervisor( powers over the banking sector

to the national central bank and b( introduction of new institutions to regulate securities markets.

+t that point in time' France had state-directed credit s(stems and limited capital markets.

In the earl( !"#$s' France was amongst the least liberali,ed. Frances relativel( earl( move to

overhaul its financial s(stem might have been accounted for b( the fact that France started out

with a highl( repressed/ financial s(stem' and hence' presumabl( faced greater market

pressures.

The decision to abandon selective credit regulation was made onl( after !"%0' when elected

authorities decided that austerit( would be unavoidable. + s(stem of multiplicit( of regulator(

agencies with responsibilities for supervision of the financial s(stem was introduced. In France' a

new securities regulator the 1onseil des 2arch3s Financiers 12F& was created in !""# and

later merged with the 1ommission des 4p3rations de 5ourse 145' the French Securities and

E6change 1ommission' created in !"*#& to form 78+utorit3 des 2arch3s Financiers +2F&' the

stock market regulator in France' in 9$$0. The +2F has the full powers of a securities regulator

and has been given a legal personalit( distinct from the state' unlike Frances other

administrative authorities. The 5an:ue de Francethe 1entral 5ank of France& still retains the

lead in banking regulations through its oversight of the 5anking 1ommission.

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;p until thirt( (ears ago' the French banking industr( was e6tremel( regulated and divided< the

French State was still ver( much in control. =owever' for a variet( of reasons it has undergone

substantial changes ever since' particularl( in the course of the last few (ears. First' the banking

law of !"%>' which placed all banks' whatever their status under the same set of rules' was the

starting point of a succession of moves that effectivel( abolished credit specialisation' and which

led to the deregulation of the banking s(stem. +s of !"""' the savings banks 1aisse d3pargne&

assumed the status of co-operative banks' now on a par with 1r3dit +gricole'the largest retail

banking group in France' and in 9$$9' mutual banks became members of the French 5anking

+ssociation F3d3ration 5ancaire fran?aise or F5F&. +s a conse:uence of credit liberalisation' all

these institutions entered into competition on their domestic market' under e:ual terms' with

practicall( no restriction at all.

Indeed' the globalisation of financial services within Europe' which took place between !""0 and

!"""' at the initiative of the European 1ommission' and the creation of the European single

currenc( at the beginning of 9$$9' French banks have been faced with growing competition from

foreign banks.

Furthermore' in !"%#' under the 1hirac government' several major banks were privati,ed. +fter a

pause' the privatisation process resumed in. This denationali,ation process came to an end in

9$$!.

Finall(' newl( privatised banks had to face a most troubled economic trend. @uring the nineties'the French econom( met with a substantial recession in !""0 and the propert( market was also

seriousl( disrupted during that period. 1onse:uentl(' the major financial crisis' which reached its

peak in !""#-!""%' hit the major pla(ers severel(.

5anks had to face strong competition which resulted in substantial changes in the industr(' all

the more so' since overdue reforms had also been dela(ed as a conse:uence of state-control.

7arge-scale ac:uisitions and takeovers took place' concluding in a full-scale reorgani,ation of

the banking sector in France.

French banks' which still ranked in !""# between !$!st and 9>$th in the world profitabilit(

league tables' had made substantial progress b( the end of the crisis. @ue to their strength in

retail banking' the( found themselves more able to keep up a proper level of profitabilit( than a

number of foreign banks' despite the increasing risks.

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PRESENT DAY

The French universal banks predominantl( rel( on retail banking' including specialised finance'

which accounts for nearl( two thirds of net banking income and provide stead( revenues as well

as a stable funding basis. 1orporate finance' investment banking and asset managementcontributions make up for the rest and are well balanced. @rawing the lessons from the financial

crisis' French banks have alread( massivel( reduced' and often closed' their pure proprietar(

trading activities. The aim of the new segregation regime is thus building closel( on the

e6perience of these past (ears' to stave off growth of volatile proprietar( trading revenues in a

ne6t c(cle.

+ll in all' French clients A corporations as well as households A benefit from a banking s(stem

that provides a broad range of several financial services. The universal banking model has indeed

some s(nergies and economies of scale to offer. + universal banking group is able to

appropriatel( diversif( its risks portfolio between business lines and products and is therefore

able to mitigate a negative shock that ma( affect one of its activities. + reform of the banking

structures should not hamper those positive e6ternalities while a sensible and reasonable

separation of risk( activities ma( contribute to anticipating and facilitating resolution in cases of

stress.

