The International Monetary Fund (IMF), in a 2005 report based on its 2004 Financial Sector Assessment Program (FSAP), concluded that France exhibits a very high level of compliance with the Basel Core Principles (BCPs). The report found France to be compliant with all but one BCP, BCP 5, which the report found to be largely compliant. With regard to this principle, which deals with investment criteria, the report recommended that France introduce an obligation to obtain prior approval from the Committee for the Establishment of Credit Institutions and Investment Companies (CECEI, the licensing agency) for banks seeking to acquire equity in non-financial enterprises. The IMF report acknowledged that French authorities have developed but not yet enacted measures in this regard, but as yet there remains insufficient publicly available information addressing this issue. There are three distinct authorities responsible for the three main banking supervisory functions. The Minister in charge of the Economy is the regulatory authority, the CECEI is the licensing authority, and the Banking Commission is the supervisory authority. The legal framework for banking supervision is mostly contained in the Monetary and Financial Code. The Code comprises several laws, including the 1984 Banking Act, as amended by the 1996 Financial Activity Modernization Act.

General Overview

A 2005 detailed assessment by the IMF on France's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision concludes that France is compliant with 29 of the 30 BCPs (considering that BCP 1 is sub-divided into 6 sub principles), and largely compliant with BCP 5 on the supervisory authority to review major investments and acquisitions. The 2005 IMF report further finds that the banking sector in France is "large, sophisticated, and of international importance" (p. 11) and is continually modernized and restructured. The supervisory system is also found to be "of high quality" (p. 55), with a legal and regulatory framework that is "clear, easily accessible, and updated periodically" (p. 11). The IMF, however, had two recommendations pertaining to BCPs 5 and 21. They are as follows: (1) oblige banks to obtain prior approval of the Committee for the Establishment of Credit Institutions and Investment Companies (Comité des Établissements de Crédit et des Entreprises d'Investissement, or CECEI) before acquiring shares in non-financial enterprises; and (2) continue taking steps to converge French accounting standards with the international accounting standards. Other areas that French authorities are advised to look into, although they do not impact France's compliance level, are: (1) establish a formal protocol for crisis management to enable two or more agencies to get involved and to cut down procedural delays and ensure speedy action; and (2) consider whether the supervisory autonomy of the Banking Commission (Commission Bancaire, or CB) is compromised due to the presence of the Director of the Treasury on its Board and whether conflict of interest arises due to the presence of industry representatives on the Boards of the CECEI and the Financial Markets Authority (Autorité des Marchés Financiers, or AMF), the securities supervisor. The French authorities responded to the latter recommendation with the assurance that there were sufficient safeguards against a potential conflict of interest.

Financial sector oversight, per the 2005 IMF report, is set up as a matrix, with sectoral distinctions (of banking, securities, and insurance sectors) in the rows, and supervisory authority distinctions in the columns. The CB, the Committee on Banking and Financial Regulation (Comité de la Réglementation Bancaire et Financière, or CRBF), the CECEI, the Insurance Supervisory Authority (Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance, or CCAMIP) replaced by the Autorité de Contrôle des Assurances et des Mutuelles (ACAM) since 2005, and the AMF are the supervisory and regulatory agencies for, respectively, the banking system, insurance, and securities industries. They have adequate arrangements in place for supervisory cooperation and coordination. In the banking sector, there are three distinct authorities responsible for the three main banking supervisory functions. The Minister in charge of the economy is the regulatory authority, the CECEI is the licensing authority, and the CB is the supervisory authority. The IMF notes that the CRBF was slated to discontinue activities in 2004, and its regulatory functions was to be taken over by the Ministry of Economy, Industry and Employment (Ministère de l'Économie, de l'Industrie et de l'Emploi, or MINEFE) in consultation with the Advisory Committee on Financial Legislation and Regulation (Comité Consultatif pour la Législation et la Réglementation Financieres, or CCLRF). The Central Bank of France (Banque de France, or BdF), the CB, the AMF, and the CCAMIP (now the ACAM) cooperate and coordinate their activities through their membership in the Board of Financial Sector Authorities (College des Autorités de Contrôle des Entreprises du Secteur Financier, or CACESF), chaired by the MINEFE. An October 2001 Charter between the CCAMIP and the CB formalizes cooperation between the two agencies. This cooperation has been strengthened by the enactment of the 2003 Financial Security Act. BdF membership in both the CB and the AMF facilitates coordination between the latter two. The BdF is also pivotal in the general governance and daily operations of the CB and the CECEI.

