Front Matter Page
© 2004 International Monetary Fund
November 2004
IMF Country Report No. 04/344
France: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Monetary and Financial Policy Transparency, Banking Supervision, Securities Regulation, Insurance Regulation, Payment Systems, Securities Settlement, and Anti-Money Laundering and Combating the Financing of Terrorism
This Financial System Stability Assessment on France was prepared by a staff team of the International Monetary Fund and the World Bank as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 21, 2004. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of France or the Executive Board of the IMF.
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Front Matter Page
INTERNATIONAL MONETARY FUND
FRANCE
Financial System Stability Assessment
Prepared by the Monetary and Financial Systems and European Departments
Approved by Stefan Ingves and Michael Deppler
September 21, 2004
This report is based primarily on work undertaken during two visits to France during February and May 2004, as part of the Financial Sector Assessment Program (FSAP). The FSAP findings were discussed with the authorities during the Article IV consultation mission in July 2004.
The FSAP team comprised Tomás J.T. Baliño (Head), Piero Ugolini, Wim Fonteyne, Daniel Hardy, Richard Lalonde, Andrea Maechler, Rodolfo Maino, Sandra Marcelino, Jan Willem van der Vossen, and Jan Woltjer (all MFD); Céline Allard (EUR); Toni Gravelle (ICM); Nadim Kyriakos-Saad (LEG); Andrea Corcoran (U.S. Commodities Futures Trading Commission); Ludovic D’Hoore (Belgian Cellule de Traitement des Informations Financières); Philippe Fleury (Swiss Autorité de contrôle en matière de lutte contre le blanchiment d’argent); Daniel Heller (Swiss National Bank); and Helmut Müller (formerly German Federal Insurance Supervision Agency). The FSAP team received excellent cooperation from the authorities and market participants. The main findings of the FSAP are:
The financial sector is strong and well supervised. On present analysis, no weaknesses that could cause systemic risks were identified.
Concentration in banking may have reached a point where further domestic consolidation could raise competition and long-term stability issues.
The supervisory system of the financial sector is segmented and specialized and requires strong coordination mechanisms.
Progressive integration across financial sectors and international borders will present challenges, with implications for stability and competition. Efficiency and responsiveness to policy signals could be enhanced by rationalizing and modernizing financial sector policies (such as the administered savings schemes).
A high degree of observance of international standards for financial policies has been achieved. The authorities are working to fill remaining gaps, for example, in the regulation of reinsurance, the clearing and settlement system, and AML/CFT provisions outside the banking system.
The main authors of this FSSA are Tomás J.T. Baliño, Piero Ugolini, and Daniel Hardy, with contributions from the rest of the FSAP team.
FSAPs are designed to assess the stability of the financial system as a whole and not that of individual institutions. They have been developed to help countries identify and remedy weaknesses in their financial sector structure, thereby enhancing their resilience to macroeconomic shocks and cross-border contagion. FSAPs do not cover risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud.
Contents
Glossary
Executive Summary
I. Background
A. Macroeconomic Setting
B. Financial Sector Structure
II. Institutional and Regulatory Framework
III. Financial Sector Soundness
A. Banking Sector
B. Insurance Sector
IV. Structural Issues and Financial Sector Efficiency
Figures
1. Corporate and Household Debts, 1993-2003
2. Financial Sector Structure as of December 2003
Boxes
1. Summary of Key Recommendations
2. Credit Risk Transfer Activities
3. Restructuring La Poste’s Activities
Annex
Observance of Financial Sector Standards and Codes—Summary Assessments
Appendices
I. Structure and Evolution of the French Financial System
II. Stress Testing Procedures and Assumptions
III. Effects of Savings Schemes and Other Government Intervention
Statistical Tables
1. Selected Economic Indicators, 1999-2004
2. Financial System Structure, 1999-2003
3. Banking Sector: Financial Soundness Indicators, 1999-2003
4. Life Insurance: Financial Soundness Indicators, 1998-2002
5. Non-Life Insurance: Financial Soundness Indicators, 1998-2002
6a. Banking Sector Stress Testing Results
6b. Insurance Sector Stress Testing Results
Glossary
| AMF |
Autorité des Marchés Financiers |
| AML |
Anti-Money Laundering |
| APE |
Agence des Participations de l’État |
| ATM |
Automated Teller Machines |
| ATS |
Automated Trading Systems |
| BCP |
Basel Committee’s Core Principles for Effective Banking Supervision |