In France' it is onl( the securities markets that have seen significant institutional change among

French regulator( institutions since the banking and stock e6change reforms of the eighties.

The French banking and financial s(stem is widel( open to foreign-owned institutions.

+t the end of 9$!!' France counted !") credit institutions under foreign control !0# banks' )#

financial corporations and ! specialised financial institution&' ** investment firms and ##

representative offices.

The ke( macro-relevant findings of the I2Fs latest Financial S(stem Stabilit( +ssessment

FSS+& for France came up with the following findingsB

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• Frances financial s(stem has shown resilience to severe market pressures but faces

challenges. Chile its structure has contributed to solid profit generation' the crisis

e6posed the risks posed b( the banks si,e' comple6it(' and dependence on wholesale

funding. The larger banks have been activel( restructuring their balance sheetsDmoving

to more stable sources of funding< reducing their cross-border presence< and building up

capital. The( remain' however' vulnerable to sustained disruptions in funding markets

and reduced profitabilit(' which would cause dela(s in meeting capital-raising plans.

• The regulator( and supervisor( regime for banks' insurance and securities markets' and

market infrastructures is of a ver( high standard. +reas for improvement include greater

de jure independence of supervisor( authorities< disclosure of the capital treatment and

related financial interactions within comple6 banking groups< a move toward a moreeconomic risk-focused approach to insurance regulation and supervision< and enhanced

supervision of investment service providers and financial advisors.

• French banks' and listed companies more generall(' make e6tensive public financial

disclosures under IFRS' and as a result of bank regulations illar III of 5asel II&.

onetheless' disclosure of financial sector data falls short of best international practice

and enhancements would be highl( desirable. 2arket discipline would benefit from the

publication of regular and comparable data on an institution-b(-institution basis' as well

as detailed official anal(ses of financial sector developments in France.

Frances financial s(stem is large' sophisticated' and integrated both verticall( and

internationall(. It is dominated b( five banking groups that are regionall( and globall( s(stemic

and among the largest in the world' and of which four have been identified as global s(stemicall(

important banks G-SI5s&. Total assets of the s(stem amounted to H!$ trillion at end-9$!!' or

five times Frances G@. France has one of the largest insurance markets in the world< the

second largest mutual fund industr( in Europe after 7u6embourg in terms of the number of funds

and the first in Europe in terms of the number of management companies&< and well developed

securities markets and infrastructures that are full( integrated into Europe. French banks are

among the largest counterparties in international e:uit( derivatives markets.

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5efore the crisis' the French financial s(stem created a robust income generating capacit(' but

also became more vulnerable to shocks. Rapid balance sheet growth during the second half of the

9$$$s was driven b( the banks e6pansion into international corporate and investment banking

1I5& and derivatives products' funded in the wholesale market' and a more limited international

retail e6pansion' particularl( in high-(ield Euro area countries. Chen the global financial crisis

hit in 9$$%' margins from domestic retail activit( and asset-gathering operations covered losses

on 1I5 activities' helping French banks weather the turmoil. 5ut with the worsening of the

European sovereign debt crisis in 9$!!' market perceptions of French banks deteriorated sharpl(

due to high leverage and reliance on wholesale funding' high e6posure to potential losses in

high-(ield Euro area countries' and capital levels below the international average. The solvenc(

and li:uidit( situation of French banks has since improved' although dependence on wholesale

funding remains a ke( risk.

+s a result' the large French banks are in the midst of significant balance sheet adjustments .

@eleveraging plans were announced b( the five largest banks in mid-9$!!' which focused

primaril( on disposing of noncore' dollar-funded international assets. @isposal of remaining

legac( assets from the first phase of the crisis also accelerated to free up regulator( capital.

@omestic credit activit( was largel( maintained and continues to grow' albeit at declining rates

owing to slower demand for bank loans.

The large banks came under significant funding pressures as interbank and foreign e6change

markets sei,ed' necessitating polic( actions. Reliance on wholesale funding and e6posures to

securiti,ed assets fed perceptions of counterpart( risk' contributing to funding problems.

@espite large losses' most banks were able to maintain net profits thanks to solid earnings from

traditional domestic retail banking.

In the aftermath of the crisis, the French authorities took a number of steps to strengthen their

oversight framework .

