General

1. This update of the 2001 MAE¹ assessment of compliance by France with the Basel Core Principles for Effective Banking Supervision was performed during the 2004 assessment of France in the context of the FSAP. The assessment was conducted from January 28–February 10, 2004. The assessment covered the activities of the key banking regulatory and supervisory bodies in France, in particular the Banque de France (BdF), the Commission Bancaire (CB), the Comité des établissements de Crédit et des Entreprises d’Investissement (CECEI), and the Comité de la Réglementation Bancaire et Financière (CRBF). The updated assessment was prepared by Jan Willem van der Vossen, Monetary and Financial Systems Department (MFD).

Information and methodology used for assessment

2. The 2001 BCP assessment performed by MAE, showed a very high level of compliance with the BCP, with “compliant” gradings for 21 out of 25 BCPs. The four BCPs which had not been graded “compliant” had been graded “largely compliant” or “largely compliant—improvement underway.” The 2004 assessment was prepared on the basis of the Basel Core Principles Methodology, the April 2000 self-assessment by the French authorities, the August 2001 MAE assessment, information provided by the French authorities how the recommendations of the 2001 assessment had been addressed, and the response to the pre-FSAP questionnaire. Furthermore, the mission studied laws and regulations relative to banking regulation and supervision. Discussions were held with representatives of the regulatory and supervisory agencies, and with representatives of the major banks, rating agencies and of the accounting and auditing profession.

3. The mission also consulted the Annual Reports and Official Bulletins of the BdF, the CB, the CECEI, and the Conseil National du Crédit et du Titre (CNCT), websites of the major banking groups, a Cour des Comptes report on the government’s intervention in the financial sector crisis, L’Intervention de l’État dans la Crise du Secteur Financier, a KPMG publication on comparative bank performance data in the EU, rating agency reports, and other sources. In addition, the authorities provided information notes on specific topics, for instance compliance of the French accounting system with IAS, and the institutional structure of the system for financial sector regulation and supervision.

4. The authorities were very open and cooperative, made excellent preparations for the meetings of the mission, and provided helpful post-mission information.

Market structure overview²

5. The French banking system, which has been modernized and restructured over the past two decades, is large, sophisticated, and of international importance. The system is dominated by six vertically integrated universal banks and their subsidiaries. Four of the six are organized on a mutual basis. Further consolidation of the sector could pose a range of challenges, including stability concerns that many banks are “too big to fail.” Two large financial institutions, La Poste and the Caisse des Dépôts et Consignations (CDC), remains in government ownership.

Preconditions for effective banking supervision

Principle-by-principle assessment

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

Principle 1.	Objectives, autonomy, powers, and resources
	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	See descriptions of principles 1 (1) – (6)
Assessment	See assessments of principles 1 (1) – (6)
Principle 1(1).	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks.
Description	The main legislative basis of financial sector supervision in France is the COMOFI, which compiles the Banking Act 1984, as amended in 1996 by the Financial Activity Modernization Act (FAMA 1996), the 1999 Savings and Financial Security Act (SFSA 1999), and the 2003 Financial Security Act (Loi de Sécurité Financière, LSF). The COMOFI identifies and clearly regulates the three authorities separately responsible for the three main banking supervisory functions: (a) regulation: Minister in charge of the economy, (b) licensing: CECEI, and (c) supervision: CB. The BdF, the CB, and the CECEI are closely connected through joint staff and chairmanship (see also CP 1(2)). The legislative framework for financial supervision, as currently compiled in the COMOFI, has been recently revised to take account of new developments and to accommodate institutional streamlining.
	The CB is an “independent administrative authority” responsible for the supervision of individual credit institutions (banks and other credit institutions) and individual investment firms with regard to their financial condition, operating practices and compliance with rules and regulations. The CB has powers to issue injunctions and impose sanctions. The FSA 2003 has expanded the range of sanctions that it could impose on the retail Bureaux de Change, or door-to-door selling of financial services (COMOFI, Articles L.520-3 and L.341-17 respectively).
	Under the FSA 2003, the MoE is now directly responsible for setting regulations for credit institutions and investment firms, notably also covering internal controls, minimum capital, and management standards. Previously the authority to issue prudential standards was vested in the CRBF, with formal approval by the MoE; the CRBF has issued a broad network of regulations on all aspects of prudential supervision. In particular, all relevant regulations, for instance on licensing, capital adequacy, liquidity, internal controls, risk diversification, reporting, and other intervention mechanisms have been issued. COMOFI, Art. L.611-1 now vests this authority in the MoE. The MoE also chairs the Comité de la Réglementation Comptable (CRC), which sets accounting rules for, inter alia, banks, investment firms and financial holding companies. Before regulations are issued, the Comité Consultatif de la Législation et de la Réglementation Financières (CCRLF) and the Autorité des Marchés Financiers (AMF) with regard to investment firms should be consulted. Regulations issued by the MoE may not infringe upon the jurisdiction of the AMF (COMOFI, Art. L.614-2). The CCLRF, together with the Comité Consultatif du Secteur Financier (CCSF) are consultative bodies with cross sector membership and with industry membership. The CCSF may issue recommendations and provide advice on general matters relating to the financial sector, upon the initiative of its members, or of the MoE. The CCLRF advises the MoE on all draft regulations with regard to financial matters and draft EU directives, except in areas under the competence of the AMF (COMOFI L614-3). The composition of the CCRLF is to be established by a decree of the Council of Ministers.
	Under the COMOFI (Articles L.612-1–L.612-5), the CECEI is responsible for granting licenses, authorizations, and exemptions for banks and investment firms (except asset management firms). When a license is withdrawn as a sanction, the CB is the competent authority. The CECEI may obtain advice from the CB on any prudential issues that come up in the licensing process. In practice, both bodies cooperate closely on a day-to-day basis. CECEI authorization must also be obtained in case of significant changes in the situation of the institution. The latter includes restructuring of the shareholder base, changes in corporate legal form, and the appointment of senior managers. The CECEI is consulted by the Conseil de la Concurrence with regard to any change in ownership structure in a bank or investment firm which could affect competitive conditions in the banking or investment industry. The CECEI is also responsible for the inward and outward implementation in France of the EU rules on a single EU banking passport (right of cross border establishment of branches and cross-border provision of services).
	Under the new legislative framework, overall surveillance of the financial markets in which banks and investment firms operate is shared between the AMF and the BdF. The AMF, an “independent public authority” with legal personality, issues authorizations to engage in the business of an investment firm. Supervision exercised by the AMF focuses on asset management companies, and supervision of compliance with rules of conduct by investment firms and credit institutions. It specifically, (a) verifies information published by companies; (b) issues authorizations for unit trusts and mutual funds; (c) approves the program of operations of banks and investment firms when these intend to provide asset management services; and d) monitors compliance with laws against insider trading and market manipulation. It also participates in the regulation and oversight of European and international markets of financial instruments (COMOFI L.621-1). The BdF has a residual supervisory role in the negotiable debt instrument markets and monitors the unregulated money market.
	Separate legislative and institutional arrangements have been made for supervision of the insurance sector. France does not have a unified system of financial sector supervision, although arrangements are in place to assure sufficient cooperation and coordination.
	The creation and functioning of a FGD is regulated by the COMOFI Articles L.312-4 through L.312-18. The FGD has legal personality and comprises a system for the reimbursement of deposits which have become unavailable due the illiquidity of the institution. The FGD also covers bank guarantees (cautions, Art. L.313-50), as well as certain forms of investments in securities (COMOFI Articles L.322-1 and L.322-2). The FGD is funded by the participating institutions through contributions and if needed borrowings or guarantees from the members. The FGD is overseen by a Conseil de Surveillance made up of bank members of the FGD, and managed on a day-to-day basis by a directoire appointed by the Conseil de Surveillance. The overall contribution levels are fixed by the MoE, but calculations for individual bank contributions are performed by the CB, as are the pay-out levels. The FGD has an excellent website (www.garantiedesdepots.fr) which provides very clear information how the FGD functions and can be accessed. The mutual banks are also mandatory members of the FGD, and contribute to its funds (COMOFI Art. L.312-7 III). Upon request of the CB, the FGD can intervene in a bank (COMOFI Art. L.312-5 II), when a bank is considered unable to meet its obligations when due. It may also lend to, or take an equity interest in a bank in distress, and is authorized to accept participations in a mutualist structure, in exchange for assistance
	A number of elements have been put in place in the interest of adequate coordination and cooperation between the agencies responsible for aspects of banking supervision, for instance: The Collegedes Autorités de Contrôle des entreprises du Secteur Financier (CACESF), replacing the former Comité de Liaison des Autorités Monétaires et Financières (CLAMEF), in which the chairs of the CB, AMF and the CCAMIP exchange information on cross-sector issues, prepare regulatory proposals to improve cross-sector supervision, and facilitate exchange of staff to enhance a cross-sector approach to financial sector supervision (COMOFI Art. L.631-2). Chairmanship of the governor of the BdF of the Boards of the CECEI and the CB (COMOFI Articles L 612-3, and L 613-3); Representation of the governor of the BdF on the Board of the AMF (COMOFI Art. 621-2); Membership of the Boards of the three main supervisory bodies overlaps to a considerable extent (see COMOFI, L.612-3, L.613-3, and L.621-2): all three boards comprise members of the judiciary (Cour de Cassation), representatives of the MINEFI and/or the Trésor; the president of the AMF is member of the CECEI, the MoE appoints representatives of the state in all three Boards, and civil society is represented on all three Boards; Staff regularly rotates between the department of the BdF which services the CB and CECEI and other departments of the BdF; Exchange of information between the CB, CECEI, AMF, CCAMIP, the Comité des Entreprises d’ Assurance (CEA), FGD, the guarantee fund for insurance companies, market enterprises and chambres de compensation (COMOFI, Art. L.631-1); and Joint meetings are organized twice a year between the CB and the CCAMIP, or more frequently as needed, to discuss issues of common interest (COMOFI, Art. L.613-3 (3).
	In addition, the CSF 2003 has reduced the number of supervisory agencies, and has provided for better sharing of information, coordination and cooperation, for instance by appointing the chairpersons of the CB and the CCAMIP to each others’ Boards.
	Taken together, while logical and consistent with the objectives of the authorities, i.e., a specialized system for the supervision and regulation of each of the main components of the financial markets, the institutional structure could be seen as complex. The specialized “columns” for each of the sectors (i.e., banking, insurance and securities) consists of a regulatory layer, a licensing layer and a supervisory layer. Coordination is, however, enhanced by the considerable overlap in the composition of the oversight bodies and the definition of responsibilities. Within each sector, the responsibility for supervision, including problem resolution, is clearly defined. Also, as described above, a number of coordination mechanisms have been put in place between supervisory authorities. The authorities point out that in most situations, including problem situations with regard to institutions active in more than one financial sector, it will be clear which of the bodies is to function as “lead supervisor.” It is also pointed out that in practice, the officials and staff of the three supervisory authorities work closely together to resolve issues of common interest. With regard to banks, there is no doubt that the CB takes the lead in resolving any stability issues related to banks. The authorities stress that in problem situations the actual channels of action and communication become much simpler in practice, and the “unofficial” structure is fully effective.
	Examples of how the structure functions in concrete cases of problems with regard to financial institutions are mentioned under BCP 1 (4) below (cases of banks which faced serious problems which ended in either re-organization of the shareholdings, transfer of the bank’s assets to other banks, and/or the closing of the bank). Bilateral meetings between the CB and the CECEI staff take place before every regular meeting of the board of the CECEI and multilateral meetings take place at least every month between CB, CECEI and AMF services to address individual and general issues of common interest.
	Art. L.613-1 of the COMOFI states that the CB is charged with monitoring compliance with the rules and regulations and is authorized to take sanctions against cases of compliance. This authority is delineated in more detail in COMOFI Art. 613-21. An institution that has infringed upon a legal or regulatory requirement, has ignored a recommendation or warning, has not complied with an order to reestablish the sound financial condition of the institution, or has not complied with conditions attached to the license or a previous decision of the authorities, can be subject to sanctions by the CB which can include issuance of a warning, a reprimand, a prohibition to engage in specific activities, to suspend one or more managers, appoint a temporary administrator, remove one or more managers with or without simultaneous appointment of a temporary administrator, and have the institution stricken from the register, with or without appointment of a liquidator. In specific cases, payment of dividends can be prohibited, and money penalties imposed. The CB can disclose to the public sanctions taken against an individual institution.
Assessment	Compliant
Comments
Principle 1(2).	Each such agency should possess operational independence and adequate resources.
Description	Operating as an “independent administrative authority,” i.e., placed outside the regular administrative structures, the CB is a Collège of seven members, i.e., the governor of the BdF (or his/her representative), “chairman ex officio,” the president of the CCAMIP (or his/her representative), the Director of the Trésor of the MINEFI (or his/her representative), and four members appointed by the MoE, including a member of the Conseil d’Etat, a judge of the Cour de Cassation, and two members chosen for their individual expertise in banking and finance. The oversight of the CB is therefore subject to considerable checks and balances. The CB can independently issue instructions to implement regulations set by the MoE, and take a broad range of remedial actions against banks. Licensing authority is vested in the CECEI, which is also the competent authority for a number of administrative decisions with regard to banks, for instance approval of new establishments of banks, changes in management and share ownership. The CECEI is also chaired by the governor of the BdF (or his/her representative). Other members of the board of the CECEI include the Director of the Trésor of the MINEFI (or his/her representative), the Chairperson of the AMF (or his/her representative), the Chairperson of the Managing Board of the Deposit Guarantee Fund (FGD) (or his/her representative, member of the Managing Board), and eight members, including a member of the Conseil d’État, a member of the Cour de Cassation, a senior manager or ex-manager of a credit institution, a senior manager or ex-manager of an investment firm, two trade union officials representing the staff of credit institutions, and two individual experts. Also here, elaborate checks and balances have been put in place with regard to the governance of the agency. Although the chairmanship of the CECEI and the CB is by law performed by the governor of the BdF, who is appointed by the Council of Ministers for a term of six years, once renewable, the secretaries general of these two bodies are appointed for an open term by the MoE, on a proposal of the Governor of the BdF. It is thus assumed, although the COMOFI does not make this explicit, that the Secretaries General of the CB and the CECEI can be removed from their position at any time, for just cause and following the same process. The grounds for removal would not be disclosed.
	The BdF plays a pivotal role in the overall governance and the day to day operations of the CB and the CECEI. The governor also has a seat on the AMF and the CCAMIP. The CB and the CECEI are staffed and provided with logistical support by the BdF, according to an agreement between the BdF and the CB (COMOFI Art. 613-7), thus removing direct budgetary interference in the resources of the CB. The governor and two deputy governors of the BdF are appointed by the Council of Ministers for an irrevocable six year, once renewable, term. The remaining six members of the Governing Council of the BdF are also appointed by the Council of Ministers for an irrevocable renewable nine-year term. The fixed term appointments help assure the independence of the BdF, which provides the chair, primary resources and coordinates the oversight of the CB and the CECEI. Decision making within the CB is by simple majority.