| BdF |
Banque de France |
| BTANs |
Bons du à faux fixe et à intàrêt annuel |
| BTFs |
Bons du Tràsor à faux fixe et à intàrêts precomptàs |
| CAR |
Capital Adequacy Ratio |
| CB |
Commission Bancaire |
| CCA |
Commission de Contrôle des Assurances |
| CCAMIP |
Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance |
| CCMIP |
Commission de Contrôle des Mutuelles et des Institutions de Prévoyance |
| CDC |
Caisse dés Depôts et Consignations |
| CDD |
Customer Due Diligence |
| CDGF |
Conseil de Discipline de la Gestion Financiere |
| CEA |
Comité des Entreprises d’Assurance |
| CECEI |
Comité des Établissements de Crédit et des Entreprises d’Investissement |
| CEL |
Compte Épargne Logement |
| CESR |
Committee of European Securities Regulators |
| CFT |
Combating the Financing of Terrorism |
| CIRCE |
Charte Interbancaire Regissant les Conditions d’échange |
| CIS |
Collective Investment Schemes |
| CMF |
Conseil des Marches Financiers |
| CMT |
Conseil des Marches a Terme |
| COB |
Commission des Operations de Bourse |
| CPSS |
Committee on Payment and Settlement Systems |
| CPSIPS |
CPSS’s Core Principles for Systemically Important Payment Systems |
| CRBF |
Comite de la Reglementation Bancaire et Financiere |
| CRI |
Centrale des Reglements Interbancaires |
| CSD |
Central Security Depository |
| DIF |
Decisions et Informations Financieres |
| DOM-TOM |
Departements et Territoires d’Outre-Mer (Overseas departments and territories) |
| ECB |
European Central Bank |
| EEA |
European Economic Area |
| EMU |
European Monetary Union |
| EU |
European Union |
| FATF |
Financial Action Task Force |
| FGD |
Fond de Garantie des Depots |
| FIU |
Financial Intelligence Unit |
| FSAP |
Financial Sector Assessment Program |
| FSSA |
Financial System Stability Assessment |
| FT |
Financing of Terrorism |
| GECO |
Gestion Collective |
| GSIT |
Groupement pour un Système Interbancaire de Telecompensation |
| IAIS |
International Association of Insurance Supervisors |
| IAS |
International Accounting Standards |
| IASB |
International Accounting Standards Board |
| ICP |
Insurance Core Principles |
| IFRS |
International Financial Reporting Standards |
| IGF |
Inspection Générale des Finances |
| IOSCO |
International Organization of Securities Commissions |
| JORF |
Journal of the French Republic |
| LEP |
Livret d’Epargne Populaire |
| LIFFE |
London International Financial Futures Exchange |
| MATIF |
Marché à Term International de France (French Financial Future Market) |
| MFP |
Monetary and Financial Policies |
| MINEFI |
Ministry of Economy, Finance, and Industry |
| ML |
Money Laundering |
| MONEP |
Marché des Options Négociables de Paris (Paris traded options) |
| MOU |
Memorandum of Understanding |
| NPL |
Nonperforming loans |
| OATs |
Obligations Assimilables du Trésor |
| OF |
Obligations Foncieres |
| OPSR |
Objectives and Principles of Securities Regulation |
| OTC |
Over-the-Counter |
| PEA |
Plan d’Épargne en Actions |
| PEL |
Plan d’Épargne Logement |
| PERP |
Plan d’Épargne Retraite Populaire (Retirement plan) |
| PNS |
Paris Net Settlement system |
| POS |
Point of Sale |
| RGV |
Relit Grande Vitesse |
| ROA |
Return on assets |
| ROE |
Return on Equity |
| ROSC |
Report on Observance of Standards and Codes |
| RSSS |
CPSS/IOSCO Recommendation for Securities Settlement Systems |
| RTGS |
Real-Time Gross Settlement systems |
| SCP |
IOSCO’s Core Principles of Securities Regulation |
| SCSS |
Securities Clearing and Settlement Systems |
| SEPA |
Single European Payments Area |
| SFSA |
Savings and Financial Securities Act |
| SIPS |
Systemically Important Payment Systems |
| SIT |
Système Interbancaire de Télécompensation (French automated clearing house for retail payments) |
| SRDs |
Service de réglement différé (Deferred settlement positions) |
| SSS |
Securities Settlement Systems |
| STR |
Suspicious Transaction Report |
| SWIFT |
Society for World-wide Interbank Financial Telecommunication |
| TARGET |
Trans-European Automated Real-time Gross settlement Express Transfer system |
| TBF |
Transferts Banque de France |
| TFT |
Trade For Trade gross settlement system for securities |
| TIP |
Titre Interbancaire de Paiement |
| TRACFIN |
Treatment of Information and Action Against Clandestine Financial Circuits |
| UCITS |
Undertakings for the Collective Investment of Transferable Securities |
| UN |
United Nations |
| UNSCR |
United Nations Security Council Special Resolution |
Executive Summary
France’s financial sector is strong and well supervised. On present analysis, no weaknesses that could cause systemic risks were identified. The strength of the system is supported by the financial soundness indicators and the strong conformity to the supervisory and regulatory standards approved by the Basel Committee, IAIS, IOSCO, FATF, and CPSS. The degree of observance of the transparency code is high in all relevant areas.