2ost importantl(B

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The Autorité de Contrôle Prudentiel +1&' attached to 5an:ue de France' was established'

bringing together responsibilit( for prudential supervision of banks' insurers' investment firms

and market infrastructure providers' and a new mandate for consumer protection< and

The Conseil de égulation Financi!re et du is"ue #$stémi"ue 1orefris& was created as an

interagenc( cooperation and coordination mechanism on s(stemic risk prevention and

management' including in crisis times.

1orefris is not a decision-making bod(' as each individual authorit( retains responsibilit( to act

in its own right. To be credible' this authorit( should anchor decision making in anal(ses of

financial stabilit( that help shape the knowledge and e6pectations of market participants and the

general public.

Role of the 2inistr( of Finance 2oF&

Cithin the 2oF' the @irectorate General of Treasur( @GT& prepares financial sector legislation

and regulation e6cept in the securities area&' participates in European and international

negotiations' and contributes to the implementation of the regulator( framework' in particular via

its attendance with no voting rights& to the +1' +2F 5oards meetings e6cept deliberative

meetings for sanctions&. The 2oF representative in +1 and +2F can ask for a seconddeliberation in certain circumstances e6cept regarding sanctions&.

Supervision of banks and insurance companies

+1 is responsible for licensing and prudential supervision' including sanctioning powers' of

banks and insurance companies. +1s statutor( objectives are to maintain financial stabilit(

through supervision of banking and insurance risks' to provide protection for bank customers'and insurance polic(holders and beneficiaries' and to supervise consumer protection' a

responsibilit( that was not held b( either of the predecessor organi,ations. +1 represents

France for matters within its jurisdiction' specificall( international prudential regulation in the

European ;nion and wider international negotiations such as the 5asel 1ommittee for 5anking

Supervision' and supports the French representatives on the Financial Stabilit( 5oard FS5&. The

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+1 General Secretariat operates as a General @irectorate of 5dF.

+1

4versight of securities markets involves +1 and +2F under a twin peaks%t(pe model' and the

&aut Conseil du Commissariat au' Comptes =01&. +1 performs the prudential supervision of

investment services providers and market infrastructure providers' including regulated markets'

multilateral trading facilities' and central clearing counterparties 11s&. +2F is responsible for

market and business conduct supervision of all market participants. It is the prudential supervisor

of portfolio management companies and the funds the( administer.

=01 is in charge of the oversight of e6ternal auditors of public interest entities' which includes

issuers as well as companies such as banks and insurance companies.

1oordination between the +1 and the +2F on consumer protection issues

In view of shared mandates of +1 and +2F in consumer and investor protection an

institutional coordination unit Joint unit - Pôle commun& was established' with no change in the

two authorities respective powers. The unit allows +1 and +2F to alert each other to mis-

selling risks' to e6change views on how to prevent such risks' and to take joint action.

ational Financial Reform +genda

The agenda put forward in the conte6t of the electoral campaign is being spelt out in more detail

b( the government' and is likel( to includeB i& a phased doubling of the ceiling on the (ivret A

and (ivret de )éveloppement )urable guaranteed remuneration rate above inflation<

ii& the implementation of internationall( agreed standards on banks<iii& a rearrangement of e6isting support programs to S2Es and innovation within a new public

financial institution<

iv& a broader financial transactions ta6 in line with the E; 1ommissions 9$!! draft proposal<

v& a reform of the corporate ta6< and

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vi&The implementation of structural reforms of the banking sector in liaison with the E;

timeline' taking into account the recommendations elaborated at the European level b( the

7iikanen =igh-7evel E6pert Group.

France has a high level of compliance with the 5asel 1ore rinciples for Effective 5ankingSupervision 51s&.

The 1ore rinciples are used b( countries as a benchmark for assessing the :ualit( of their

supervisor( s(stems and for identif(ing future work to be done to achieve a baseline level of

sound supervisor( practices. +1s supervisor( practices are of a ver( high standard'

incorporating man( high-:ualit( processes. +1 operates an e6tensive' detailed' and in-depth

program of onsite inspections and high-:ualit( offsite supervisor( processes that monitors theindividual major banks financial situation and risk management and control practices on a

consolidated basis' building on constructive home-host relationships.

The onsite process is comprehensive and of high :ualit(' but the necessar( time taken for due

process means that there can be a lag in supervisor( recommendations being communicated to

the firms. +1 should continue to build on recent developments to put in place a more fle6ible'

timel(' focused feedback mechanism as a complement to the alread( strong onsite process. +1

is at an earl( stage in assessing the :ualit( of risk governance and feeding it into overall

assessments' in part hampered b( legal obstacles to interact directl( with 5oards.