	The Director of the Trésor of the MINEFI, also appointed by the Council of Ministers may, as a member of the oversight bodies of the CECEI, request that any matter for decision by the CECEI be postponed for further consideration, thus giving the MINEFI a degree of power over the agenda of the CECEI. In practice, however, there is no significant evidence of interference by the authorities in the operational independence of each agency. Both have the resources needed to carry out their mandate. The budgets of the CB and the CECEI are part of the budget of the BdF, and are thus independent from direct political interference.
	Currently, there are almost 1,200 institutions under supervision of the CB, and the CB and CECEI together have some 585 staff to perform this task. The staff of the CB and of the CECEI are highly respected by the industry. They are well trained and the CB has attracted staff with university degrees in the disciplines necessary for the work of the CB (economists, lawyers, accountants). Effective IT systems are in place to facilitate the work of the CB with regard to individual institutions and in aggregate. Salaries offered, career prospects and benefit levels seem to be sufficiently competitive to withstand competition from the private sector. Furthermore, the CB has allocated funds for training and inspection travel abroad, and has been able to attract for temporary as well as permanent assignments senior level staff from commercial banks and academic institutions to help develop its expertise on certain issues.
Assessment	Compliant
Comments	The CB and the CECEI are independent administrative authorities, and their governance is subject to checks and balances that help maintain its operational autonomy. However, they are clearly not independent from the BdF. Based on the requirements of the Maastricht Treaty, and reflected in the Charter of the BdF, “the BdF, represented by its governor, deputy governors or any other member of the Monetary Policy Council shall neither seek nor accept instructions from the government or any other body in the performance of the tasks arising from its participation in the European System of Central Banks.” The dependence of the CB and the CECEI on the BdF is not a matter of concern.
	Also, given the statutory membership of the governing bodies of the CB and the CECEI, in particular the role of the Director of the Trésor, and the role of the MINEFI in setting regulations, it is difficult to assert that policies, plans and processes are set entirely independently from the government, and that the latter is not involved in operational supervisory and regulatory activities. Privatization of the government-owned banks has reduced the scope for conflict of interest, and there is no clear evidence that the participation of the Trésor in supervision and regulation has been a substantial issue in the past. Nevertheless, this involvement contrasts with the recent trend in many European countries toward greater institutional independence of the supervisory and regulatory agencies.
	In view of the size of the French banking system, the staff of the CB and the CECEI appears somewhat limited. Nevertheless, senior management of the CB and the CECEI are firmly of the view that budgets and staff are adequate, and that excessively rapid expansion could lead to problems of absorption.
Principle 1(3).	A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision.
Description	The COMOFI (Articles L 612-1, L 511-10 and L 511-15) clearly grants the CECEI the exclusive authority to issue and withdraw banking licenses. The CECEI may attach conditions to the license, that go beyond minimum standard prudential requirements. Based on compliance with the terms and conditions of the original license, or when the institution requests, the CECEI can withdraw the license. Only the CB is authorized to withdraw the license as a sanction.
	The COMOFI also sets out the conditions that must be met for the issuance of a license, including the program of operations (business plan) of the bank, its proposed technical and financial resources, the suitability (fit and properness) of the managers and contributors of the bank’s capital and where applicable their guarantors. Any substantive change in the way a bank meets the condition must receive prior approval of the CECEI. This can include the acquisition of capital shares that cross or fall below a threshold of 10, 20, 33, and 50 percent (the latter as a measure of full control over the bank), changes in the legal form of the institution, and redefinition of the scope of operations.
	The CECEI is to be notified in advance of intentions of banks outside France to open representative, liaison or information offices in France, must be informed immediately when persons are appointed to positions with powers to determine the policies of a bank, and after any changes to the capital structure of the bank.
	The CECEI is also the implementing agency for France of the single European banking passport, vets French banking institutions’ plans to set up branches in other EU countries, and must be notified in case of cross border provision of services in other EU countries.
	Based on the COMOFI (Arts. L.613 vv), the CB has full supervisory powers over licensed institutions, including the powers to gather information from banks in the form of periodic reports, ad-hoc information requests, off-site analysis, on-site inspections, and imposition of sanctions including withdrawal of the license.
	Under COMOFI Art. L.611-1 vv., the key regulatory powers are granted to the MoE. The MoE may issue regulations on capital of banks, acquisition of shareholdings, setting up of networks, acquisition of equity participations, solvency, liquidity, financial condition, disclosure of information to be sent to the supervisory authorities, rules on types and conditions of credit, deposit protection, rules on accounting, internal controls, IT, and safety of information.
	Regulations are adopted after consultation of the CCLRF. In case the CCLRF issues a negative opinion on the proposed regulation, the MoE is obliged to seek a second opinion of the CCLRF before the regulation can be adopted.
Assessment	Compliant
Comments	New regulations are generally prepared in close cooperation with the banking industry and thus implemented smoothly.
Principle 1(4).	A suitable legal framework for banking supervision is also necessary, including … powers to address compliance with laws as well as safety and soundness concerns.
Description	The legal framework for banking supervision in France is laid down in a number of statutes and regulations, primarily the COMOFI, which authorize the CB, the CECEI and the MoE to perform regulatory, administrative and supervisory functions with regard to the banking sector in France. Art. L.612-1 charges the CECEI with the issuance of bank licenses or exemptions from the licensing requirements as provided for in the law and regulations. Art. 613-1 charges the CB with monitoring compliance with the legal and regulatory requirements for banks and to apply sanctions against compliance. The CB inspects the business operations of the bank, monitors its financial condition, and watches over the proper conduct of the banking business.
	Supervision is applied at three levels: (a) continuous supervision by data analysis (“off-site”); (b) supervision by inspection visits “on-site”); and (c) general oversight of the banking system. Techniques designed and implemented through both off-site and on-site supervision pursuant to those powers enable the CB to assess institutions’ compliance with the applicable statute and regulations, as well as prudential and safety and soundness concerns.
	The CB has unrestricted access to all aspects of an institution’s operations, its subsidiaries and direct and indirect controlling shareholders (COMOFI, Articles L.613-8, L.613-10 and L.613-11) and to require corrective action when necessary (COMOFI, Articles L.613-15 and L.613-16). Failure to implement the necessary remedies exposes the bank to progressively harsher sanctions, which the CB may disclose to the public (COMOFI, Art. L.613-21).
	The CB can issue a recommendation or an injunction to “take all necessary measures within a given period to restore or strengthen its financial equilibrium or to rectify its management methods.” It can also appoint a provisional administrator “to whom will be transferred all the powers for administering, managing and representing” the credit institution (COMOFI, Art. L.613-18); or appoint a liquidator (COMOFI, Art. L.613-22) in case an institution’s authorization is withdrawn. COMOFI Art. L.613-21 provides that where a credit institution has contravened a law or regulation relating to its business (including failing to respect commitments given at the time of the granting of an authorization by the CECEI), has not complied with an injunction or has not heeded a warning, the CB may impose sanctions, that is, a warning, reprimand, prohibition of certain operations, temporary or permanent removal of senior executives, with or without the appointment of a provisional administrator, and withdrawal of the institution’s authorization—with or without the appointment of a liquidator. These disciplinary sanctions may be appealed to the Conseil d’Etat.
	The FGD also plays a role in dealing with weak banks. Thus, “the FGD shall intervene at the request of the CB as soon as it (the CB) finds that one of the member institutions no longer able to repay funds received…” (COMOFI Art. L.312-5). Furthermore, at the proposal of the FGD may also take preventive action against a credit institution whose situation gives rise to fears that deposits… may become unavailable at some time in the future….” (COMOFI Art. L.312– 5). Moreover, the COMOFI Art L.613-34, provides that “The CB shall hear the Chairman of the managing board of the FGD for any matter concerning an institution in respect of which it envisages seeking the intervention of the FGD or proposing to the FGD that it should take preventive action. The CB shall also hear the Chairman of the managing board at his request.” The immediate closure of a troubled credit institution can be achieved once a temporary administrator has been appointed by the CB, the administrator himself having the capacity (and responsibility) to declare the closure.
	With the 1999 Savings and Financial Securities Act (SFSA), the framework for the orderly and transparent exit of troubled banks has been strengthened. In particular, the law enhanced the CB’s ability to enforce remedial actions (such as the removal of management) with minimum interference of the courts. It also authorized the FGD to provide financial support to a potentially insolvent institution. This should facilitate the rapid transfer of a troubled bank’s deposits to sound banks, thus limiting risks of contagion, and promoting more transparent management of its assets.
	Corrective actions can be preceded by a more detailed investigation by the CB including collection of additional information, or a full on site inspection, and a meeting with the manager and internal auditor. A second layer of action includes the formulation of recommendations addressing specific fields, and asking for corrective measures. Subsequently the CB examines the situation of the bank with a view to either; (i) issuing a formal injunction; or; (ii) taking a disciplinary sanction, ranging from a warning to the compulsory resignation of a manager, appointment of a temporary administrator, or withdrawal of the license and liquidation. Over the past years, the authorities have shown their ability to take strong action against banks: in November 1997 an institution whose sole business was the provision of guarantees, Mutua Equipement, was delicensed and liquidated. In the early 1990s, apart from its intervention in Crédit Lyonnais and in other public sector institutions such as regional development corporations, which were placed under temporary administration by the CB and in most cases liquidated, the CB had to intervene in banks with heavy exposure to the real estate sector, such as Banque Pallas Stern (1995) or with specific problems, such as, at the end of 1994, Banque Commerciale Privée. The business of the latter bank was transferred to a new bank, created for this purpose with an insurance company as its main shareholder. In 1997 the Banque Opera and Laficau were delicensed and ultimately their activities taken over by an insurance company, GAN. Transmedia was an institution specialized in the administration of means of payment. When its capital fell below the minimum, and shareholders failed to raise new capital, the institution was delicensed in November 1998.
Assessment	Compliant
Comments
Principle 1(5).	A suitable legal framework for banking supervision is also necessary, including… legal protection for supervisors.
Description	The CB and the CECEI operate under general French administrative law. As neither are legal persons, they cannot incur liability in their own right. Actions against the acts or omissions of the CB or the CECEI need to be brought against the French state. In cases where a suit is brought against an official of the CB or the CECEI, the case is redirected against the state. Furthermore, the state may incur liability by the CB’s or CECEI’s acts or omissions which can be qualified as serious negligence (confirmed on two occasions in the last two years).
	Senior officials and employees of the CB, CECEI, and of the BdF’s Credit Institutions and Investment Firms Division are protected by general principles of administrative law applicable to the persons in charge of a public function. A Public Servant may not incur personal liability for an administrative error committed in the exercise of his/her public office. In those instances where such senior officials and employees are pursued for actions taken in the course of their duties, they are entitled to claim their costs from their employer. Only in case of an alleged personal fault (e.g., abuse of a client) or criminality, the Public Servant may be held liable. Nonetheless, should he/she be able to argue convincingly that no personal fault is involved, he/she may request the employer to cover the legal expenses.
Assessment	Compliant
Comments	The collegial nature of the CB’s decision-making provides a further layer of protection against suits aimed at any one of its members. Moreover, both the CB and the staff of its General Secretariat are adequately protected against the legal costs of defending legitimate actions. Thus, legal protection for supervisors is satisfactory at present.
Principle 1(6).	Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	Art. 60 of the 1999 SFSA strengthened cooperation between domestic supervisory authorities, by creating a joint body, the CACESF, comprising the Chairmen of the CB, the AMF and the CCAMIP, within which these agencies can exchange information. Operationally, cooperation has been enhanced and formalized by a charter signed by the CB and the CCAMIP in October 2001. Aside from facilitating the exchange of information, this cooperation has for instance led to a joint study on the development of credit derivatives and a joint survey (with the AMF and the BdF) on credit risk transfers. It has also provided a basis for coordinated on– site inspections in banking and insurance linked businesses.
	Art. L.631-1 of the COMOFI permits the CECEI, the BdF, the CB, the CCAMIP, the AMF and the FGD to exchange information, subject to the professional secrecy obligations of each organization. Under this provision, in conjunction with Art. L.312-5 of the COMOFI, the CB is authorized to notify the FGD of the weak condition of a bank and request the FGD to intervene.
	Art. L.613-12 of the COMOFI provides for exchange of information between the CB and the banking supervision authorities of a country within the European Economic Area (EEA). In particular, when the authorities of an EEA country wish to verify information concerning a “legal person” which controls a credit institution or investment firm registered in France, the CB is required to either perform this verification itself on behalf of the requesting state, or permit the foreign supervisory authorities to do so. Equally, where a “legal person” has its registered office in an EEA State, on-site supervision may be effected by the CB by requesting the foreign authorities to verify the information on its behalf or, with the country’s consent, by appointing its own representatives. In the interest of effective supervision, the CB may require branches of French banks in an EEA country to disclose all relevant information, and, after informing the country’s supervisory authorities, perform an on-site inspection itself.
	Exchange of information with the supervisory authorities of the EEA countries is facilitated by the harmonization of the rules on professional secrecy of supervisors within the EU, notably the Second Banking Coordination Directive. Within this framework, the CB and the CECEI have built an extensive network of Memoranda of Understanding (MoU) to facilitate the exchange of information. The Secretary General of the CB is a member (deputy-chairperson) of the new Committee of European Banking Supervisors and of the European Central Bank’s (ECB) Banking Supervision Committee, within which EU supervisory authorities exchange information. The General Secretariat of the CB takes part in technical working parties set up by both bodies.
	In the case of EEA supervisory authorities, since the adoption of the1999 SFSA, which has been codified in the COMOFI Art. L.613-13, the CB has been vested with the power to conclude bilateral agreements with the authorities of a state not party to the EEA entrusted with duties similar to those entrusted in France to the CB and provided that such authorities are themselves bound by an obligation of professional secrecy. The objectives of this provision are (i) to permit the CB to conduct on-site inspections of establishments abroad of French banks or financial holding companies; (ii) to permit the CB to conduct, at the request of foreign supervisory authorities, on-site inspections of establishments in France of foreign banks (such inspections may be carried out jointly); and (iii) to define the modalities of the transmittal, receipt and exchange of supervisory information.
	Art. L.613-20 also authorizes the CB to share information with authorities in EEA countries, even without a bilateral agreement, provided that; (i) the foreign authority is bound by an obligation of professional secrecy subject to the same guarantees as in France; and (ii) there is reciprocity.
	The CB has concluded a number of bilateral agreements with EEA countries, among which the Czech National Bank (June 2002), the Office of the Superintendent of Financial Institutions (OSFI) of Canada (July 2002), the State of New York Banking Department (July 2002), the National Bank of Slovakia (November 2002), the Bank of Slovenia (October 2002), the Commission Fédérale des Banques of Switzerland (November 2002), the Financial Supervisory Commission of Korea (September 2003), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (May 2004).