The 2005 IMF report notes that the Monetary and Financial Code (Code Monétaire et Financier, or COMOFI) incorporates all the legal provisions on banking sector regulation and supervision. The COMOFI has been updated with the incorporation of laws on the Deposit Guarantee Fund (Fonds de Garantie des Dépôts, or FGD) and the new AMF. The guidelines (Recueil des Textes Réglementaires) published by the CRBF contain the key banking and accounting regulations. The French accounting and auditing professions are well-regulated. The High Counsel for Statutory Auditors (Haut Conseil du Commissariat aux Comptes, or HCCC) and the National Organization of Registered Auditors (Compagnie Nationale des Commissaires aux Comtes, or CNCC) issue codes of conduct and other regulations for the accounting and auditing professions. The IMF report found that France is moving toward greater convergence with international accounting standards. The enactment of the 1999 Savings and Financial Securities Act has brought France closer to European and international accounting standards. France is also taking steps to adhere to the Basel II framework of capital adequacy and risk management.

The 2008 IMF Article IV consultation report provides statistics on the French banking sector as of 2006. There are 313 commercial banks, of which 309 are private banks and 4 state-owned banks. There are 121 mutualized banks/credit unions. Of the 309 private banks, 131 are domestic banks and 178 are foreign banks. The banking sector in France is highly concentrated. Nine universal banks dominating the system, claiming three-fourths of the total banking sector assets, which amount to €5542.9 billion. Two large financial institutions, La Poste and the Caisse des Dépôts et Consignations, are government owned. The 2005 IMF report fears that further consolidation in the sector could challenge the system with stability concerns, and the "too-big-to-fail" problem.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

FC

The IMF's 2005 assessment notes that France is compliant with this principle. The IMF notes that the COMOFI forms the main legislative basis of financial sector supervision in France. It comprises the 1984 Banking Act, as amended by the 1996 Financial Activity Modernization Act; the 1999 Savings and Financial Securities Act; and the 2003 Financial Security Law (Loi de Sécurité Financière). Under the COMOFI, the three distinct authorities responsible for the three main banking supervisory functions -- regulation, licensing, and supervision -- are the MINEFE, the CECEI, and the CB, respectively. The three supervisory agencies are closely connected due to joint staff and a single chairman. The legislative framework has seen recent revision to keep up with new developments and institutional streamlining.

1.(2) Operational independence and adequate resources.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. Further, the CB and the CECEI are part of the BdF, but are independent administrative authorities with operational autonomy. They are also free from undue government interference or influence, although the MINEFE and the Director of the Treasury do have a role in decision making. The IMF felt that the staff resources are limited, though the French authorities maintain that their budget and staff are adequate, and rapid expansion would be unfavorable.

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

As the IMF's 2005 assessment notes, France is compliant with this principle. The COMOFI charges the CB with the responsibility of monitoring compliance of banks and credit institutions with laws and regulations and apply sanctions for non-compliance. It can make on-site visits for inspections and can take corrective measures when needed, including de-authorization.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

FC

As the IMF's 2005 assessment notes, France is compliant with this principle. The COMOFI charges the CB with the responsibility of monitoring compliance of banks and credit institutions with laws and regulations and apply sanctions for non-compliance. It can make on-site visits for inspections and can take corrective measures when needed, including de-authorization.

1.(5) Legal protection for supervisors.

FC

The IMF's 2005 assessment finds France compliant with this principle. "Legal protection of the supervisory staff is satisfactory" (p. 23) and "the collegial nature of the CB's decision-making" (p. 23) is an additional safeguard against lawsuits. The staff at the CB and its General Secretariat is also protected from bearing legal costs to defend legitimate actions.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. The 1999 Savings and Financial Securities Act created a joint body, the CACESF, to strengthen cooperation between the CB, the AMF, and the CCAMIP (now the ACAM). The COMOFI permits the CECEI, BdF, CB, CCAMIP, AMF, and the FGD to exchange information within the bounds of professional secrecy obligations of each organization. Further, harmonization with the European Union (EU) Second Banking Coordination Directive has facilitated the supervisory exchange of information within the European Economic Area (EEA).