*he legislative framework is broadl$ sound, but two deficiencies could hamper supervisor$

effectiveness.

Firstl(' an almost complete lack of a complete legislative framework related to +1s powers to

regulate the responsibilities of the banks 5oard of @irectors' as distinct from senior

management. This weakness' coupled with +1s practice of limited direct interaction with the

5oard' has conse:uences in several areas' including the integrit( of the fit-and proper process'

the inabilit( of +1 to suspend or dismiss 5oard members individuall( or collectivel(&' and

+1s inabilit( to set re:uirements for 5oard responsibilities in oversight and risk governance.

+s a result' the possibilit( of effective earl( intervention and the abilit( to assess whether the

5oard of @irectors of an institution has sound knowledge of the business and risks of a bank is

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weakened. Irrespective of legislative change' +1 needs to make more use of direct contact with

the 5oard in order to deliver critical supervisor( messages as directl( and clearl( as possible and

to ensure that the governance of the bank is appropriate. The second legal issue is that +1 does

not have the formal power to approve ac:uisitions b( French banks when the target ac:uisition is

outside France. This can undermine the effectiveness of +1s otherwise rigorous practice of

consolidated supervision. Chile +1 can react to an unacceptabl( risk( ac:uisition b( a French

bank after the fact' this is not as effective as having approval authorit( e6 ante.

Chile capital re:uirements are in man( wa(s prudent and appropriate' there are a few areas

where current capital regulations in France' pursuant to E; capital rules' fall short of the

applicable 5asel standards' particularl( 5asel II.). Chile capital re:uirements are' in man( wa(s'

prudent and appropriate' there are material weaknesses in the definition of capital' and related

public reporting vis-K-vis current 5asel IILII.) re:uirements. This is particularl( the case for

bancassurance the sale of insurance and other similar products through a bank& groups and

cross-holdings of banks b( certain major internationall( active publicl( traded entities within

some major mutual bank groups. =owever' despite improvements' the current approaches risk

confusion for marketplace participants and the authorities should re:uire full and consistent

disclosure of the capital treatment in place' and the related financial interactions within comple6

groups.The treatment of bank cross-holdings affects the publicl( reported capital of somematerial internationall( active subsidiaries in the affected groups' but does not affect the

consolidated capital position of the groups. The result can be double counting of capital in the

relevant banking part of the group' or counting as capital amounts that ma( not be available in

the event of need' thus leading to market and investor misunderstanding. This can be e6acerbated

because of the comple6it( of the intra-group relations and opacit( in disclosures about how the

mutual group operates.

Insurance Regulations

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Insurance regulation and supervision in France is predominantl( carried out using a Solvenc( I

approach' though preparations for Solvenc( II are underwa(. Solvenc( @irectives are primaril(

concerned with the amount of capital that E; insurance companies must hold to reduce the risk

of insolvenc(.

In 9$!$' France launched +1 +utorite de 1ontrole rudentiel&' a new banking and insurance

regulator( bod(.

The current thorough approach to assessing insurer technical provisions and their coverage b(

admissible assets' as well as current and likel( future solvenc( of insurers against Solvenc( I

solvenc( margin re:uirements' has led to financiall( sound insurers. The new Solvenc( II regime

is based on economic risk and should provide greater incentives for insurers to properl( measure

and manage their risks than the current approach. France has been waiting for the finali,ation of

the E; technical standards before moving to implement Solvenc( II t(pe re:uirements.

Securities Regulation

The legal framework is robust and provides +2F and +1 with broad licensing' supervisor('

investigative' and enforcement powers within their respective competencies. There are robust

arrangements for cooperation between the two authorities. 4ffsite mechanisms are in place andrisk-scoring frameworks have been developed for investment services providers b( +1' and for

portfolio management companies b( +2F. The authorities have also established arrangements

for the oversight of the French portals of the ew Mork Stock E6change MSE&' Eurone6t and

the various related trading platforms. In addition' +2F has robust market surveillance s(stems

and has been active in enforcement of market abuse provisions.

The authorities have achieved concrete results in the implementation of supervisor(

arrangements in the new areas identified in the current I4S14 International 4rganisation of

Securities 1ommissions& principles' in particular' those pertaining to the identification and

monitoring of emerging and s(stemic risks' although best practices in this area have not (et

emerged and guidance from I4S14 is limited.