	In general—and subject to the disclosure mechanisms described above—the staff of French supervisory authorities are bound by a professional secrecy obligation, except in cases specifically stipulated by the law. The COMOFI Art. L.641-2 provides that breaches of that obligation may be subject to criminal prosecution. Furthermore, the COMOFI, in Art. L.613-14, requires that the CB refuse any request for assistance from a foreign supervisory authority where the result is likely to be prejudicial to French sovereignty, security, economic interests, or public policy, or when criminal proceedings have been initiated on the matter at issue.
Assessment	Compliant
Comments
Principle 2.	Permissible activities
	The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible.
Description	France has a broader definition of “credit institution” than other EU countries (the definition of a bank under the Second Banking Coordination Directive includes the elements deposit taking and granting of credits for the bank’s own account).
	In Art. L.611-1 of the COMOFI, “credit institutions” are defined as “legal persons carrying out banking operations as their usual business.” “Banking operations” are then defined as any of the following three main categories of activities: the “receipt of funds from the public, credit operations, and making available to customers or managing means of payment.” Art. L.511-9 then further refines the definition of “credit institutions,” by setting out the various types of banking operations in which each category (i.e., “banks,” “mutual or co-operative banks,” “savings and provident institutions,” “municipal credit banks,” “financial companies” or “specialized financial institutions”) is permitted to engage. The definition of credit institutions thus includes institutions that provide credits, but do not collect deposits. This helps to explain the rather high number of institutions licensed by the CECEI and supervised by the CB. Art. L.511-5 of the COMOFI states that “it shall be prohibited for any person other than a credit institution to carry out banking operations on a regular basis.” Art. L.531-10 of the COMOFI provides that “no one other than an investment service provider may provide investment services to third parties as its usual business.” The COMOFI, in Arts. L.511-8 and L 531-11, prohibit – under threat of criminal liability (see COMOFI Articles L.571-3 and L.573-2) – the use of business names, advertising or any expression wrongfully implying that, or causing confusion whether an institution is an authorized credit institution.
	The CECEI’s authority under Art. 511-10 of the COMOFI to impose terms and conditions on a banking license, and that of the CB to impose sanctions on an institution where such terms and conditions are not respected (COMOFI Art. L.613-21), allow considerable control by the authorities over the nature of a bank’s business.
Assessment	Compliant
Comments
Principle 3.	Licensing criteria
	The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization’s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.
Description	The CECEI reviews several hundred applications per year, including those for new licenses, changes of license, changes in ownership and approval of new managers. In 2002, the CECEI approved 20 new licenses, of which 14 related to new institutions and 6 related to restructuring operations or changes in category of institution, 97 withdrawals of licenses, of which 38 cases of cessation of business, and the remainder related to restructuring or change of category. In 79 cases the CECEI approved changes in shareholder structure of which 31 cases in which control over the institution changed hands, including the acquisition of Credit Lyonnais by Crédit Agricole in 2003. Almost 390 requests for approval of management appointments were received. The COMOFI (Art. L.511-10 – L.511-13) provides that before granting a license, the CECEI must: (a) ensure that the institution meets the minimum capital requirement (Art. L511-11) and CRBF Regulation 92-14 as amended); (b) ensure that there are two senior managers of integrity and experience responsible for the overall direction of the institution’s conduct of business (Art. L.511-13); (the CECEI describes in more detail in its annual report what requirements must be met by the managers of a bank); (c) review the business plan (in coordination with the CB) and the available technical and financial resources (Art. L.511-10); (d) assess the suitability (fit and properness) of the investors (or their guarantors) (Art. L.511-10); and (e) “assess the applicant undertaking’s capacity to achieve its development objectives in a manner compatible with the smooth working of the banking system and which offers sufficient safety for its customers” (Art. L.511-10). The COMOFI (Art. L.511-10), further provides that the CECEI “may withhold authorization when it is likely to be hindered in the exercise of its supervision of the applicant undertaking either by the existence of equity links, or links of direct or indirect control between the undertaking and other natural or legal persons, or by the existence of laws or regulations of a EEA country when one or more of the above– mentioned persons are governed by such laws or regulations.” The minimum capital requirement (Art. 1 of CRBF Regulation 92-14) is EUR 5 million, EUR 2.2 million, EUR 1.1 million or EUR 1 million, depending on the type and characteristics of the credit institution.
	Although there is no legal requirement to do so, the CECEI consults the CB on license applications, a practice underpinned by the fact that the governor of the BdF is the Chairman of both the CECEI and the CB. Similarly, an institution’s adherence in practice to a business plan submitted to the CECEI is determined by the CB during its ongoing supervisory activities. The information needed to take a decision on the granting of the license is largely collected through CECEI’s application form (“Authorization Dossier”) which requests specific information on: (a) management; (b) proposed management and control procedures; (c) strategy; and (d) the origin of the initial capital. The CECEI may insist on increased initial capital in light of the business plan. Part IV of the Authorization Dossier, entitled “Declarations to be forwarded by the Contributors of Capital” requires shareholders to confirm that they are aware of Art. L.511-42 of the COMOFI, which allows the governor of the BdF, in his capacity as chairman of the CB, to call upon shareholders to contribute further capital if needed, in light of the financial condition of a credit institution.
	A centralized database on “fit and proper” characteristics of banking and financial institutions managers (FIDEC) has been created and is operational.
Assessment	Compliant
Comments	Although a formal requirement to do so is not in place, the CECEI routinely requests evidence of a EEA home supervisor’s prior consent to establish a subsidiary in France. The introduction of a formal regulation on this matter would be desirable.
Principle 4.	Ownership
	Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties.
Description	CECEI’s prior authorization must be obtained whenever the result of the intended actions of a person, or a group acting in concert would be: (a) to acquire or relinquish effective control over the management of the institution or firm; or (b) to acquire or relinquish 33.3 percent, 20 percent or 10 percent of the voting rights of the bank (this requirement is omitted in the case of an internal restructuring by French or other EEA groups) (CRBF Regulation 96-16, Art. 2 (1)). Also, see description under BCP 3.
	CRBF Regulation 96-16 also requires that each bank files with the CB information on each holder of at least 10 percent of its outstanding capital stock and gives to the CB the right to exact all necessary information on holders of between 0.5 percent and 10 percent of such outstanding capital stock. In addition, any acquisition of 5 percent or more of the institution’s (or firm’s) voting rights must be immediately reported to the CECEI. The latter may also require that an institution (or firm) identify those shareholders declaring holdings of between 0.5 percent and 5 percent of an institution’s voting rights (Art. 3).
	A transaction effected outside France which changes the allocation of an indirect equity interest in an institution or firm subject to CRBF Regulation 96-16 (Art. 2.1) must be reported immediately to the CECEI, which may decide that the effect of the transaction is sufficient to warrant the re-examination of the regulatory position of the institution (or firm) (Art. 2.2). With respect to those credit institutions which are listed on regulated markets, the COMOFI (Art. L.511-10) states that where a natural or legal person intends to initiate a take over bid – friendly or hostile– over such credit institutions, this person is compelled to inform the Governor of BdF, as Chairman of the CECEI, eight business days before the take over bid is filed with the AMF and/or made public.
	If the CECEI does not render its decision within a period of three months, a positive decision is considered to have been taken. Where a transaction is completed without first obtaining the required authorization from the CECEI, the COMOFI (Art. L.611-2), provides that the CECEI may apply to the courts to have the voting rights applicable to the shares in the transaction suspended.
	CRBF Regulation 96-16 requires that the prior approval of the CECEI be obtained (or that it be notified) in the case of proposed changes that would result in a change of ownership or the exercise of voting rights over threshold levels or a change in controlling interest. Given the “collegiality” of the French system of banking supervision, there is close collaboration between the CECEI and the CB on any such proposed changes. The CECEI may reject any request for approval of a change in ownership changes, but must state its reasons.
Assessment	Compliant
Comments
Principle 5.	Investment criteria
	Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.
Description	A participation (i.e., an equity interest over 10 percent) in another corporation (except in a financial institutions or an EEA registered insurance company), may not exceed 15 percent of the bank’s own funds (CRBF Regulation 90-06, Art. 4; also see COMOFI, Art. L.511-2). The aggregate of such acquisitions may not exceed 60 percent of the bank’s own funds. These limits are applied on a consolidated basis. On the basis of CRBF Regulation 90-06 (Art. 4), the CB may authorize a credit institution to exceed one of the limits set out in Art. 2, although the excess over and above these limits are deducted from the bank’s regulatory capital.
	CRBF Regulation 90-06, Art. 3b, allows exceptions to this rule for limited periods of time, when a bank holds the stock as a result of a financial support operation, the shares are held for the account of a third party, as a result of a bought underwriting deal, or as a result of a purchase order executed on behalf of a third party.
	On the basis of CRBF Regulation 96-16, the CECEI must give its prior approval for any investments—also of banks—in a supervised institution when the acquisition leads to control over the institution, or shareholdings exceed or fall below 10, 20, or 33 percent of the votes. Any acquisition over 5 percent must be notified to the CECEI. It is also sufficient to inform the CECEI when the acquisition (i) takes place between subsidiaries of one and the same corporation; and (ii) is located within the EEA. Acquisition transactions between companies registered outside France, concerning companies subject to supervision in France but registered outside France, must also be notified immediately to the CECEI.
	There is no requirement under current French law and regulations to obtain approval from the French supervisory authorities for the acquisition of interests in banking business in EEA countries before such investments are implemented, but the CB relies on an annual survey of banking establishments outside France to identify any such transactions.
	The COMOFI, Art. L.511-7, limits in general terms the extent of nonbanking activities that may be carried by a credit institution. CRBF Regulation 86-21 further limits total revenues from nonbanking activities to 10 percent of net banking income.
	Although CRBF Regulation 90-06 sets quantitative limits on the acquisition of nonfinancial sector equity interests, it does not yet require the supervisor to review a planned acquisition below these limits beforehand. Where a transaction is viewed as unsound, the COMOFI Art. L.613-16, authorizes the CB to “issue an injunction calling upon (the credit institution) to take all necessary measures within a given period to restore or strengthen its financial equilibrium, improve its management methods or ensure the adequacy of its organization to its activities.”
	COMOFI Art. L.511-10, authorizes the refusal of a license when it is likely that the CB would be hindered in its supervision of the applicant undertaking…by the existence of equity links or links of direct or indirect control between the undertaking and other natural or legal persons…” CRBF Regulation 96-16, specifically the latter’s requirement for notification to—or prior approval by—the CECEI of acquisition of equity interests in supervised credit institutions, allows the CECEI to reject corporate structures that present undue risk to the credit institution or create an impediment against effective supervision by the CB. The CB is also aided by CRBF Regulation 90-06, in particular the quantitative limits set out with regard to nonfinancial sector equity interests.
Assessment	Largely compliant
Comments	With the implementation of Directive 2002/87/EC (“Financial Conglomerates Directive”), this prior consultation procedure will be extended to cover equity interests taken in insurance companies, either in France or in any other EEA country. In order to reinforce the French regulation in this respect, revision of the CRBF Regulation 96-16 is under preparation and will be adopted by the MoE once the new CCLRF is appointed, This amendment will require prior approval of the CECEI for the acquisition of nonfinancial equity holdings as well as for the opening by French banks of branches or subsidiaries outside the EEA. Improvement in compliance with this principle is therefore underway.
Principle 6.	Capital adequacy
	Banking supervisors must set minimum capital requirements for banks that reflect the risks the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord.
Description	Laws and regulations require credit institutions to maintain both an absolute level of minimum capital (CRBF Regulation 92-14, Art. 1) and a minimum ratio of own funds to risk weighted assets (CRBF Regulation 91-05 and 95-02). Art. L.511-40 of the COMOFI states that all credit institutions must be able at any time to prove that their assets exceed their liabilities by an amount at least equal to the minimum capital. Moreover, according to CRBF Regulation 91-05 and 95-02, credit institutions shall observe at any time a minimum 8 percent ratio of own funds to risk weighted assets, on a consolidated basis, also covering market risk exposure and off balance sheet exposure. The capital adequacy requirements apply to all types of credit institutions, whatever their legal form or their structure. Financial holding companies are also subject to the same capital requirements. In addition, the CB can require (an) institution(s) to meet requirements on a solo or sub-consolidated basis, when allocation of capital within the group is perceived to be unbalanced or inadequate (see Principles 18 and 20) and it may refuse to include certain resources in the calculation of own funds when certain conditions are not met.
	Components of capital and own funds and the method for their calculation are defined in CRBF Regulation 90-02 and further detailed in the CB Instructions 90-01 and 96-01. Tier 1 capital is restricted to core capital and general reserves. Provided they meet strict requirements with regard of stability and capacity of absorbing losses, certain subordinated debt instruments (Tier 2) are taken into account but are limited in importance. Tier 3 instruments are strictly limited to the coverage of market risks (transposition of the Basel market risk amendment of 1993).
	French requirements on capital adequacy are fully in line with the Basel Capital Accord and European legislation. The latter includes both balance sheet and off balance sheet commitments, weighted according to the Basel Capital Accord rules. The COMOFI (Art. L.613-16), moreover, enables the CB to take disciplinary action against institutions that fail to meet minimum requirements; the CECEI and the CB may also require higher solvency ratios than this legal minimum whenever they deem this justified by specific risk characteristics of a credit institution. This power can be exercised in full discretion, no binding policy or line of conduct having been published by the CECEI or the CB in this respect. Moreover, whenever overall weaknesses or negative trends should appear in the financial system or with regard to significant types of activity, the governor of the BdF can issue a formal warning to the profession (as happened for real estate financing).
	Capital adequacy requirements for banks’ market risk exposures are set according to the standardized approach (CRBF Regulation 95-02). While most French banks use the standardized method to determine the capital charges incumbent upon their market risk exposures, major banks use their own internal models. The adequacy and effectiveness of these models must be assessed and approved by the CB, which has a specialist team for assessing their adequacy and effectiveness (see Principle 16).
	At least semi-annual comprehensive reporting on solvency to the CB is mandatory. In case a credit institution fails to meet the requirements, or whenever the evolution of ratios puts it at risk of shortfalls, the CB may require the bank to take corrective action.
Assessment	Compliant
Comments	France intends to implement the new Basel Capital Accord (Basel II) in due course, and to permit banks to apply the internal ratings based (IRB) capital adequacy calculation methods and advanced operational risk capital adequacy charge calculations envisaged in the new Accord. Several working groups involving on-site and off-site supervisors have been put in place in order to prepare future implementation of the Accord. In 2003, the CB has also engaged in a series of Information Missions with major French groups in order to evaluate the state of preparation of their IRB systems. French banks have participated in the quantitative impact studies of the Basel Committee to test the effect of the new proposals on banks’ capital adequacy levels.
Principle 7.	Credit policies
	An essential part of any supervisory system is the independent evaluation of a bank’s policies, practices and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.