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

The IMF's 2005 assessment notes that France is compliant with this principle. The report further notes that the definition of a "credit institution" is broader in France than other EU countries. Also, the CECEI has considerable control over the nature of a bank's business.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

FC

As the IMF's 2005 assessment notes, France is compliant with this principle. The COMOFI has detailed guidelines on the criteria for licensing, and the CECEI grants licenses on the basis of specific information submitted with the application for license. France has a central database for the "fit and proper" qualifications for bank managers. In the absence of a formal requirement, the CECEI routinely requests evidence of an EEA home supervisor's prior consent before it authorizes a subsidiary in France. The IMF recommends formulating a regulation for this requirement.

4. Authority to review and reject transfer of ownership.

FC

Per the IMF's 2005 assessment, France is compliant with this principle. The CECEI's prior authorization must be obtained before a firm is acquired or relinquished, and the CECEI may reject such request with stated reasons.

5. Authority to review major acquisitions and investments.

CP

The IMF's 2005 assessment finds France largely compliant with this principle. The CRBF Regulations 96-06 and 96-16, and 86-21, coupled with the COMOFI, have detailed criteria on investment. The IMF report notes that the implementation of the EU Financial Conglomerates Directive will cover investment by banks in France or the EEA in insurance companies. Also, revisions to the CRBF Regulation 96-16, when adopted, will require banks to obtain prior assent from the CECEI to acquire nonfinancial equity holdings or to open a branch or subsidiary outside the EEA. This step will improve France's compliance with this principle. The IMF assessment recommended that France introduce an obligation to obtain prior approval from the CECEI (the licensing agency) for acquisitions of equity in non-financial enterprises by banks. The IMF report did acknowledge that the French authorities have developed but not yet enacted measure in this regard. There is no further recent information publicly available on this issue.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

FC

As the IMF's 2005 assessment notes, France is compliant with this principle. "French requirements on capital adequacy are fully in line with the Basel Capital Accord and European legislation" (p. 28). All credit institutions are required to maintain both an absolute level of minimum capital and a minimum ratio of capital to risk weighted assets. The IMF also notes that France is preparing to implement the Basel II requirements in due course. The 2007 CB Instruction Relating to Capital Requirements Applicable to Credit Institutions and Investment Firms No. 2007-02 contains guidelines on adhering to the Basel II. The 2006 CECEI annual report notes that the 2007 regulations transpose EU Directive 2006/48/EC, and the EU directive follows the capital adequacy regime under the Pillar 2 of Basel II.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. CRBF Regulation 97-02 (as amended by Regulation 2001-01 and Regulation 2004-02) sets standards for the internal control structure of credit institutions and holds the bank's management and board responsible for the provision of proper credit administration, risk assessment and monitoring, and supervision of the effectiveness of pertinent procedures and policies. However, the IMF finds that, in practice, banks have not always been able to secure margins to adequately reflect credit risk involved, despite a white paper issued by the CB and a procedure established to notify the CB of such loans.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

FC

Per the IMF's 2005 assessment, France is compliant with this principle. CRBF Regulation 97-02 and accounting rules (Comité de la Réglementation Comptable, CRC No. 2002-03) require banks to have adequate systems in place to assess the quality of loans and identify doubtful, compromised, and restructured loans. The Committee on Banking Regulation (Comité de la Réglementation Bancaire, or CRB) encourages prudent provisioning and some banks general loan loss reserves for even non-doubtful loans, though this practice is not uniform.

9. Prudential limits and management information system on concentration of exposure.

FC

As the IMF's 2005 assessment observes, France is compliant with this principle. CRBF Regulation 93-05 and CB Instruction 2000-07 "limit large exposures to a single borrower or group of connected borrowers to 25 percent of the bank's own funds" (p. 32) and applies this limit on a consolidated basis for on- as well as off-balance sheet loans.