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Regarding +1' a greater use of stronger enforcement measures' including sanctions should be

used whenever necessar(' as it would help support moral suasion' and more fre:uent reporting of

capital ade:uac( would enhance the +1 supervisor( approach of investment services providers'

and' in particular' its earl( warning mechanism.

1risis 2anagement

+lread( before the crisis' France had a comprehensive framework for crisis management and

bank resolution' which allowed the authorities to deal with problem financial institutions

effectivel(' making France one of the least affected nations' particularl( in the European ;nion.

Cith some e6ceptions' the framework contains the instruments and measures that now constitute

international best practicesB

The +1 has available a broad set of powers to initiate or e6ecute resolution with the aim to

restructure the institution or ensure its orderl( li:uidation' although no specific resolution

framework for financial institutions is in place and the judicial s(stem shall help ensure the fair

treatment of owners and other rights holders and the broader interests' such as financial stabilit(.

The +1s crisis preparation' identification' and management processes are comprehensive

and well structured. The( allow proper identification of weak banks and re:uests for appropriate

remedial measures to be taken. The +1 activel( uses the 5asel II illar 9 instrument to re:uireadd-ons to the minimum regulator( capital re:uirements on an individual bank basis' reflecting

the assessed riskiness of a bank.

The +1 has been given a wide range of remedial and sanctionar( powers. =ence' it is a

watchdog in the industr(. It has the +uthorit( to revoke the license of a bank' which can

automaticall( start the judicial li:uidation process. That said' it is widel( believed that the +1

would benefit from a structured framework for earl( action/ in which supervisor( judgments as

well as formal breaches of regulations ma( lead to remedial measures.

France has in place a comprehensive legal and institutional framework that achieves a high

level of compliance with the Financial Action *ask Force +FA*F - / 0 ecommendations.

The regime seems to be largel( in line with the standard for anti-mone( laundering and

countering the financing of terrorism +27L1FT& that was in place at the time of the mutual

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evaluation visit in a number of areas' including the criminali,ation of mone( laundering and

terrorist financing on the basis of ;nited ations conventions' and international cooperation and

e6change of information. 1ustomer due diligence' record keeping' and suspicious transaction

reporting re:uirements are largel( compliant with the standard. Supervision of financial

institutions is efficient and effective.

France has a well%developed public infrastructure supporting effective banking supervision.

France has a complete s(stem of business laws that are consistentl( enforced.

+ccounting standards for listed companies and other consolidated accounts are prepared to IFRS

standards' as adopted b( the European ;nion' for :uite some time. +uditing standards are

generall( consistent with international auditing standards and there is a French audit oversight

bod( =01& that inspects audit firms. Rules to limit potential threats to auditor independence'

such as restrictions on non-audit services an audit firm ma( offer' are tougher in France than in

other jurisdictions. =01 has onl( recentl( revised its approach to inspections' so that the bod(

itself now inspects audit firms to determine that audits are being conducted consistent with

accounting standards applicable in France and French audit standards. reviousl(' these

inspections were done b( the professional bod( under =01s oversight.

*he assessment is based on the laws, regulations, and other supervisor$ re"uirements and practices in place at the time of the assessment.

This is particularl( relevant as France' like numerous other E; countries' is working to develop

Solvenc( II re:uirements' but as mentioned earlier on' hasnt taken concrete intermediate steps

towards implementing similar re:uirements as (et' especiall( related to risk-management

re:uirements for insurers.

Institutional Structure

The current regulator( structure is a variation of the twin peaks model.

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The classic twin peaks model' basicall(' promotes two major regulators in the market of an(

nation< this is so as to draw clear lines of demarcation between their responsibilities and

authorities.

In France' +1 is primaril( in charge for the prudential supervision of ISs and market

infrastructure providers' including regulated markets' multilateral trading facilities 2TFs&' and

central clearing counterparties 11s&. 4n the other hand' the +2F is the markets supervisor

and is responsible for conduct supervision of all participants in the securities market including

ISs' portfolio management companies 21s&' financial investment advisors FI+s&' and

market infrastructure providers' and e6ercises prudential supervision over 21s and the funds

the( administer. + third authorit(' the =01' is in charge of the oversight of e6ternal auditors who

conduct audits of public interest entities including auditors of listed issuers& and non-public

interest entities' but' it is a minor pla(er' hence' the variation.

5ut' now that the SS2 2odel is going to be applicable in less than a (ear' the future of this

s(stem hangs in the balance.