The French banking system has been modernized and restructured over the past two decades. Consolidation among financial institutions has resulted in six large universal, vertically integrated banking groups having a strong position in the domestic market. Mutual groups have been a key driving force in the consolidation. The system has been almost entirely privatized and relieved of most of its public policy roles, although strong government influence (mainly through the administered savings schemes and tax provisions) remains. As in other industrialized countries, wholesale banking is more open to international competition than retail banking and the emphasis on “national champions” in banking may have limited the scope for cross-border cooperation and consolidation.
The banking sector is well capitalized. The reported level of NPLs was stable through the recent economic downturn. Bank profitability has improved markedly over the past decade and is in line with average euro area levels. Stress test results corroborated the sector’s resilience.
Systemic vulnerabilities in the important insurance sector are well contained. The sector showed resilience to recent shocks (for example, the significant fall in equity prices, historically low interest rates, and natural catastrophes), and available sector soundness indicators and stress test results are satisfactory. Additional sources of stability include conservative investment portfolios, the success of the life sector in shifting investment risks to policyholders, and limited domestic provision of reinsurance.
Securities markets are large and sophisticated. Exchange-traded equities and derivatives markets have been restructured. The government debt market is large and the corporate debt market has been growing rapidly since the introduction of the euro.
Notwithstanding the strengths of the French financial sector, a number of issues—many of which are also found in other advanced countries—emerged from the FSAP and deserve the authorities’ attention (the key recommendations are summarized in Box 1):
Concentration in banking may have reached a point where further consolidation could intensify concerns over the scope for collusion and long-term stability where many banks could be considered “too big to fail.”
Banks’ large and growing portfolios of fixed-rate residential housing loans could represent a longer-term risk in the event of large increases in funding costs and/or a significant fall in real estate prices. However, short-term vulnerabilities and household debt remain low.
Some administered savings schemes and other policy measures give rise to costs and impede financial market innovation. These schemes are not well targeted to achieve intended social goals, and are not well aligned with current priorities, such as strengthening the pension system.
The banking system’s rapid accumulation of capital strengthens banks’ resilience. This accumulation is harder to control for mutual banks, given their legal restrictions on remuneration of their members. And, for all banks, it could encourage expansion through expensive takeovers and risky new ventures.
The supervisory system of the financial sector is composed of specialized segments. Recent steps to streamline the supervisory structure are welcome, but coordination mechanisms need to be adapted following the changes. Additional steps should be considered in the future as cross-sectoral financial groups become more prevalent.
Government and industry representation in the supervisory process can give rise to interference and at least the appearance of conflicts of interest. The Ministry of Finance retains full responsibility for issuing prudential rules for banking, certain investment services providers, and insurance (although the relevant supervisory authorities are fully consulted). It also participates in the AMF body that hears sanction proceedings affecting security market participants. The presence of industry representatives raises other conflict issues.
The insurance industry is facing a number of challenges over the medium term. Key challenges facing the industry include the possibility of a sharp and sustained increase in interest rates, and the adoption of new IFRS standards. As in other countries, regulation of the reinsurance sector is relatively weak. The authorities are working on preemptive measures, such as the refinement of risk-management practices and an EU-wide initiative to strengthen the regulatory framework for reinsurance.
The consolidation of the French stock and futures markets with others in Europe has increased the importance of effective cooperation across national jurisdictions. Moreover, the authorities face the challenge of adjusting to and effectively implementing the significant regulatory overhaul that took place in late 2003.