Description	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 investment firms supervised by the CB. It indicates that it is a key responsibility for the bank’s management and board to provide for proper credit administration, risk measurement and monitoring, and to supervise the effectiveness of the policies and procedures established for this purpose (Art.s 18-24). Internal controls should include a control system for operations and internal procedures, the organization of accounting and information processing systems, risk and result measurement systems, risk monitoring and supervision systems, and a documentation and information system. Each credit institution must set up a consolidated system adapted to the nature and volume of its activities, its size, its establishments and the various types of risk to which it is exposed.
	Specifically, the regulation requires clear criteria to be set for the granting of loans according to their nature and importance, and to conduct a comprehensive forecast analysis of credit risk and verification after the fact of the profitability of credit operations. All operations must be analyzed by a unit that is independent of the operational entity, and lending or commitment decisions must be taken by two persons. For transactions of a certain nature or size, the two persons must occupy senior positions. Commitments must subsequently be subject to strict and frequent monitoring and analysis.
	The responsibilities of the decision-making body, executive body, and of internal and external auditors are clearly defined. Lending criteria should be set by top management and compliance controlled by the internal auditors. The regulation lays particular emphasis on the need to involve the decision-making body, with the optional assistance of an audit committee, in setting lending and loss limits, and to inform it of the extent of exposure, the main characteristics and concentration of risks, doubtful debts, and the results of the internal auditor’s work. Each year, credit institutions must provide to the supervisory authorities a report on the conditions in which internal control is conducted and on the measurement and monitoring of their exposure.
	The assessment of the credit process and risk management is conducted in large part through off-site supervision (including through a study of the abovementioned annual report), through the analysis of credit portfolios using the ratings produced by rating agencies and the BdF, and through regular meetings with bank managers. It is also a main area of attention in regular on– site supervision. As described below under Principle 16, several external sources (national credit register, ratings by the BdF and by rating agencies, access to a national register of published annual accounting statements) allow CB inspectors to use information from multiple sources to help assess banks’ systems and procedures, including bank’ own credit risk assessment. On-site inspections also give adequate attention to the total exposure of debtors and to large exposures.
Assessment	Compliant
Comments	For large segments of the credit market, especially for credit to small and medium enterprises, the toughness of competition between banks appears to have often impaired banks’ capacity to secure margins that adequately reflect the credit risk involved, particularly in the event of an economic downturn. While the BdF and the CB have repeatedly stressed such risks (including through the publication of a White Paper (Livre Blanc) on this matter), and have instituted a procedure for notifying all credits with abnormal margins to the CB, only limited results have been obtained so far. This issue is revisited under Principle 8.
Principle 8.	Loan evaluation and loan loss provisioning
	Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.
Description	CRBF Regulation 97-02, in particular Articles 18 and 24, requires banks to provide for an adequate system for assessing the quality of the loans, in particular through the classifications of loans into buckets according to their internal rating system. Provisioning is required on the basis of individual reviews of credit files or a statistical analysis of past losses. There is no harmonization as to the number of buckets or the standards for internal ratings, nor specific requirements for performing loans to be broken down into normal loans and special mention loans. Instead, credit institutions must use judgment, on a case-by-case basis (except for small customers loans with similar characteristics) for assessing their risk profile and determining the level of provisions. This approach is meant to induce banks to make their own assessments and seeks to avoid the potential pitfalls of excessively “mechanistic,” “by-the-book” loan classification and provisioning procedures.
	In addition, accounting rules (Comité de la Réglementation Comptable, CRC No. 2002-03) require more detailed information regarding doubtful, “compromised” and restructured debts. New subcategories have been introduced: within the category of standard debts, a new category of restructured debts with nonmarket conditions has been created; within the “doubtful” category, a new category of “compromised” debts including restructured debts with outstanding payments and doubtful debts for which reclassification as “standard” is not foreseeable. According to these accounting rules and the former CB instruction 94-09, a debt must be classified as doubtful when it is probable or certain that the creditor will not recover all or parts of amounts due according to the contractual terms, in one of the following circumstances: (a) payments are three months overdue (six or nine months respectively for property loans or loans to local authorities); or (b) the situation of the debtor presents such characteristics that, even if no payment is yet overdue, it is probable or certain that the creditor will not recover all or parts of amounts due according to the contractual terms; or (c) legal proceedings have been filed against the debtor. Classifications by the banks are examined by the CB on a regular basis, both on-site and off-site. An effort by the CB to assess the consistency of the ratings (and rating systems) across banks is currently under way in order to prepare for the implementation of Basel II.
	Banks must seek to obtain recent and reliable information on the financial situation of their customers. In particular, they have access to a detailed Credit Register at the BdF (see Principle 16), which they also have the obligation to update. France also has a well-developed rating industry, including an in-house rating system at the central bank (cotation BdF), which is generally well used by the banks in their credit decisions and assessments.
	The level of provisions must take account of all prudently valued security (collateral or guarantees) and the costs and likelihood associated with their recovery. Provisions must be constituted as soon as a risk of nonrecovery arises. Provisions must cover at least the amount of recognized but not yet collected interest income in relation to doubtful loans. Moreover, CRC No. 2002-03 requires determining provisions using the discounting method whenever discounting impacts are significant.
	Besides the day to day and regular review and assessment of credit quality by independent credit risk divisions within the institutions (pursuant to CRBF Regulation 97-02), the main responsibility for regularly reviewing and assessing asset valuation and risk provisioning lies with the internal controller and/or auditor and the external auditors (the Commissaire Aux Comptes, CAC), the latter of whom, if they do not agree with the accounts as presented, may issue an adverse opinion or refuse to certify the accounts. However, the CACs are not required to certify the loan classification as such. During regular on-site inspections, loan classification and provisioning are reviewed by CB inspectors (comprehensively or through sampling), making use of information obtained from the Credit Register, the rating agencies and various BdF sources. These inspections often result in recommendations for re-classifications and additional provisions. The board of directors, is empowered to draw up the accounts, which are reviewed by the auditors. Where relevant, the CB may make a deduction from regulatory capital to compensate for under provisioning or, if it deeply disagrees with the accounts as presented, demand the publication of rectified accounting statements.
	As part of the quarterly reporting, the CB obtains detailed information on the loan portfolio of each credit institution. To assist in checking the risk concentration features of the portfolio, the CB has access to comprehensive databases at the BdF, which cover, inter alia, capital links between companies, management and board functions, and outstanding loan balances. Moreover, the staff of local BdF agencies can provide more detailed information about companies and individuals whenever required. The CB has built an information system that aims at a flexible exploitation of these databases, used in preparing and performing local on– site inspections.
Assessment	Compliant
Comments	As the CB strives to encourage prudent provisioning, some banks build up, in addition to specific loan loss provisions relating to doubtful loans-the amount of which can be determined on an individual or statistical basis, according to Regulation 2002-03, different types of general loan loss provisions that are not expressly provided for in the accounting rules and which are intended to cover credit risk related to nondoubtful loans. These additions to reserves are mostly not tax-deductible.
	Some loan loss provisions are recognized on the liability side of the balance sheets and are classified as contingencies and loss provisions, based on comprehensive estimations rather than statistical calculations; these provisions comprise provisions related to overall risks linked to particular countries or economic sectors. Others are recognized as a reduction of the carrying amount of the assets and are statistical provisions relating to homogeneous groups of loans, particularly in the field of consumer credits; they constitute a form of dynamic provisioning. However, the build-up of general loan loss provisions is not systematic, nor uniform, especially on the liability side.
	A system of general forward-looking (dynamic) provisioning-favored by the French authorities for the large numbers of standardized credits, based on historical and statistical analysis of large credit portfolios, was discussed at the international level notably with the IASB, which introduced such a proposal in its exposure draft on amending IAS 39 issued in June 2002. France, which has been somewhat of a precursor in this area with discussions on this issue starting as early as mid–1998, published an exposure draft proposing to introduce this provisioning approach in March 2002. However, the IASB finally decided to maintain an “incurred loss model” in its final amended IAS 39 issued in December 2003. But it introduced the possibility to use bankers’ expert judgment to estimate or adjust amounts of impairment loss. This is a first step toward recognition of a more forward looking provisioning for banks.
Principle 9.	Large exposure limits
	Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.
Description	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. This limit is to be applied on a consolidated basis for on- and off-balance sheet exposures. The aggregate of such large exposures, defined as individual exposures of 10 percent or more of the bank’s own funds, may not exceed 800 percent of own funds. A large exposure is to be measured net of collateral, guarantees or other deductions. A “single borrower,” as the basis for defining large exposures, is formulated by CRBF Regulation 93-05 Art. 3 as: “persons connected in such a way that, were one of them to encounter financial problems, the others would probably experience payment problems.”
	Regulation 97-02 requires banks to put in place adequate monitoring procedures for large exposures, actively involving top-management in the assessment process. Notwithstanding these precise prescriptions, the CB has large discretion in assessing and adapting the notion of closely related exposures to deal with the complexity of relations between companies, groups and individuals acting as managers or directors. Moreover, while institutions are required to comply with the rules on a consolidated basis, the CB may require compliance on an individual or sub-consolidated basis, especially when it considers that the distribution of own funds within a group is unsatisfactory with regard to the exposure of the institutions concerned.
	The regulation also requires that monitoring of group exposures be backed by a sector-wide and geographical analysis of the portfolio. All exposures over 10 percent (see above) must be reported to the CB on a quarterly basis (5 percent in the case of exposure to a shareholder or manager). Moreover, quarterly reporting is mandatory bearing on all exposures in excess of 10 percent of the banks’ own funds and credit institutions must declare their principal risks on a gross basis if those risks exceed 10 percent of own funds or EUR 300 million (CB Instruction 2000-07 on large exposures and exposures on a gross basis).
	The CB obtains detailed information on the loan portfolio of each credit institution on a quarterly basis. To assist in checking the risk concentration features of the portfolio, the CB has access to comprehensive databases at the BdF, which cover, inter alia, capital links between companies, management and board functions, and outstanding loan balances. Moreover, the staff of local BdF agencies can provide more detailed information about companies and individuals whenever required. The CB has built an information system that aims at a flexible exploitation of these databases, used in preparing and performing local on– site inspections.
Assessment	Compliant
Comments
Principle 10.	Connected lending
	In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.
Description	The 1966 Commercial Companies Act regulates all transactions with related parties for all corporations and fully applies to all credit institutions. These transactions require arm’s length lending, full board authorization and reporting to the annual General Assembly of shareholders of transactions between the company and a director or senior manager (including their close relatives) which is not in the line of a company’s day-to-day business or not entered into under normal market conditions. Related parties, as defined by banking regulations (CRBF Regulation 93-05, Art. 3) are persons that have capital links such as one of them exercises, directly or indirectly, exclusive or joint control or that are subject to common management, or persons connected in such a way that, were one of them to encounter financial problems, the others would probably experience payment problems (see description of BCP 9).
	CRBF Regulation 97-02 (modified by Regulation 2001-01), Art. 21, and Art. 42 (f) provide that credit institutions and investment firms should set up adequate internal control in view of monitoring and controlling risks, including for connected lending. Lending to related parties and to their parent companies, subsidiaries, significant shareholders (or their partners) must be reported under the same regulations and procedures as that for reporting large exposures whenever they exceed 5 percent of the banks’ own funds. Under the discretionary powers available to them, supervisors may also require that exposure to borrowers between whom there is no apparent link be aggregated.
	To tighten up these regulations, the authorities introduced measures (CRBF Regulations 90-02, Art. 6 ter, and 2000-09), which impose a deduction from the bank’s regulatory own funds of all commitments to shareholders or linked staff exceeding 3 percent of own funds. Some exceptions, essentially for investment grade commitments to related parties, are allowed.
Assessment	Compliant
Comments
Principle 11.	Country risk
	Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks.
Description	Banks’ country risk exposure, including credit, market risk, is regulated in CB Instruction 2001-01 on international claims, which applies to all balance sheet and off-balance sheet exposures to private or public borrowers residing in non-G10 and non-EEA countries or having a non G10 or non-EEA nationality. Also included are local claims denominated in local currencies on the private sector and short term local commercial loans. Moreover, through the CRBF Regulation 97-02, banks are required to have information and management systems that allow for proper identification, monitoring and controlling of country-risk. These policies and procedures are reviewed during the regular on-site inspections.
	Annual (semi-annual for the share held by large or internationally active banks) reports on country risk exposure except to G10 and EEA countries, are sent by credit institutions to the CB, which closely monitors exposures. Exposures are broken down by type of borrower and type of credit. The CB carries out cross studies on the basis of prudential reports.
	Country-risk provisions are not mandatory, and each credit institution is entirely responsible for the level of its reserves. Nevertheless, the CB has strongly recommended, on a case-by-case basis and if the economic situation of a given country deteriorates, to constitute what it considers to be a minimum provision. Special attention is given to country risk provisioning by both the external auditors and the CB in the audit of financial reports. The CB also pays particular attention to large international groups’ internal control systems for country risk, especially as regards procedures for setting limits and channels for issuing authorizations and centralizing loans.
	The CB also carries out regular cross studies on emerging economies or countries at risk. It also performs stress tests in order to assess the resilience of French banks to a deterioration of economic or financial conditions in emerging countries and to evaluate the potential impact of an emerging crisis.
Assessment	Compliant
Comments
Principle 12.	Market risks
	Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposures, if warranted.
Description	CRBF Regulation 95-02 and its annexes contain detailed capital adequacy rules for banks. Banks are required to retain sufficient capital to cover trading portfolio risk, exchange rate risk, and settlement risk. The CB can authorize banks to use internal models for calculation of the capital requirement for market risk. The regulations also set criteria for risk measurement and prudential limits. Market risks are covered by appropriate own funds, namely residual own funds after the solvency ratio has been covered, and own funds specifically earmarked for coverage of market risks.
	Supervision, especially for large banks and trading banks, is based on the analysis of specific returns relating to compliance with prudential requirements and on verification of control systems. On-site inspectors verify these aspects within the framework of general assignments or assignments focusing specifically on trading activities. Credit institutions may use the standard method for calculating own funds requirements or their own internal models. In the latter case, the CB must give its explicit approval after the model has been validated by a specially assembled team of experts. Until now, five models have been validated by the CB. Institutions using their own models must also apply a multiplier, which has hitherto consistently been set at a higher level than the regulatory minimum.
	Semi-annual reporting to the CB is imposed by its Instruction 96-01. Regulation 97-02 (for both credit institutions and investment firms) on internal control define strict organizational internal control requirements and set strict conditions for the recording of information on market exposure, for the measurement and monitoring of market risk and for its supervision by top management and the board of directors. Internal control systems should record trading book and foreign exchange operations on a daily basis, contain all information for assessing the related risk, and assess the capital adequacy to cover these risks daily.
	Systems accepted by the CB can be both fully fledged models, specifically agreed to by the CB, and appropriate management information systems for banks with more limited market activities. Formal agreements on model validation rely on an extensive expert report from a specialist team at the CB. Model validation is based on state of the art statistical and mathematical analysis, using VAR approaches, Monte Carlo models and other techniques. Each agreement procedure also contains extensive stress-testing of the models. Consideration must be given to maximum potential loss and maximum limits must be set for each category of risk. The systems must also be able to aggregate positions in different products and markets, at both individual and group level.