5oth +2F and +1 are governed b( a 5oard' while a separate enforcement committee is in

charge of the imposition of sanctions.

Cithin both 5oards' there is representation from different interests' including representatives

from speciali,ed public entities' issuers' intermediaries' and' in the case of +2F' investors. Thecomposition of the enforcement committees is also built upon the principle of representation of

interest of the various market users or participants. There are conflict-of-interest provisions in

place which seek to address the drawbacks of industr( representation. Chile not being formall( a

member' a representative from the 2oF attends the meetings of the 5oards as well as the

enforcement committees with no voting rights. =owever' heLshe has the power to re:uest a

second deliberation' i.e.' a second discussion' in decisions taken b( the 5oards' but not b( the

enforcement committees.

To carr( out their respective mandates' +2F and +1 have been given broad licensing'

investigation' supervision' and enforcement powers. The onl( limitation in powers relates to

rulemaking is that +2F has the power to draft its own regulations' which are subject to

homologation/ or stamping b( the 2inistr( of Finance2oF&. +1 does not have such powers.

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The authori,ation of e6changes remains in the hands of 2oF' based on a recommendation b(

+2F.

5oth regulator( authorities operate under a framework of accountabilit( and transparenc(.

+uthori,ation re:uirements are established b( law and developed via regulations and are all

available on websites. +2F follows a consultation process to develop regulations. Individual

decisions must be motivated and are subject to judicial review. +2F and +1 prepare annual

reports that provide a detailed account of their activities and budget.

Their budgets are subject to oversight b( the audit of the 1our des 1omptesLEuropean 1ourt of

+uditors E;s independent e6ternal auditor&.

Single supervisor( mechanism SS2&

The European 1entral 5ank E15& is preparing to take on new banking supervision tasks as part

of a single supervisor( mechanism.

The single supervisor( mechanism aims to create a new s(stem of financial supervision

comprising the E15 and the national competent authorities of participating E; countries' one of

which is France.

Specific tasks relating to the prudential supervision of credit institutions will be conferred on the

E15 according to +rticle !9#*& of the Treat( on the Functioning of the European ;nion.

The main aims of the single supervisor( mechanism will be to ensure the safet( and soundness of

the European banking s(stem and to increase financial integration and stabilit( in Europe. It will

detect weaknesses earl( on and make sure action is taken to strengthen ailing financial

institutions. It is also designed to help break the connection between the member states8 budgets

and some of their banks.

The E15 will be responsible for the effective and consistent functioning of the single

supervisor( mechanism' cooperating with the national competent authorities of participating E;

countries.

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The E15 will assume its new banking supervision responsibilities in autumn 9$!>.

;nder the new s(stem of supervision' the E15 will directl( supervise significant credit

institutions. It will work closel( with the national competent authorities to supervise all other

credit institutions under the overall oversight of the E15. The E15 ma( decide at an( time to

take responsibilit( for a less-significant credit institution.

The European 5anking +uthorit( E5+& will be responsible for ensuring effective and consistent

implementation of the Nsingle rulebookN for the banking industr(< it will promote consistenc( in

supervisor( practice' thus protecting the integrit( of the internal market' and help maintain the

stabilit( of the financial s(stem.

+s it is an untested model there have several debates as to this model. 1ontrolling the activities

of major European nations will affect' both' the nations and the European ;nion.

Reform of the French banking sector

In Jul( 9$!0' France adopted a watered down banking reform aimed at preventing a repeat of the

9$$% financial crisis. 1ritics of the banking sector have called for banks to be forced to strictl(

separate all trading activities from deposit-taking' protecting savers and ta6pa(ers from

potentiall( risk( investments.

5ut the law merel( forces banks to move purel( speculative trading into separatel( funded

entities' leaving man( trading activities attached to deposits. The reform also bans high

fre:uenc( trading' which was considered to be a major cause of the 9$$% crisis' the controversial

practise of having super-computers carries out ultra-fast trades' and commodit(

derivatives trading' which is thought to disrupt food prices.

The law' now' also re:uires banks to make public a list of their global subsidiaries and

worldwide activities' in a bid to shine a light on ta6 havens and fiscal fraud.

5ut' despite of all its failings' it has improved certain aspects of the French banking law.

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1ecessit$ of a separation between trading and retail activities

The French reform of the banking sector aims at separating activities that contribute to funding

the econom( from speculative activities.