10. Arm's length rule and monitoring for connected lending.

FC

The IMF's 2005 assessment notes that France is compliant with this principle. Transactions with related parties are regulated under the 1966 Commercial Companies Act, which requires arm's length lending, full board authorization and reporting to the annual General Assembly of shareholders in the case of transactions that are not business-as-usual. CRBF Regulation 97-02 (modified by Regulation 2001-01), also require credit institutions to set up adequate internal controls to monitor and control risks related, inter alia, to connected lending.

11. Policies and procedures for country risk and transfer risk.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. CB Instruction 2001-01 on international claims regulates banks' country risk exposure, including credit and market risk. CRBF Regulation 97-02 requires banks to have in place information and management systems to identify, monitor, and control country-risk; and these systems are reviewed during on-site inspections.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

FC

As the IMF's 2005 assessment notes, France is compliant with this principle. Detailed capital adequacy rules for banks are provided for in the CRBF Regulation 95-02.

13. Comprehensive risk management processes.

FC

The IMF's 2005 assessment observes that France is compliant with this principle. The assessment observes that "the structure and content of the system of prudential standards in the French supervisory system, which are applied on a consolidated basis, are a strong impetus for good risk management practices in French banks" (p. 34), and the implementation of Basel II promises to provide greater impetus for continued improvement of risk management practices in French banks.

14. Adequate internal controls.

FC

Per the IMF's 2005 assessment, France is compliant with this principle. CRBF Regulation 97-02, modified by Regulation 2001-01 and 2004-02, lays down a comprehensive set of instructions, requirements, and criteria for the overall internal control structure of banks and investment firms and incorporates all the main recommendations relating to internal controls issued by the Basel Committee. Further, the 1966 Commercial Companies Act has general guidelines on the role and responsibility of corporate and bank managers. The IMF report finds that France is making efforts to generalize the use of audit committees, and recommends that all Boards require the participation of external, well-qualified members. The 2008 IMF Article IV consultation report states that the government of France has asked both regulators and financial institutions to join in strengthening internal controls and risk management systems to reduce vulnerabilities in the banking sector and for greater alignment with the Basel II framework. The report recommends that supervisors increase pecuniary sanctions for non-compliance with regulations, and the financial institutions to get "fully involved in risk control and fraud identification" (p. 3).

15. Strict "know-your-customer" rules and high ethical and professional standards.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. The COMOFI has comprehensive customer identification, record keeping, and reporting requirements for banks. It empowers the CECEI to refuse authorization to a bank if its director, management, or other key officers lack sufficient integrity, skills, or experience. Decree 91-160 requires banks to adopt written internal rules and establish internal control procedures to ensure compliance with the anti-money laundering (AML) provisions of the COMOFI and Decree 91-160. However, banks are not required to appoint an AML officer with explicit responsibility for AML compliance. The CB regulates and supervises banks' compliance with their AML and combating the financing of terrorism (CFT) obligations through special on- and offsite examinations prioritized on a risk basis, and applies sanctions for breaches in compliance. Per the 2005 IMF report, the "CB appears to have a robust program of examinations and sufficient human and financial resources to carry it out" (p. 38), and as the CB staff reported to the IMF, "AML/CFT compliance levels are generally good and steadily improving" (p. 39).

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

The IMF's 2005 assessment observes that France is compliant with this principle. The COMOFI authorizes the CB to conduct off-site monitoring and on-site supervision of banks. Off-site supervision comprises of systematic and ongoing analysis of quantitative and prudential reports, as well as annual reports of credit institutions. On-site supervision involves general or periodic inspections; inspections focused on a specific sector of activity; inspections triggered by a bank's financial condition perceived to be of concern; thematic inspections, such as AML/CFT focused inspections; Basel II preparedness inspections; and inspections to monitor follow up actions on previously recommended corrective actions. The 2005 IMF report also observes that France continuously updates its analytical tools to keep pace with new developments, and introduces macro-prudential approaches to supervision.