The infrastructure for clearing and settlement of payments and securities is generally sound and modern. However, there is some room for improvement in the clearing and settlement of retail payments and securities, where the multilateral netting systems lack fully adequate safeguards to ensure timely settlement in case of default.
The overall legal and institutional framework for AML/CFT is comprehensive. France maintains a high level of compliance with the FATF 40+8 Recommendations, and has gone beyond the standard in a number of areas, such as sectoral coverage and reporting requirements for the import and export of monetary instruments. However, further improvements could be achieved in some areas, mainly: the implementation of UN Security Council Special Resolution on terrorism financing (an issue common to other EU countries); the overall quality of suspicious transactions reporting (STR); AML/CFT regulation, supervision and enforcement for sectors other than credit institutions and certain investment firms; and criteria for when financial institutions should exercise increased diligence.
Summary of Key Recommendations
Banking issues
Ongoing efforts to reform the government’s influence over savings allocation through various schemes and fiscal incentives should be accelerated with the medium-term objective of their orderly phase-out. In the short term, the focus should be on reducing the distortions caused by the schemes and realigning them with current priorities, for example, by reducing the incentives to save for housing, which would make personal pension schemes more attractive. Other measures, required in their own right and also facilitated by the current low interest rate environment, could include eliminating the “ni-ni” rule (which prohibits the payment of interest on demand deposits and charging for checkbooks) and relaxing the limit on “usurious” lending rates.
Given the current degree of concentration in the financial system, continued vigilance is needed to preserve a healthy level of competition. Ongoing efforts to improve disclosure and pricing transparency requirements for banking services will foster competition and should be continued. Separating La Poste’s banking activities and subjecting them to standard prudential requirements is welcome. However, it must compete on a “level playing field” with other banks in terms of its tax status and costing its use of postal facilities. Consideration should be given to its eventual privatization. Competition at the retail level and the availability of financial services could further be enhanced by moving away from the notion of “national champions” and introducing a positive credit registry.
Corporate governance and risk taking of banks need to be monitored carefully, particularly when they expand into unfamiliar activities. Potential pressure on banks to over-expand could be eased by reducing barriers to the return of profits to owners. It would also help to reduce legal impediments to changes in ownership structure and to encourage financial institutions to increase the share of their equity held in negotiable form.
Improving creditor legal rights would facilitate the provision of credit. The ongoing reform of the corporate bankruptcy legislation should help clarify and limit the liability of creditors, while also facilitating the restructuring of troubled companies. In addition, banks should be allowed to write off nonperforming loans without jeopardizing their legal claim on the debtor.
Insurance
Regulations on corporate governance, internal controls, and risk management should be upgraded and improved. Adding supervisory staff may help speed up harmonization of the supervisory and regulatory framework across the industry. The Ministry of Finance should delegate to the supervisory agency the authority to issue regulations, as it is already the case in other supervisory agencies.
The supervision of the reinsurance sector should be strengthened and France should anticipate the main elements of recent Eu initiatives in this area.
Securities market
The effectiveness of the securities regulator could be strengthened by requiring (rather than just authorizing) cooperation across authorities and removing the government’s presence from the sanctioning commission.
Minimum standards of conduct for marketing collective investment schemes (mutual funds); the regulator’s resources to inspect investment service providers, especially CIS depositories; and its powers to oversee audits of public companies should be enhanced. The timeliness of public disclosure of insider transactions should be strengthened.
Payment and securities settlement systems
Measures should be taken to protect the financial system against potential disruptions that arise in the multilateral netting systems by implementing as soon as possible appropriate safeguards to comply with international standards.
An analysis of concentration risk should be undertaken, given the prevalence of tiering in some systems. The analysis may suggest institutional changes to reduce tiering without loss of efficiency.
AML / CFT
The legal and regulatory framework should be strengthened to complete the implementation of UN Security Council Special Resolution 1373 on terrorist financing and to align the suspicious transaction reporting requirement with predicate offenses for money laundering.
Further guidance should be provided to reporting entities, including those in the Overseas Departments and Territories, to improve the detection of suspicious transactions and the rate and quality of their reporting.
Regulation and supervision of AML/CFT provisions for sectors other than credit institutions and certain investment firms should be strengthened, and corresponding resources of the relevant agencies increased. Enforcement efforts vis-à-vis unlicensed informal funds transfer businesses should be reviewed and monitored more closely. Provisions regarding increased diligence, and those regarding the application of AML/CFT requirements to branches and subsidiaries located abroad, should be enhanced.