+bove a specific threshold' the bill re:uires trading activities or unsecured financing to hedge

funds to be conducted within a separated trading entit(' which would be regulated and

supervised as an investment firm or as a credit institution. This trading entit( would neither be

allowed to collect deposits nor to offer pa(ment services to retail customers' nor to benefit from

group guarantee or li:uidit( support be(ond e6posures that fall within a restrictive large

e6posure limitB the trading entit( will be treated for the purposes of this internal limit as if it were

not part of the group. In other words' retail client deposits will not be used to finance proprietar(

speculative activities.

2ore specificall(' market making activities are considered as necessar( to preserve li:uidit(

capacit(' but the 2inister of the Econom( is e6pected to set thresholds above which market

making activities would have to be contained within a separate entit(. 2oreover' the dedicated

trading entities are prohibited from high fre:uenc( trading or derivatives trading on agricultural

commodities for speculative purposes.

#trengthening the supervisor$ framework

The reform of the banking sector strengthens the supervisor( framework b( giving new powers

and responsibilities to the supervisor( authorities.

The law undertakes a comprehensive review of the French banking s(stem and supervisor(

framework' both nurturing a better governance of the industr( and shaping supervisor( powers to

improve financial stabilit( and manage bank failure resolution.

Improving governance under the supervision of the ACP

reventing defaults is the most straightforward wa( to nip in the bud interconnections-driven

s(stemic disruptions.

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For this purpose' the 5asel framework sets up not onl( :uantitative re:uirements but also rules

for a sound governance and risk monitoring and market discipline. Sound governance involves

primaril( e:uit( holders as well as to a lesser e6tent subordinated debt holders.

The new French banking law reinforces the +1s e6-ante intervention tools.

@uring the financial crisis' studies suggested that the :ualit( of the board was absolutel( crucial

to prevent the failure of a bank. =ence' new powers are vested in the French banking supervisor

to assess the suitabilit( of board members. otification for the fit-and-proper test ' previousl(

carried out onl( for managers' will be e6tended to board members. It will ensure greater

effectiveness of the control of their reputation and professional competence. The French

supervisor will be able to oppose a nomination and suspend a member if conditions are no longer

met. The supervisor will indeed check whether the collegial bodies members abide b( the rules

throughout their mandate. This wa( the bank should enjo( advice from more suitable

stakeholders in its choice of the right business model.

Governance monitoring tools thereb( should help preventing organisational failures. From an

institution-level perspective' the( reduce e6-ante the probabilit( of a default that could spur a

s(stemic event.

*he ACP will be granted 2resolution3 powers

@uring the financial crisis' some public authorities were forced to bail-out troubled banks that

were identified as s(stemicall( important financial institutions SIFIs& and too-big-to-fail. From

such e6perience' banks e:uit( and shareholders ma( consider the( benefit from an implicit

guarantee b( governments' covering all activities' as the deposit guarantee scheme protects the

depositors. This e6pectation lowers their incentive to assess the risk the( bear. This makes a

default both more likel( A since market discipline disappears A and more costl( A since the

resolution is comple6.

Cithin the new +1R' a devoted board will be in charge of resolution measures in case of

default.

This board has the power to change managers' designate provisional ones' transfer or sell the

whole or part of the institution. 2ost importantl(' the new French banking law establishes losses

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are to be borne b( e:uit( holders and subordinated creditors.+n E; directive will complete these

measures' which adapt the li:uidation process to properl( strengthen the institutions capital

base. Risks and risk bearers are thus e6plicitl( defined' withdrawing the e6pected implicit

guarantee enjo(ed b( e:uit( and shareholders and promoting a cautious management.

+t the same time' it improves the protection of depositors and the stabilit( of the financial

s(stem at large b( increasing the si,e of the e6isting guarantee scheme' thus enhancing its

potential to contribute to the rescue or the resolution of an institution.

egulation of )erivative 4arkets and 1aked #hort #ales

+n investor selling financial instruments securities and options' forwards' swaps' etc.& is

prohibited from issuing a sale order unless he holds in his account the financial instruments he is

selling or has taken the necessar( measures to ensure that he will be able to deliver such financial

instruments on the settlement date.

einforcement of Financial Professional 5bligations to Clients

The 7aw reinforces the obligations of financial intermediaries to their clients. +ll financial

intermediaries will be re:uired to register in one single register that consumers will be able to

consult.

eform of the Procedure for 4andator$ *ender 5ffers

The 7aw reforms the procedure for mandator( tender offers to increase the protection of

shareholders and prevent NrampantN takeovers. It also amends the definition of Nparties acting in

concert.N The 7aw decreases the threshold that triggers the obligation to launch a mandator(

tender offer from one-third i.e.' 00O& to 0$O of the shares or voting rights.