17. Regular contact with bank management and understanding of bank's operations.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. The CB meets with senior management of banks as an integral part of its supervisory process and this "enhances its understanding of the bank's operations and management" (p. 42).

18. Analytical reports and statistical returns on solo and consolidated basis.

FC

As noted by the IMF's 2005 assessment, France is compliant with this principle. Off-site supervision by the CB comprises systematic and ongoing analysis of quantitative and prudential reports, as well as annual reports of credit institutions. Most of the CRBF regulations and the CB's instructions require all institutions, including mutualist groups, to provide reports or statistical returns on both a solo and a consolidated basis.

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

Per the IMF's 2005 assessment, France is compliant with this principle. The CRBF Regulation 91-01 obliges banks to publish annual financial statements certified by a registered public accountant (CAC). This certification "provides an important means of verification of the supervisory information provided by the bank" (p. 44). External audit is done by a CAC, who is required to be a member of the CNCC. The 1999 Savings and Financial Securities Act provides an enabling framework for more effective relationship between the supervisors and the external auditors. However, the IMF report notes that, as of 2004, the new Code of Ethics for the accounting profession has yet to be confirmed.

20. Ability to supervise on a consolidated basis.

FC

The IMF's 2005 assessment notes that France is compliant with this principle. CRBF regulations require banks to prepare regulatory filings on a consolidated basis. Further, the COMOFI empowers the CB to supervise credit institutions on a consolidated basis. The report, however advises the French supervisory authorities to "continue attempts to obtain access to information from all countries where French banks have business units" (p. 47).

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

FC

As observed by the IMF's 2005 assessment, France is compliant with this principle. The CRC has been empowered by the COMOFI to issue accounting regulations for banks and investment firms, after formal consultation with the CCLRF. Before the CRC was created, the CRB and CRBF issued regulations, which are still in force. The CB is entrusted with analyzing the forthcoming changes to the international accounting system, and it aims at making the financial institutions aware of the need to adapt to internationally recognized and updated standards. The IMF finds that French banks are making progress towards meeting the requirements of Pillar 3 of Basel II, as also towards greater convergence with the international accounting standards. The report encourages France to "continue to strive toward convergence between French accounting standards and IAS" (p. 56).

22. Adequate supervisory measures to ensure timely corrective action.

FC

Per the IMF's 2005 assessment, France is compliant with this principle. The CB has a broad range of enforcement and sanctioning powers under the COMOFI. If a bank is negligent in fulfilling its obligations or breaches a law or regulation, the CB can issue a warning, recommendation, or supervisory reprimand. It can suspend or remove a manager, with or without the appointment of a temporary administrator, and it can restrict the activities of the bank; impose pecuniary sanctions; or withdraw the license, with or without the appointment of a liquidator. The decisions of the CB may be appealed against in the Council of State (Conseil d'Etat), the highest administrative judicial authority.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

FC

The IMF's 2005 assessment finds France compliant with this principle. Per CRBF Regulation 2000-03, banks and their holding companies are obliged to comply with the prudential standards on a consolidated basis, applicable to both their domestic and foreign establishments. The CB and the CECEI also have extensive memoranda of understanding with the EEA supervisory authorities. Further, under the 1999 Savings and Financial Securities Act, the CB may conclude bilateral agreements on cooperation, information exchange, and on-site inspections with the financial supervisory authorities in countries outside the EEA. In addition, "to address the cross border implications of the implementation of Basel II, the CB has created working arrangements with all foreign supervisory jurisdictions in which French banks have establishments or which have establishments in France" (IMF 2005, pp. 51-52).

24. International exchange of information with other supervisors.

FC

According to the IMF's 2005 assessment, France is compliant with this principle. Further, "French laws and regulations provide a comprehensive framework for cooperation with foreign authorities" (p. 52). Also, France has "satisfactory agreements for supervisory cooperation" (p. 52) for foreign establishments of French banks and vice versa.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

FC

Per the IMF"s 2005 assessment, France is compliant with this principle. Prudential requirements for foreign banks operating in France are as stringent as those for French banks, and within the EEA, such requirements are harmonized. The CB also has complete powers to enter into supervisory cooperation and information exchange agreements with home supervisors of internationally active banks.