	During on-site supervision, substantial attention is given to the adequacy of systems and controls (including at times renewed testing of models), to that of limits and segmentation and to the validity of assumptions for both day-to-day measurement and stress-testing. The model validation specialists are actively involved during such on-site inspections. As a result of such reviews, the CB often makes comments or asks for changes to be made. Similarly, bi-annual returns relating to the calculation of prudential ratios are carefully scrutinized, and disciplinary action may be taken in the event of an infringement.
Assessment	Compliant
Comments
Principle 13.	Other risks Banking
	supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks.
Description	CRBF Regulation 97-02 provides for rules on all major risks, including explicitly credit, market, interest rate, and settlement and liquidity risk. Furthermore, Regulation 90-07 addresses interbank risk, Regulation 88-01 deals with liquidity, while CB Instructions 88-03 and 89-03 regulate liquidity risk in more detail, providing a quantitative “liquidity ratio” banks must abide by.
	In addition to the follow-up of this liquidity ratio, the CB aims at ensuring that the bank has a general strategy, approved by top management and the Board of Directors, and that it is regularly audited by the internal auditor of the bank. Furthermore, the strategy should avoid over-reliance on the lender of last resort, in particular in the case of major banking groups, through adequate liquidity monitoring systems, and a detailed set of limits within each institution. Also, the CB ensures that adequate stress tests and contingency plans are developed and implemented. Banks are required to describe their liquidity and asset/liability management procedures in their annual reports. The CB has had intensive discussions with some institutions to increase their long term funding and to reduce their dependence on a limited number of funding sources, and has instituted specific monitoring requirements (on a daily or weekly basis) when serious doubts arose about a bank’s liquidity position. No liquidity squeezes have been reported over the past two years.
	At the time of licensing, the internal risk management systems are also reviewed by the CECEI in collaboration with the CB. Under the terms of Articles 32 to 37 of regulation 97-02, the systems must measure and monitor internal limits, both overall and operational. These must be reviewed at regular intervals. Furthermore, Articles 11 and 17 of CRBF Regulation 97-02 require banks to regularly review their risk measurement systems and their relevance to the risk profile of the bank. Under Art. 11, the bank must assure that the risk inherent in any new activity has been rigorously analyzed, that systems for measurement, limitation and control of the risk are adequate, and that improvements in the systems are made as needed.
	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. Banks’ supervisory reporting requirements imply that they register and monitor risk relevant data. Developments in the quality of assets must be analyzed rigorously and at regular intervals, in particular with a view to making any necessary reclassifications and determining the appropriate levels of provisions (see Principle 8). Under Art. 20 of the regulation, the bank must analyze the profitability of credit transactions before entering into the transaction, including an assessment of all operational and financing charges and costs, and remuneration of capital.
	Next to the detailed attention to credit risk and market risk, special attention is given to large exposures (see Principle 9), transformation risk (interest rate risk), foreign exchange risk and liquidity risk. With respect to liquidity and interest rate risks, precise and comprehensive guidelines and limits have been established by the CB. In the case of liquidity risk, institutions are required to maintain a minimum ratio between current liabilities and liquidity, determined according to precise rules that take account of the potential risk of withdrawal or immobilization of resources and exposures. As mentioned under Principle 6, the CB may impose additional capital requirement in relation to the individual risk profile of a bank.
	Articles 38 and 39 of Regulation 97-02 require that the non-executive board members meet at least twice a year to review the results of the internal audit (if an audit committee exists, this meeting shall be held only once per year), based on information provided by the executive management. At least once per year the executive management of the bank informs the nonexecutive members of the main risks the bank has incurred and the measures taken to limit the risks.
	Regular corporate law provides for general rules regarding the responsibility of the board of directors and individual directors. It has been amended in 2001 by the Loi sur les Nouvelles Régulations Economiques which contains provisions on the respective functions of Chairman of the Board and general director and rules governing plurality of offices. For example, no individual is allowed to hold more than five non-executive board memberships at the same time. Furthermore, the 2003 FSA introduces specific requirements to ensure that the board is able to exercise effective control over every aspect of the bank’s activity and risk management. In this respect, the Chairman of the Board of Directors is asked to produce a report to the shareholders’ meeting on internal controls. The external auditors are required to comment on this report.
	Banks are involved in the development of a more formalized approach to operational risk, under Basel II. A working group on operational risk has been established by the General Secretariat of the CB to prepare the implementation of Basel II.
	The CB monitors compliance with these regulations in the course of its off-site review and periodic on-site inspections. The largest six banking groups are monitored on a continuous basis.
Assessment	Compliant
Comments	In view of the adoption of the Loi sur les Nouvelles Régulations Economiques, and the 2003 FSA, improvements have been introduced in corporate governance since the previous assessment. Furthermore implementation of Basel II—which is already being prepared—will in general be a strong impetus for continued improvement of risk management practices in French banks. EU regulators are cooperating to develop a common approach to Basel II implementation.
Principle 14.	Internal control and audit
	Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations.
Description	Efforts have been undertaken to strengthen bank governance, particularly to ensure that the composition of the board of directors allows for a full understanding and assessment of all activities undertaken by a bank and the risks it assumes. Indeed, in two reports published respectively in 1995 and 1999, the Rapports Viennot, special attention has been drawn on the importance for financial institutions to conform to the principles and rules of corporate governance, expecting French performance in this respect to be enhanced. The Rapports Viennot have been followed by the Rapport Bouton in September 2002 which recommends an increase of independent board members and the strengthening of audit committee. Banks have taken important steps to introduce the necessary changes. Major French banks now have an audit committee. The establishment of a continuously updated database on bank managers with regard to whom “fit and proper” characteristics may be at issue, developed by the CECEI (FIDEC; see Principle 3), is helpful.
	CRBF Regulation 97-02 updates the existing rules introduced in 1990 and incorporates all the main recommendations relating to internal controls issued by the Basel Committee in recent years. A mandatory and comprehensive annual reporting system is in place on internal control systems of banks, and on auditors’ reports. The CB regularly requires banks to improve their systems, and to ensure that top management is capable of exercising full control and responsibility for the business.
	The general guidelines regarding the role and responsibility of corporate managers, also of banks, are covered by the Commercial Companies Act of July 24, 1966. Specific regulations for bank managers are more strict. Senior bank managers (Art. L.511-13 of the COMOFI) must fulfill certain conditions of competence, training and reputation. The CECEI ensures compliance with these requirements, and must approve management appointments. As a disciplinary measure, the CB is authorized to temporarily suspend or require the resignation of one or more senior managers (Art. L.613-21 of the COMOFI), and to appoint a provisional administrator as warranted.
	CRBF Regulation 97-02 modified by Regulation 2001-01 and 2004-02 gives a very comprehensive set of instructions, requirements and criteria to define, monitor and evaluate the overall internal control structure of banks and investment firms. Appropriate rules are provided on internal controls and the appointment of internal auditors, which are monitored by the CB through specific reports from the banks, which are regularly verified. All good practices such as segregation of duties, checks and balances, delegation of functions and responsibilities, reconciliation of accounts and information of senior management are properly provided for.
	The internal audit office is required to have unfettered access throughout the bank and its adequate staffing, independence and functioning are periodically reviewed during on-site inspections. Significant progress toward enhancing the responsibility and awareness of the boards of directors has been made by major banks by establishing incipient audit committees, as explicitly referred to by the said regulation.
	The CB pays close attention, both during on-site inspections and through the off-site analysis of internal control reports, to the independence of internal controllers within the firm, to the procedures for making decisions and delegating powers, the quality of internal control and the resources made available for it, and the practical procedures for informing the decision-making body. Supervisors may call for the reporting hierarchy to be changed or for additional staff so that internal controllers are fully independent of operational departments and can regularly review all areas of activity in a timely manner. Similar recommendations may also be made with regard to specific departments, such as accounts or information technology. These on-going measures have helped to focus the attention of managers on the importance of rigorous internal control. Systems to limit exposure are steadily being introduced and credit risk is being monitoring more closely.
	The external auditor and the CB are in regular contact. If the auditor encounters irregularities that could threaten the delivery of a “clean” opinion on the annual statements, the auditor is obliged to inform the CB. The auditor routinely receives the CB’s findings of an on-site inspection.
Assessment	Compliant
Comments	Further efforts are being made to generalize the use of internal audit committees. A next step could be to require that all boards include the participation of external, properly qualified members. CRBF Regulation 97-02 has been amended by a new Regulation 2004-02, to cover more specifically aspects such as operational risk and business continuity planning. This initiative is in line with the discussions within the Financial Stability Forum and of the on-going work at the European level.
Principle 15.	Money laundering
	Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.
Description	The COMOFI requires banks to identify their customers and verify their identity on the basis of a reliable document; they must identify and verify the identity of occasional customers with respect to transactions above EUR 8000 in a similar manner; they must also obtain information about the true identity of the persons on whose behalf an account is opened or a transaction conducted if there are any doubts as to whether the customer is acting on his or her own behalf. Décret No. 91-160, sets out additional requirements specific to the identification of legal entities.
	The COMOFI requires banks to retain records on the identity of their clients and on transactions for five years. It also requires banks to report to TRACFIN transactions that they suspect may be related to drug trafficking or organized criminal activity.
	Decree 91-160 requires banks to adopt written internal rules defining procedures for implementation of the AML provisions of the COMOFI and the Décret 91-160. They must ensure that all staff involved in combating ML are kept informed and receive training.
	Regulation 91-07 of the CRBF requires banks to establish internal controls and procedures to ensure compliance with the AML provisions of the COMOFI and the Décret 91-160, including an audit system to verify compliance with the above-mentioned procedures. Regulation 97-02 requires banks to appoint an officer to ensure the consistency and effectiveness of the internal audit for prudential purposes. There is no requirement to appoint an AML officer with explicit responsibility for AML compliance.
	The licensing authority for banks is the CECEI. The COMOFI provides that the CECEI may refuse authorization should the persons responsible for directing the bank’s activity lack sufficient integrity, skills and experience.
	The CB is responsible for regulating and supervising banks’ compliance with the legislative requirements applicable to them, including AML/CFT requirements, and to sanction breaches in compliance. The CB has authority to conduct on-site and off-site examinations. It also conducts special AML/CFT examinations. Banks are required to submit annually a detailed questionnaire on compliance with AML/CFT requirements, as well as a report on the state of their internal controls, including for AML/CFT.
	The CB appears to have a robust program of examinations and sufficient human and financial resources to carry it out. It prioritizes its activities for AML/CFT on a risk basis, focusing attention on entities engaged in riskier activities, those whose questionnaire responses are not satisfactory and on those with regard to whom TRACFIN has signaled lapses in the quality and quantity of suspicious transaction reports.
	The CB can impose adequate disciplinary sanctions on entities that fail to comply with their legislative and regulatory obligations, ranging from a warning up to the withdrawal of a license to operate or removal from the register. It can impose fines of up to an amount equal to the minimum capital of the legal entity. CB indicates that AML/CFT compliance levels are generally good and steadily improving. The CB has imposed sanctions for breaches relating to AML/CFT requirements. The sanctions ranged from a warning to removal from the register, but the most frequent sanction was a warning plus a fine. Decisions involving the imposition of sanctions mainly for failure to implement AML/CFT requirements were systematically publicized.
Assessment	Compliant.
Comments	A more comprehensive assessment of compliance against international AML/CFT standards can be found in the AML/CFT detailed assessment report.
Principle 16.	On-site and off-site supervision
	An effective banking supervisory system should consist of some form of both on-site and off– site supervision.
Description	The COMOFI, Art. L.613-6, states that the General Secretariat of the CB shall carry out off-site monitoring and on-site supervision. In 2003, the CB conducted 188 inspections in banks and investment enterprises. With regard to the largest banks, the CB conducts more focused inspections rather than comprehensive inspections. In 2003 the focus of the inspections in the largest banks was on credit risk and information systems. Foreign establishments of French banks were the object of 22 inspections, of which 17 outside the EEA.
	The Direction du Con trôle des établissements de crédit et des entreprises d’investissement (DC) of the CB counts approximately 160 staff and conducts off-site analysis both sector-wide (including for instance sector or geographical risks), and of each individual institution. Around 40 staff of the DC focus specifically on the six largest banking groups. The Délégation au Contrôle sur Place (DCP) numbers around 180 staff and conducts on-site inspections. The Direction de la Surveillance Générale du Système Bancaire (DS) numbers approximately 100 persons and is in charge of international relations, accounting matters, IT and macro-prudential studies and/or scenarios and research projects. For purposes of off-site analysis the supervised institutions are divided into four categories, allocated to four separate divisions within the DC: (a) “general” non mutual credit institutions; (b) “specialized” credit institutions; (c) mutual credit institutions and provincial banks; and (d) investment firms and market operators. Persons working in DC and DS participate periodically in on-site inspections, and vice versa. Off-site supervision is based on systematic, continual analysis of quantitative and prudential reports, including e.g., reports produced by the bank’s management and financial accounting systems, periodic reports on compliance with laws and regulations, and on the bank’s internal controls. Also publicly available documents, e.g., the credit institution’s annual report and accounts are included in the off-site analysis.
	Furthermore, off-site supervision is supported by a number of supervisory tools which help identify the need for corrective action or an ad-hoc inspection The Organisation et Renforcement de l’ Action Préventive (ORAP): a CAMELS-type risk analysis and rating system for individual banks. In ORAP, each credit institution is assessed on a series of 15 indicators covering: (i) the bank’s current activities; (ii) its observance of prudential ratios and the strength of its capital base; (iii) the current risk profile of each of its main business lines; (iv) earnings; (v) internal risk monitoring procedures, (vi) the appropriateness of its organizational structure; (vii) internal control system; and (viii) the professional capacities of its senior management. This assessment produces an overall rating of the bank, a rating for each major risk category, and, as applicable, identifies areas for corrective action. The Système d’Aide à l’Analyse Bancaire (SAABA), an automated early warning system focused on weaknesses in a bank’s financial condition. Combining data from twenty-five databases, SAABA produces: (i) a detailed loan quality analysis on each credit institution;; (ii) a partial analysis of the principal aspects of banking risk; and, as required; (iii) an aggregate overview of these aspects across the banking system. It can also be adapted to simulate the effects of various events, e.g., sector-specific economic shocks. Besides the BdF’s databases, SAABA also uses the product of special surveys (e.g., real estate risk, country risk) and external sources, such as rating agencies. The Base des agents financiers (BAFI), which is drawn from accounting and prudential returns filed by supervised institutions with the CB; The Service Central des Risques (SCR), which contains information on performance of all loans of more than EUR 75,000 to nonbank entities reported to the BdF by credit institutions; The Fichier Bancaire des Entreprises (FIBEN), which collects information on businesses and managing directors and contains accounting and financial data reported to the BdF by all nonbank businesses in France with annual gross revenues exceeding EUR 750,000. FIBEN covers 200,000 firms, and thus accounts for 90 percent of total bank credit to businesses in France. Thus, FIBEN provides a regularly updated rating system for most French businesses, that goes substantially beyond the capacity of the private rating agencies, and thereby plays a fundamental role in bank lending to small and medium businesses. Furthermore, the CB has access to databases maintained by the BdF.