Improvement of Insolvenc$ (aw for Companies Facing Financial )ifficulties

The 7aw introduces an Naccelerated financial safeguardN procedure that ma( be triggered under

certain circumstances. The procedure will be available to a debtor that has reached an out-of-

court restructuring arrangement with a majorit( of its financial creditors andLor bondholders.

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Covered 6onds

The 7aw creates a new t(pe of covered bonds called obligations de financement de l7habitat

home finance bonds& that are designed to facilitate the refinancing of home loans.

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RECOMMENDATIONS

Coordination in monitoring of financial stabilit$ and in the prevention and management of

crises is likel$ to be facilitated b$ the structural relationships between the relevant authorities.

In the current structure' it makes sense to leave the leading role in crisis prevention and

management to the +1' while the 5dF leads on wider macro-financial monitoring. =owever'

best practices for governance and accountabilit( re:uire that the separate views of the relevant

agencies' based on their specific objectives' be e6pressed transparentl(. +ccountabilit( and

transparenc( could be increased b( i& publishing +1 meeting records' e6cept when individual

institutions are involved< and ii& written consultations between the +1 and the 5dF on issues

pertaining to their respective mandates< or financial stabilit( and macro-prudential considerations

regarding the +1. It should be noted that no domestic 2emorandum of ;nderstanding specific

to crisis management has been agreed.

4oreover, additional measures are re"uired in some areas.For e6ample' legislative measures to

enable authorities to sei,e and confiscate laundered propert( and proceeds of mone( laundering

and predicate offenses should be completed. Chile demateriali,ation of securities has reduced

risks related to shareholder anon(mit(' the identification of nonresident shareholders needs to be

enhanced. +lthough it appears that TR+1FI the financial intelligence unit-FI;& has made

good progress in carr(ing out its mission of collecting' anal(,ing' and disseminating suspicious

transaction reports to the judicial and law-enforcement authorities' it needs to issue more

guidance to the nonfinancial professions and re:uires additional resources to increase its

anal(tical capacit(.

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CONCLUSION

In conclusion' several directions have been e6plored to address the issue of the necessar(

structural reform of the banking sector with the Polcker rule in the ;nited States' the

Independent 1ommission on 5anking chaired b( Sir John Pickers in the ;nited Qingdom'!$ and

the =igh-7evel E6pert Group chaired b( Erkki 7iikanen in Europe. The French reform builds

upon their in-depth anal(sis and conclusions but also considers the hurdles that still have to be

overcome. In France' the reform is a change of paradigm in the sense that it introduces in a

coordinated manner preventive and curative measures b( giving legal force to the principle of

separation and b( strengthening macro prudential and resolution tools.

The separation part is well suited to keep the advantages and resilience of universal banking

while diminishing the risks' with implementation alread( b( 9$!). It constitutes a promising

venue at the European level.

The new set of tools is well suited to handle s(stemic risk and to tackle individual and sector-

wide sources of s(stemic disruptions' lowering the probabilit( of their materialisation and

decreasing their costs. If the s(stemic event cannot be avoided' it ensures that costs will not be

borne primaril( b( the ta6 pa(er but that risk takers dul( take their part in the resolution process.

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BIBLIOGRAPHY

Articles:

!. +ntoin 2urph(. NCorporate 5wnership in France8 *he Importance of &istor$ 'N RandallQ. 2orck' ed.' N+ =istor( of 1orporate Governance around the CorldB Famil( 5usiness

Groups to rofessional 2anagersN ;niversit( of 1hicago ress 9$$)&

9. +lain lessis' The &istor$ 5f 6anks in France' European +ssociation for 5anking

=istor(

Websites:

httpBLLwww.ban:ue-france.fr

httpBLLwww.acpr.ban:ue-france.fr

httpBLLwww.france.frL

Miscellae!"s

• FranceB Financial S(stem Stabilit( +ssessment' I2F 1ountr( Report o. !9L0>!

http://www.banque-france.fr/

http://www.acpr.banque-france.fr/

http://www.france.fr/

http://www.banque-france.fr/

http://www.acpr.banque-france.fr/

http://www.france.fr/

draft a

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