	Further, the CB has developed a cross-industry methodology for “homogenous line(s) of business groups” (peer groups) enabling it to analyze profitability and capital structures of credit institutions with closely comparable line(s) of business profiles.
	The off-site supervision process also encompasses regular direct contact with the credit institution’s management by telephone or in meetings, to discuss with bank management the results of the off-site analysis.
	On-site supervision is especially important to determine the exact state of the credit institution’s loan portfolio or its system of internal controls. Various types of inspections are held: (i) a general, periodic inspection; (ii) inspections limited to a specific sector of the activity (especially used with regard to the largest banks); (iii) triggered by the bank’s perceived financial condition; (iv) “thematic” inspections, focused for instance on AML/CFT compliance; (v) preparedness for Basel II; and (vi) “follow-up” of compliance with earlier recommended corrective actions.
	In addition to the supervisory tools supporting off-site supervision an on-line Système d’Information de l’Inspection Générale (SIGAL) to retrieve financial information, accessible to inspectors on their laptops during inspections. SIGAL analyzes accounting statements and prudential reports, extracts statistical information concerning the structure and quality of a credit institution’s loan book and scans for connected borrowers.
	A wide spectrum of risks (credit risk, liquidity risk, operational risk, etc.) may be addressed in the course of on-site inspections, with particular focus on internal control systems, adequacy of regulatory and management reporting, internal and external audit and management capabilities. More specific areas of attention include capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk, as well as compliance with the law and regulations.
	On-site inspection “teams” are led by a Chief Inspector, assisted by two or more examiners, with the same “team members” remaining as a unit for several inspections. The “teams” are helped, as needed, by two groups of specialists, specifically on Information Technology and Model Risk Analysis.
	For the “Big Six” largest banking groups, on-site inspection is almost continuous, focusing on key risk areas, and on a consolidated basis, including foreign branches and subsidiaries where deemed necessary. Comprehensive on-site inspections of nonsystemic institutions and where off-site supervision has not revealed significant weaknesses, are conducted on a three-to-five year cycle. On-site inspections outside the “Big Six” may also have a specific focus (e.g., rapid growth in assets, marked deterioration in observance of prudential standards or, on a general basis, a specific activity, such as lending to particular segments of the economy).
	In addition to general licensing, prudential and supervisory rules which fully apply to this kind of credit institutions, the COMOFI, Articles L.511-31 and L.511-32, states that central bodies of mutualist credit institutions shall ensure that the laws and regulations applying to these institutions are implemented and exercise administrative, technical and financial supervision over their organization and management. On-site supervision may be extended to their direct and indirect subsidiaries and to those of affiliated institutions. Central bodies may take disciplinary action as authorized by the laws and regulations. Without prejudice to the powers conferred on the CB to exercise supervision, the central bodies shall assist in implementing the laws and regulations. The central bodies shall bring any noncompliance to the attention of the CB.
	On-site inspections are conducted on the basis of specific standardized, written procedures. The program of inspections is proposed by the DC, after input from on-site inspectors, and approved by the CB, and can be modified as needed. Approximately 240 on-site inspections per year are performed. On-site inspections are characterized by ongoing communication with the DC, the DS (accounting and prudential issues) or the DSJ (legal matters). During the inspections (especially when a credit institutions or an investment firm appears in distress) the team leader files progress reports to the CB, so the CB could be informed as quickly as possible.
	The DC sends letters with recommendations or requirements for action to banks with a “substandard” or “poor” rating. It can also ask for remedial action when a banks has been perceived as financially vulnerable, or sensitive to the deterioration of individual clients, sectors, geographical areas or macro-economic developments.
	To minimize misunderstandings, a draft inspection report is first discussed with the top management of the credit institution who may submit written comments. Where the inspection report contains matters of concern (e.g., regarding provisions, the organization and the management, the interpretation of the license or of the regulations) the Senior Inspector usually discusses its content in detail with the DC, so as to cross-check the technical or regulatory features. The final report is signed by the Senior Inspector and forwarded to the DCP. The result of the on-site inspection –i.e., the follow-up letter (lettre de suite) of recommendations and prescriptions– has to be communicated to the institution’s Board of Directors or the managing or supervisory board (or other similar decision-making body) and to the external auditors (COMOFI Art. L.613-10). The lettre de suite is drafted by the DC and signed by the CB’s Secretary General or, in certain instances, by the Governor of the BdF, as chairman of the CB. Follow-up of the required remedial actions is the responsibility of the DC. The Senior Inspector in charge of the inspection is kept informed of the bank’s follow up actions.
	Staff of the four divisions of the CB can exchange views in periodic working groups, e.g. on draft regulations or reviews of emerging risks. Monthly meetings between the senior management of the CB and the Senior Inspectors permit discussion of current issues. To foster collaboration, the four divisions of the CB regularly exchange personnel. Recruits to the other divisions are regularly seconded to DCP inspection teams to gain field experience. Heads of divisions periodically head on-site inspections. Conversely, inspectors are seconded to positions in the DC at various hierarchical levels.
	Staffing numbers have increased considerably since 1995 in order to cope with the growing demands of banking supervision. Currently the CB and the CECEI together have some 585 staff at their disposal. In addition, in response to the growing complexity of banking, the CB has recruited specialists, for instance on derivatives.
	The CB continues to complement its micro economic analysis by strengthening its capacity to assess macro-prudential risks and to take early action to limit systemic risks. In particular, DC and DS use databases, and collect detailed information from the banks when needed, to analyze what impact a macro-economic or sectoral deterioration could have on the financial soundness of the credit institutions. The CB is developing a module in the SAABA system to simulate the impact of for instance a deterioration in the housing and construction sectors, or fluctuations in macroeconomic variables such as the interest rates, exchange rates, or growth rates.
	Over the past years reinforcement of the supervision of large systemically important groups has been one of the main objectives of the CB, and has led to the design of a “reinforced surveillance program,” including a significant increase in staff supervising these groups. A yearly or semi-annual meeting takes place with top executives of the groups (including heads of business lines, financial officers, risk managers), more specific meetings on issues identified by the off-site analysis performed by the CB, with the objective of assessing the risk profile of the institution more precisely, and the ability of the institution to monitor the risks. The results of these contacts serve as input to the on-site inspection program. A number of inspections take place with regard to each group per year, for instance different types of risk, risk management regulatory compliance and audit functions. CBRF Regulation 97-02 on internal controls is to be amended soon to include a requirement for business continuity planning by banks.
Assessment	Compliant
Comments	Analytical tools are improved continuously to stay abreast of the changing environment and emerging issues, and to introduce macro-prudential approaches to supervision. Ongoing work on macro-prudential issues within the ECB’s Banking Supervisory Committee comprising the 15 banking supervisory authorities and national central banks, remains of great importance.
Principle 17.	Bank management contact
	Banking supervisors must have regular contact with bank management and a thorough understanding of the institution’s operations.
Description	Also see the description under BCP 16. In general, the CB enhances its understanding of the bank’s operations and management through meetings with senior management. These meetings are an integral part of the supervisory process.
	Overall, with a degree of variation depending on the significance of the institution, contacts between the bank and the CB are frequent, including for instance the quarterly discussion of the results, some ten meetings annually of the CB’s and the bank’s specialists on technical matters, and a yearly meeting between top management of the banks and the CB. The inspection process with regard to the big six groups in practice is virtually an ongoing process, with some four to five inspections per year, covering different topics. The CB meets regularly with the CACs of the banks to discuss broader issues relative to the banks.
	During an on-site supervision working meetings take place with senior management and external auditors, permitting the supervisory authority to convey its impression of the standard of performance achieved by both. Off-site supervisors also hold regular contacts with banks’ senior management and are kept well-informed by on-site supervisors, as well as through the outputs of the analytical tools at their disposal.
	On-site inspections also give the opportunity to meet with management and the external auditors, to convey the ongoing findings of the inspection, listen to explanations and, where required, resolve matters of interpretation. On completion of the examination, inspectors discuss the draft report with the bank before the final report is officially forwarded to the CB and the chairman of the bank.
	The inspection process helps to inform the CB’s assessments of top managers, especially their ability to define and implement a consistent and sound strategy for the institution, and of the quality of the management team. Inspection assessments are taken into account in the ORAP criteria. If serious operational deficiencies or statutory infractions are encountered, the CB may take disciplinary action against the Chairman and/or the executive officers.
	Also outside the inspection process, periodic contacts take place between the bank’s key officers and top management and the DC and the DS, but also with the Secretary-General of the CB and his/her deputy. The agenda of these meetings depends on the size and risk profile of the institution and may include discussions with such key executives as the chief financial officer, the chief risk manager, the head of internal audit, the external auditors and the senior officers responsible for the critical risk areas, as established by the CB’s risk-based approach to supervision. Discussions include remedial actions, amendments to corporate strategy, operational performance, changes in asset quality and any other significant issues that have arisen in the period under review.
	CRBF Regulation 96-16, requires that banks notify the CECEI of any significant changes in their circumstances, including the appointment of senior managers (Articles 9-11). The CECEI can inform the bank that a modification of the license is needed, or that a proposed management appointment is not acceptable.
Assessment	Compliant
Comments
Principle 18.	Off-site supervision
	Banking supervisors must have a means of collecting, reviewing and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis.
Description	Under Principle 16 an extensive description is provided of the review and analysis function of the CB.
	In accordance with the COMOFI, Art. L.613-8, “the CB shall draw up a list of the documents and data to be submitted to it and determine their form and the deadlines for filing. In addition, it may require the credit institutions and investment firms to provide any information, clarification or proof necessary to the exercise of its functions. It may ask to receive the auditors’ reports and, in general, all accounting documents (and, when necessary, for them to be certified), as well as all other relevant information and data.” Accordingly, the CB’s database is compiled from documents that include off-balance sheet transactions, doubtful loans and the corresponding provisions for loss. Large institutions file monthly reports on their activities and situation in France, and they must, like other institutions, file quarterly reports, which include their foreign branches. Profit and loss accounts must be filed twice a year. Consolidated accounts must be filed annually (see above), but the larger institutions now publish consolidated data on a quarterly or semi-annual basis, as expected by the market. Filings made to the CB that are repeatedly found to be in error or late may subject the bank to sanction.
	Specifically, the CRBF and the CB have issued a series of regulations and instructions on prudential standards, which include statistical and prudential reporting requirements. These include for instance regulations on Own Funds (Regulation 90-02, and CB Instruction 90-01); Solvency, (Regulation 91-05; CB Instruction 91-02); Large Exposures (Regulation 93-05; CB Instruction 2000-07); Capital Adequacy for Market Risks (Regulation 95-02; CB Instruction 96-01); Liquidity (Regulation 88-01; Regulation 92-06; CB Instruction 88-03); Own Funds and Permanent Capital Ratio (Regulation 86-17; CB Instruction 87-03).
	Most of the CRBF Regulations and most of the CB’s instructions require institutions to provide reports or statistical returns on both a solo and a consolidated basis. In particular, credit institutions must comply on a consolidated basis with Management Standards on Solvency, Large Exposures and Internal Control. Further, should the CB consider that the distribution of an institution’s own funds within a financial group is unsatisfactory from the standpoint of safety and soundness, it may require that the institution complies with certain regulatory standards on an individual or sub-consolidated basis.
	The CRC’s Regulation 99-07 applies consolidation rules according to the nature of the activity carried out by the consolidated entity and the level of control. Thus, institutions constituting an economic group must prepare and publish audited consolidated annual accounts, a copy of which must be sent to the CB. In accordance with the COMOFI, Art. L.511-37, the CB ensures that periodic publication takes place.
	CRBF Regulation 2000-03 on consolidated supervision, as modified by Regulations 2001-03 and 2001-05 to explicitly include the mutualist groups, reflects the new accounting rules introduced by CRC Regulation 99-07. Regarding the particular case of mutualist groups-in which, typically, local banks hold the capital stock (and elect the Board of Directors) of regional banks and the latter, in turn, hold the capital stock of the central institution-the CRBF Regulation 2001-03 clearly obliges such groups to provide fully consolidated accounts. It must also be pointed out that new reporting obligations have been set, for each mutual or non mutual group, concerning subsidiaries and branches abroad.
	The data received though the reporting system provide the input for a number of supervisory tools, i.e., the SAABA system, which analyses each bank’s risk profile, ORAP, which grades the individual banks and serves as an early warning system. Furthermore, the CB may require banks to provide any information the CB considers necessary for its supervision.
Assessment	Compliant
Comments	Since the 2001 assessment, measures have been taken to ensure that the mutualist groups report on a consolidated basis,
Principle 19.	Validation of supervisory information
	Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors.
Description	Under CRBF Regulation 91-01, banks are under an obligation to publish annual financial statements. The statements must be certified by a registered public accountant (CAC). This system provides an important means of verification of the supervisory information provided by the bank.
	Furthermore, the supervisor has access to all information concerning the supervised institution’s affairs and, where necessary, to its Board of Directors, senior management and staff. The COMOFI, Art. L.613-8, authorizes the CB to require supervised institutions to deliver to it all information the CB considers necessary, and in the format and with the frequency that it deems appropriate. Included in this broad power is the CB’s capacity to “require delivery to it of the official auditors’ reports and, in general, all accounting documents (and, when necessary, for them to be certified).” Art. L.613-9 also authorizes the CB to ask for any clarification from the bank’s external auditors with regard to their work for the bank. If the CB strongly objects to the bank’s financial statements, it can demand that a rectification be published (Description of BCP 8).
	As noted in the discussions of Principles 16 and 17, the CB operates a highly developed system of off-site and on-site supervision, the latter providing—as part of its mandate—a means of verification. Integral to the supervision process is the practice that the CB inspectors hold two meetings with the CAC in the course of an on-site inspection.
	The external audit is entrusted to a CAC, who is required to be a member of the CNCC. In order to reinforce the supervision of this profession, the 2003 CSF created the Haut Conseil du Commissariat aux Comptes (HCCC), which is in charge of monitoring the CACs activities and, together with the CNCC, has established a code of conduct for CACs. Decree 84–709, as modified by decree 2002-30, provides (Art. 29) that a credit institution must advise the CB of the external auditors that it proposes to nominate and that the CB has two months to give its opinion on such a nomination. This opinion has to be brought to the attention of the institution’s shareholders meeting.
	Under COMOFI Art. L.613-9, the CAC is required to inform the CB of any cases of noncompliance with the rules and regulations, which could impact the financial condition, the profits or the own funds of the bank, could endanger the continuity of the institution, or lead to a qualified auditors’ opinion on the annual financial statements. The CB may also provide the external auditors with information for them to accomplish their assignment. There is no barrier of professional secrecy between the CB and the CAC. In practice, contacts between the CB and the CAC are frequent and informal, and there are no statutory barriers of professional secrecy between the CB and the CAC.
	The CB has the right to designate a supplementary CAC when it considers this necessary (COMOFI Art. L.511-38) and may ask the Court or the CNCC to dismiss or suspend a CAC (Art L.613-9), and/or inform the CAC’s professional governing body of any infraction of the COMOFI, as amended, or where the external auditors appear to be insufficiently independent of the client. Though the CB is not involved in the evaluation of the quality of the work of the auditor (or of the firm to which he/she belongs), nor in the definition of his/her mission, the 2003 CSF now specifies that the Ministry of Justice, when deciding to conduct an inquiry on a CAC, can ask the CB’s cooperation. On a case by case basis, the CB has been able to require an audit firm, other than that nominated by the credit institution, to conduct a specific mission in that credit institution. This occurs several times per year.
	Given its resource limitations, and the three to five-year examination cycle, the CB has under review the means by which it may derive greater benefit from the work of the external auditors in the execution of its own mandate. Important reforms have been made in this regard, through close consultations between the CB, the AMF and the CNCC and the assessment of the external auditors is often asked for by the supervisory authority. Should the CB have some doubts about the quality or the level of the works done by the CAC of a credit institution or an investment firm, it has the capacity to nominate an additional external auditor.
Assessment	Compliant
Comments	Following the adoption of the 1999 SFSA, France has acquired a corpus of legislation that should enable external auditors and supervisors to develop more effective relations within the framework of their respective legal responsibilities. The implementing decrees concerning the CAC nomination proceedings toward the CB are now in force. Decrees of application of the 2003 FSA remain to be adopted, and the new Code of Ethics of the accountancy profession confirmed.
Principle 20.	Consolidated supervision
	An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis.
Description	According to the rules set out in CRBF Regulation 2000-03 (which codified previous regulations), as amended by Regulations 2001-03, and 2001-05, banking regulations taken as a whole (see below) require regulatory filings to be prepared on a consolidated basis. The CRBF Regulation 98-03 (Art.) provides that the CB may insist that an entity be excluded from the scope of consolidation where there exist obstacles to the transfer of information necessary to determine accurately the level of exposure, or in those cases where consolidation would be misleading or inappropriate from the standpoint of prudential supervision. As noted in Principle 18, the applicable CRBF Regulations and CB instructions require that institutions provide to the supervisory authority their reports or statistical returns on both a solo and consolidated basis.
	The CB is well aware of the overall structure of banking organizations or groups (i.e., the credit institution and its subsidiaries) and has an understanding of the operations conducted therein. The COMOFI, as amended, empowers the CB to supervise the entire activities of a credit institution, whether those activities are carried on directly (including branch operations located outside France), or by means of subsidiaries and/or affiliates. At the same time, the CB’s on-site and off-site supervisory processes enable it to evaluate the risks that nonbanking activities conducted by a credit institution or the other elements of the banking group may pose for the institution or group as a whole.
	The CB’s risk-based approach to supervision encompasses the evaluation of all significant activities of the institution, whether or not these constitute “banking operations” within the meaning of the term given by the COMOFI, as amended (Art. L.511-1) (see Principle 2). As discussed above, the CB has access to all the records of a credit institution or investment firm. In addition, the COMOFI (Articles L.613-10 and L.613-11) requires that the CB has on-site access to the business and records of the corporate entities controlled by the institution, including subsidiaries or affiliated companies, as well as to the business and records of “the legal persons directly or indirectly controlling it (i.e., the institution) and to their subsidiaries.” For corporate entities located outside France, the CB has all powers necessary to collect data and information from the group’s corporate headquarters in France and to extend its supervisory activities (including on-site inspections) to those entities when necessary. In that regard, the CB has signed a large number of MoUs with supervisory bodies within and outside the EU. When no MoU has been concluded, on-site inspections will require the permission of the host country. In addition, the CB monitors the relationships of credit institutions with regulatory bodies in other jurisdictions to ensure that the credit institution complies with all regulatory requirements, on a globally consolidated basis.
	The CRC Regulation 99-07 contains new rules for the drawing up of consolidated accounts for credit institutions. It includes a definition of exclusive control and introduces consolidation criteria for special-purpose entities, including the possibility for networks affiliated with a “central body” (as defined in the COMOFI, as amended, Articles L.511-31 and L.511-32) to draw up consolidated accounts comparable to those of other bank groups. Thus, as indicated under Principle 18, the CRBF Regulation 2001-03 obliges the mutualist groups to report fully consolidated accounts, and all mutualist groups now prepare a form of consolidated accounts.
	Under COMOFI Articles L.613-10 and L.613-11, the CB may inspect the activities of a bank’s direct or indirect parent and sister companies. Protection of the credit institution against adverse developments at the parent or nonbank affiliate companies would be achieved through application of the general provisions of the COMOFI on sanctions (Articles L.613-15, L.613-16 and L.613-21).
	In respect of owners of parent companies, the CRBF Regulation 96-16 requires the prior authorization—by the CECEI—of the acquisition of defined levels of direct—or indirect—equity interests in credit institutions. Indirect acquisitions of French credit institutions through acquisition of parent companies by acquirers domiciled outside France require immediate notification to the CECEI, which may find reason that the credit institution’s authorization be reexamined. Given the close operational links between the CECEI and the CB, the supervisor thereby has a means of establishing and enforcing “fit and proper” standards for owners.
	For senior managers, the COMOFI, as amended (Art. L.517-1), makes “financial holding companies” subject—inter alia—to the “four eyes” principle, laid down in Art. L.511-13 of the COMOFI, under conditions set out in Regulation. CRBF Regulation 96-16 (Art. 9) requires notification of changes in senior management to the CECEI, affording the latter the opportunity to state whether an appointment is seen as compatible with the credit institution’s authorization. This provides an oblique means of establishing and enforcing “fit and proper” standards for senior managers of parent companies of credit institutions.
	Information exchange mechanisms with other domestic and foreign regulators allow the CB to adequately access information on the financial condition and the risk management practices and controls of business vehicles within a banking group. In non-EEA countries, bilateral agreements are strengthening this aspect of supervision, though the scope of competence is a frequent stumbling block in certain countries with a tradition of opacity (see Principle 24).
Assessment	Compliant
Comments	The authorities are encouraged to continue attempts to obtain access to information from all countries where French banks have business units.
Principle 21.	Accounting standards
	Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.
Description	The COMOFI (Arts L.511-36 and L.511-37), refers to the CRC the competence and responsibility to issue accounting regulation for banks and investment firms, after formal consultation with the CCLRF. Before 1998, the CRB, then (after 1996) the CRBF was the only body enabled to regulate accounting matters for banks (and then investment firms).
	Between 1998 and 2003, the CRC was entitled to issue accounting regulation for banks and investment firms, after formal consultation with the CRBF.
	Most of the current regulations were defined by the CRB, then the CRBF, before the CRC was created. The CRB, in particular in Regulation 91-01, has elaborated extensive accounting and valuation rules for the financial sector, thus providing for a framework specifically adapted for keeping bank records and for publishing statutory accounts for financial institutions. In particular, French regulations (88-02, 90-01 and 90-15) allow for “mark to market” valuation for the trading book under the conditions that it concerns assets that are likely to be traded, and that appropriate management and control procedures are in place. Moreover, CRBF regulation 97-02 on internal control issues strict rules regarding internal control procedures in accounting aiming specifically at ensuring the “auditability” of accounts (audit trail). CRC Regulations 99-07 (for banks, financial holdings and most investment firms) and 99-02 (for some investment firms) further specify the modalities for the preparation of consolidated accounts.
	As explained under Principle 19, the CACs play a fundamental role in certifying banks’ accounts and the 1999 FSFA has strengthened the CB’s capacity to request the assistance of the CAC in monitoring the activities of the credit institutions and investment firms and ensuring the reliability of their reports.
	A joint white paper (Livre Blanc) issued by the COB (now the AMF) and the CB in December 1998 noted that much remained to be done toward strengthening the transparency of reporting by French banks and making it comparable to practices prevailing in many other G–7 countries. In particular, the report stressed the more limited and less standardized disclosure by banks of information on credit risk, including information allowing an assessment of the quality of the bank’s assets, provisioning and treatment of interest on nonperforming loans.
	The report also noted some weaknesses with regard to reporting of market risk, including disclosure of derivatives activities and counter party risk. The quality of the notes to the financial statements could be improved in view of the practices in other G7 countries. Moreover, the heterogeneity of presentation of financial statements across banks hindered comparison across banks.
	In its Annual Report of 2001, the CB compares 15 large U.S. and European banking groups’ disclosure practices. with a view to setting a disclosure agenda for the French banking system in 2005, when the IAS will become the standard for financial disclosure in the EU (although IAS 39 is still a contentious issue between the IASB and the EU, and France in particular.)
	Since the issuance of the Livre Blanc, in 1998, the authorities have undertaken a number of measures to improve the quality of financial disclosure by banks. Decision 98.05 and recommendation 98.R.01 of the Conseil National de la Comptabilité (CNC), on market risk disclosure; Joint recommendation of the COB, precursor of the AMF, and the CB of January 2000, on credit risk disclosure, which recommends that banks’ financial disclosure break down credit risk by economic sector, counterpart (government, banks, businesses, individuals, etc.) and geographical area, as well as provide information on bad loans and provisions, and the ratio between general provisions and overall credit risk; Joint Recommendation of the COB and the CB of November 2002 on deconsolidation and separation of assets; Regulations of the Comité de la Réglementation Comptable (CRC) No. 2000-03 on solo accounts, and No. 2000-04 on consolidated accounts; Regulation of the CRC No. 2002-03 on disclosure of credit risk.
	Furthermore, the annual analysis by the Transparency Group of the Basel Committee, for the accounts of major French banks (BNP Paribas, SG, CASA, CL) over bookyear 2002 shows that major improvements have taken place since 1999, although the improvements relate to different aspects across banks. In its 2001 Annual Report, the CB published a study on financial disclosure by banks, summarizing the main international developments on bank accounting, and foreshadowing the need for change in the French financial accounting system.
	Again in its Annual report over 2002, the CB performs a preliminary analysis of the coming changes to the international accounting system. Clearly, the CB wishes to keep the debate alive, and to sensitize the French financial institutions to the need to adapt to more internationally recognized standards. Specifically with regard to credit risk, the Report states on page 173 that “current French standards appear to be too restrictive and insufficiently conservative with regard to credit risk provisioning, to the extent that provisioning often takes place rather late” Under current rules, provisioning seems to depend on classifying a loan as “doubtful,” which requires occurrence of a concrete event. The CB expects that implementation of IAS 39, a main component of which relates to credit risk, would lead to earlier and smoother provisioning.
	However, these comments were issued in a context where the exposure draft of IAS 39 published at this time was based on an “expected loss” model, incorporating a concept of “dynamic provisioning” largely suggested by the CB. The final version of IAS 39 is based finally on an “incurred loss” model which appears to be a bit more restrictive than the actual French Regulation (see comment on Principle 8). French banks are making progress toward meeting the requirements of Pillar 3 of the new Basel Capital Accord. A survey conducted by the CB in May 2003 shows that French banks have fulfilled the majority of the Pillar 3 requirements for market risk disclosure, but still need to continue work on credit risk disclosure.
	Nevertheless, CRC Regulation 2002-03, of December 2002, addresses a number of important areas of credit risk disclosure. It requires banks to make a distinction in their accounts between standard and doubtful loans, dividing the latter into two categories, “non compromised” doubtful loans and “compromised” doubtful loans, the latter of which where payment is not expected, assuming that loans for which a loss occurs are derecognized from outstanding amounts in the balance sheet to the extent of the loss amount (Articles 3 and 9). Banks are required to disclose in their financial statements the gross amounts of standard, restructured, doubtful and compromised loans, as well as the criteria used to define these categories (see Articles 22 and 24). The rules applied by the banks to determine the level of provisions need to be disclosed (Art. 26) as well any changes made in these rules since the last set of statements.
	All loans need to be broken down into categories relative to the most significant sectors (within geographical, economic sector, counterparty (also interbank)), and by residual maturity. The doubtful and compromised loans, as well as the provisions taken must be broken down into the same categories (see Articles 28 through 30, and Chapters 3 and 4).
	The CNC envisages to resolve one area of divergence concerning the choice offered to French banks in the calculation of the present value of restructured loans by proposing to the CRC to allow only the calculation of the present value on the basis of the original loan conditions. However, no formal decision has been announced yet by the CNC, which prepares the future regulations to be adopted by the CRC.
	The issuance of regulations since 2000 by the CRC, in particular Regulation 2002-03 that ensure broader disclosure “on a uniform and internationally comparable basis,” have thus contributed to the improvement of disclosure by the French banks. Financial statements have also been improved by harmonization of key ratios that facilitate the comparison of banks’ performances.
	The most delicate matter concerns communication by banks of problem situations. Notwithstanding clear evidence, as noted in the report on financial transparency, of the beneficial effects of timely crisis communication, most bankers remain reluctant to accept regulations or to make firm commitments in this respect. While the CB has encouraged banks to adopt a policy of open and timely communication on any significant difficulties and on relevant external events that affect their risk-exposure, results so far have been mixed.
Assessment	Compliant
Comments	Progress is being pursued toward greater convergence with IAS, and the authorities clearly stimulate greater convergence, in the interest of greater comparability of financial statements.
Principle 22.	Remedial measures
	Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation.
Description	As noted with regard to Principle 1(4), the COMOFI, Articles L.613-1, L.613-15–19, and L.613-21–23 confer a broad range of enforcement and sanctioning powers upon the CB.
	Measures range from a recommendation (Art. 613-16) to an injunction both aiming at making the credit institution take appropriate corrective action within a given period of time in order to improve its financial situation, enhance its management methods or insure the adequacy of its organization to its activities or development targets up to the withdrawal of the license (Art. L.613-21). The most common and effective means to obtain remedial measures are the lettres de suite following an on-site inspection. They call on the responsibility of both management and Board of Directors to ensure correction of the situation.
	Under COMOFI Art. 613-21, if a bank ignores a recommendation or is in breach of a law or regulation, the CB can: (i) issue a warning; (ii) issue a supervisory reprimand; (iii) prohibit to perform certain activities; (iv) suspend one or more managers, with or without appointment of a temporary administrator; (v) remove one or more managers, with or without appointment of a temporary administrator; (vi) withdraw the license, with or without appointment of a liquidator.
	Pecuniary sanctions may also be imposed upon the bank in addition to these measures. Moreover, the CB may impose the withdrawal of the voting rights of certain or all shares, the prohibition to pay dividends or other form of remunerations to shareholders and the obligation for the credit institution to disclose, at its own expenses, the disciplinary sanctions. The CB may mention infringements or criminal offenses to the Public Prosecutor’s Office.
	Whenever a bank is deemed to be at risk of not being able to meet its commitments toward its customers, the CB can request intervention of the FGD (COMOFI Art. L.312-5). Given that the primary concern in such case is the optimal protection of the interest of private customers covered by the FGD, the CB and the FGD cooperate closely both in the decision-making and the implementation of the measures.
	When imposing sanctions, the CB is an administrative judiciary authority (Art. L.613-23 of the COMOFI), and its decisions and sanctions can therefore only be challenged before the Conseil d’Etat, the highest administrative judicial authority. In particular, bank customers and/or management and directors can contest the appointment of temporary administrators by the CB. They can also contest the decisions and actions of these administrators. In urgent cases, appeals against the decisions of CB to appoint an administrator or a liquidator do not suspend their implementation (Art. L.613-23 II).
	Moreover, under Art. L.613-21, the CB may prohibit payment of dividends or other form of remunerations to shareholders and the obligation for the bank to disclose, at its own expenses, the disciplinary measures.
	In 2002, the CB issued one injunction against a bank, 8 warnings, 15 supervisory complaints (some of which with a pecuniary penalty), ordered one bank to limit its activities, and delicensed three investment companies for disciplinary reasons. Five disciplinary actions were initiated against money changers.
Assessment	Compliant
Comments
Principle 23.	Globally consolidated supervision
	Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures and subsidiaries.
Description	CRBF Regulation 2000-03 specifically obliges banks and their holding companies to comply with the prudential standards on a consolidated basis, without distinction whether consolidated entities are located abroad or not. Furthermore, with regard to internal controls and banks’ management of specific types of risk, CRBF Regulation 97-02 requires that banks view their risks on a consolidated basis, including all its foreign subsidiaries and branches, and its controlling entity and to the subsidiaries of the latter. One of the key-features of Regulation 97-02 on internal control is that each institution must ensure that its organization and procedures are adequate for its activities and that of the group it belongs to. This covers the inclusion of foreign branches and subsidiaries in management information, the internal control structure of the organization and the daily oversight responsibility of management. During on– site inspections on internationally active banks, the CB ascertains that the organization and internal control of the French parent fully meet this requirement. Part of the on-site inspection is in many cases carried out at the premises of foreign branches (and in some cases even jointly with the local supervisor) of French banks. Even when rules, regulations and requirements are not fully equivalent to those for the parent bank, the CB requires fully consolidated prudential information on all entities of a group, both purely national groups and those also operating abroad, on the basis of the groups’ internal accounting and external prudential norms.
	The French regulations make a distinction between EEA branches and other entities. In the case of EEA branches, which have to be notified to the CECEI prior to their establishment, the “home” supervisory authority retains all its sanctioning powers and can withdraw the authorization to run a branch that is deemed to be unsound or in violation of the home regulations. The home authority should advise (and consult with) the “host” authority. In the other cases, if the branch does not comply with the host country’s regulations, only the host supervisor can directly sanction it. However, as home supervisor, the CB could sanction the parent bank or require it to stop or limit its activities, making use of the powers specified by COMOFI Art. L.613-21.
	As noted in Principle 1(6), the CB and CECEI have established an extensive network of MoUs with supervisory authorities Within the EEA, specific directives require the supervisory authorities to cooperate by mutually allowing each other to properly exert consolidated supervision. Thus, France has a wide range of MoUs in place to implement these directives. Wherever a significant presence of French banks abroad (or vice versa for foreign banks) exists, these MoUs give rise to regular consultations, both formal (MoU meetings on a regular basis) and informal. For a limited number of international financial conglomerates, involving French banks, these consultations are frequent and intense and are covered by special, sometimes multi-party MoU agreements. It should be noted that the EU Directive 2002/87/EC on the supplementary supervision of financial conglomerates further expands the scope of consolidated supervision.
	For some non-EEA countries, similar bilateral agreements have been established following the 1999 SFSA vesting the CB with the power to conclude bilateral agreements with the authorities of a state not party to the EEA entrusted with duties similar to those entrusted in France to the CB. Apart from this formal aspect, the CB already engages in close cooperation with all the main G10 or industrialized countries’ supervisory agencies. In this framework, regular individual sharing of information is carried out between the CB and non-EEA supervisors, periodic meetings take place and stand alone or joint on-site inspections of French branches and subsidiaries are usual, especially in North America and Asia where most French foreign operations are located.
	These bilateral agreements, regarding mutual cooperation and exchange of information in the performance of prudential supervision, provide for arrangements for the collection and sharing of information, in particular through on-site inspections. In this case, information should be shared in support of the objective to facilitate and meet the requirements for effective consolidated supervision. However, for countries for which the scope for cooperation is limited by the opacity of local rules on establishment, supervision and professional secrecy, the CB asks the institutions themselves, on a case by case basis, to provide the information it requires in order to carry out its supervisory duties on a consolidated basis.
	Any inspection carried out by foreign supervisory authorities representatives may only concern compliance with the prudent management standards of the State concerned so as to permit assessment of the financial situation of a banking or financial group. A report on the inspection must be provided to the CB, which alone may impose sanctions with regard to the branch or subsidiary inspected in France.
	In addition, the 2003 FSA has broadened the scope of cooperation with non-European banking groups. In particular, it enables undertakings established in France that are part of the financial group or mixed group to which belong credit institutions or investment firms having their registered office in a State with which France has concluded a bilateral agreement of sharing of information, to transmit the necessary information to undertakings of the same group having their registered office in the State party to the bilateral agreement. These exchanges of information can cover, in accordance particularly with COMOFI Art. L.511-34, all matters related to the consolidated supervision of the financial situation of a cross-border establishment as well as the organization of the fight against money laundering and the financing of terrorism.
	In order 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.
Assessment	Compliant
Comments
Principle 24.	Host country supervision
	A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities.
Description	French laws and regulations provide a comprehensive framework for cooperation with foreign authorities. As already mentioned in Principle 1 (6), the 1999 SFSA has extended the power of the CB, which may now conclude bilateral agreements with the authorities of a country that is not an EEA Member State, in order to: (a) perform on-site inspections on entities in the jurisdiction of the signing authorities; (b) allow the national authorities to perform on-site inspections, upon request of the co-signing authority or jointly with them, on subsidiaries or branches of institutions under the supervision of the said foreign authority; and (c) lay down conditions and modalities for the exchange of information. The main conditions for exchange of information are that the counterpart authority be subject to the same professional secrecy regulations as the CB, that regulation and supervision in the country concerned be reasonably equivalent to those in France, and that the reciprocity principle be fully respected. For some countries, where the elaboration of a formal agreement is still under negotiation, pragmatic arrangements for informal information sharing are in place and appear to function reasonably well. Whenever French banks have the intention to branch out to a country or acquire or establish a banking activity there, the CB must approve the project and negotiate the cooperation on supervisory matters of the authority concerned. For EEA or OECD member countries, the CB is authorized to rely on these counterparts having faithfully implemented EEA legislation or OECD recommendations and, thus, fulfilling all the requirements and conditions set by the French laws. The CB establishes with the competent authority the practical means and ways of cooperation. For other countries, the CB investigates whether acceptable terms for cooperation can be agreed on. In case of unsatisfactory supervision or unacceptable conditions for supervisory cooperation, the CB can oppose a proposal to branch out.
	As explained under Principle 23, the CB and CECEI have in place a number of MoU agreements with EEA authorities. For these MoUs, a practice of regular consultation and cooperation has been established, frequently exceeding the minimum frequency of meetings prescribed in the MoUs, certainly with regard to countries with important financial markets.
	For a heterogeneous financial conglomerate, a more elaborate three-party MoU has been prepared, which allows for far-reaching cooperation and for a clear sharing of responsibilities and information between the supervisors concerned. For heterogeneous international financial conglomerates the CB has in place arrangements for cooperation and exchange of information with other domestic supervisors, such as the AMF (see above) and the CCAMIP.
	In addition, EU Directive 2002/87/EC provides for a set of rules on the supervision of financial conglomerates. The Directive establishes the principle of supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. Supplementary supervision should cover all financial activities identified by the sectoral financial legislation. This directive obliges to increase collaboration between authorities responsible for the supervision of credit institutions, insurance undertakings and investment firms, including the development of ad hoc cooperation arrangements between authorities involved in the supervision of entities belonging to the same financial conglomerate. France is planning to bring into force the laws, regulations and administrative provisions necessary to comply with this directive before August, 2004.
	For all foreign establishments of French banks and vice-versa, satisfactory agreements for supervisory cooperation are in place and operational. Furthermore, informal exchanges of information have been taking place for several years now with other supervisors of the world’s leading financial markets. Other formal bilateral agreements are under preparation. However, the CB wishes to limit the formal bilateral agreements to countries which share the same concern for transparency in the communication of information, professional secrecy and, more generally, compliance with and effective application of the criteria developed by the Basel Committee.
	In the context of international arrangements for the exercise of supervision over cross border financial institutions or conglomerates, the arrangements include names and coordinates of contact persons, to facilitate and expedite the establishment of contact between home and host supervisors, of which there could be several, between countries as well as within countries.
	At present, the activities of French banks in other EEA countries are generally small when compared to their domestic activities (by contrast, operations in the United States and in several Asian countries account for a significant part of the consolidated balance sheet of the largest banking groups). Thus, the coordination of France’s supervisory activity with that of its counterparts appears to be sufficient, based on bilateral MoUs, and discretionary exchanges of information. The active participation of the French authorities in both European and international consultation forums on matters of cooperation places them in the forefront of international cooperation.
Assessment	Compliant
Comments
Principle 25.	Supervision over foreign banks’ establishments
	Banking supervisors must require the local operations of foreign banks to be conducted to the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision.
Description	As stated under Principle 24, the CB has full power to enter into any agreement or arrangement to mutually share information with its peers abroad concerning internationally active banks. For branches of EEA banks, European regulation entrusts full supervisory responsibility to the home-country supervisor, with the exception of liquidity supervision and the compliance with rules of conduct and money laundering provisions. Branches of non-EEA banks are subject to the same rules and regulations as are French banks. The CB may, however, accept that these branches meet different requirements (e.g., with regard to solvency and large exposures) provided that: (a) the home-country regulations require full consolidation of the risks taken abroad by the mother-bank; (b) the latter commits itself to supervise the operations and the situation of its branch on the same basis and principles as for a home-based institution and this under the supervision of its national supervisory authority; and (c) an equivalent treatment is granted to the branches of French banks in the country concerned.
	For subsidiaries, France, as the host-country, must provide for the full respect of its rules and regulations, as such institutions are incorporated under French law, and hence are subject to full CB-supervision, with both on-site and off-site examinations, on the same basis as French banks. The CB also has the same sanctioning powers over such subsidiaries as over French banks, inclusive of the right to close their operations. Unlike branches of foreign banks, French subsidiaries of foreign banks are also covered by the FGD. Since branches of EEA banks are covered by the deposit guarantee scheme of their home country, in accordance with EEA directives on deposit guarantees, the coverage of their customers is equivalent to that under the French regime.
	Cooperation with the home-country supervisor ensures that the latter is enabled to perform fully consolidated supervision and that it can be called upon to take supervisory action whenever serious problems might occur. In addition, for licensing, the CECEI, before making any decision, may seek the advice from the home-country supervisory authority and its assessment of the project.
	Overall, the prudential norms applied to foreign banks are as stringent as those applied to French banks. Within the EEA, prudential rules are harmonized. Nevertheless, the CB may allow exceptions for branches from countries whose regulations are at least as stringent as in France. Furthermore, the CB does not rule out the possibility of asking such branches to increase their own funds if they appear insufficient in relation to their exposure. Off-site supervisors regularly verify the rules that apply to foreign institutions. Likewise, the CB frequently organizes on-site supervision of the branches of foreign banks, as for branches of French banks. In the event of a serious deficiency, the matter may be referred to the home country authorities, a practice which has become more widespread with the possibilities offered by the 1999 FSFA.
	The annual report of the CECEI describes in more detail its practices with regard to cooperation with foreign supervisory authorities, including obtaining in all cases of establishment of a foreign bank in France the approval of the supervisory authority charged with the supervision on a consolidated basis of the group.
Assessment	Compliant
Comments

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Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

Principle 1.	Objectives, autonomy, powers, and resources
	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	See descriptions of principles 1 (1) – (6)
Assessment	See assessments of principles 1 (1) – (6)
Principle 1(1).	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks.
Description	The main legislative basis of financial sector supervision in France is the COMOFI, which compiles the Banking Act 1984, as amended in 1996 by the Financial Activity Modernization Act (FAMA 1996), the 1999 Savings and Financial Security Act (SFSA 1999), and the 2003 Financial Security Act (Loi de Sécurité Financière, LSF). The COMOFI identifies and clearly regulates the three authorities separately responsible for the three main banking supervisory functions: (a) regulation: Minister in charge of the economy, (b) licensing: CECEI, and (c) supervision: CB. The BdF, the CB, and the CECEI are closely connected through joint staff and chairmanship (see also CP 1(2)). The legislative framework for financial supervision, as currently compiled in the COMOFI, has been recently revised to take account of new developments and to accommodate institutional streamlining.
	The CB is an “independent administrative authority” responsible for the supervision of individual credit institutions (banks and other credit institutions) and individual investment firms with regard to their financial condition, operating practices and compliance with rules and regulations. The CB has powers to issue injunctions and impose sanctions. The FSA 2003 has expanded the range of sanctions that it could impose on the retail Bureaux de Change, or door-to-door selling of financial services (COMOFI, Articles L.520-3 and L.341-17 respectively).
	Under the FSA 2003, the MoE is now directly responsible for setting regulations for credit institutions and investment firms, notably also covering internal controls, minimum capital, and management standards. Previously the authority to issue prudential standards was vested in the CRBF, with formal approval by the MoE; the CRBF has issued a broad network of regulations on all aspects of prudential supervision. In particular, all relevant regulations, for instance on licensing, capital adequacy, liquidity, internal controls, risk diversification, reporting, and other intervention mechanisms have been issued. COMOFI, Art. L.611-1 now vests this authority in the MoE. The MoE also chairs the Comité de la Réglementation Comptable (CRC), which sets accounting rules for, inter alia, banks, investment firms and financial holding companies. Before regulations are issued, the Comité Consultatif de la Législation et de la Réglementation Financières (CCRLF) and the Autorité des Marchés Financiers (AMF) with regard to investment firms should be consulted. Regulations issued by the MoE may not infringe upon the jurisdiction of the AMF (COMOFI, Art. L.614-2). The CCLRF, together with the Comité Consultatif du Secteur Financier (CCSF) are consultative bodies with cross sector membership and with industry membership. The CCSF may issue recommendations and provide advice on general matters relating to the financial sector, upon the initiative of its members, or of the MoE. The CCLRF advises the MoE on all draft regulations with regard to financial matters and draft EU directives, except in areas under the competence of the AMF (COMOFI L614-3). The composition of the CCRLF is to be established by a decree of the Council of Ministers.
	Under the COMOFI (Articles L.612-1–L.612-5), the CECEI is responsible for granting licenses, authorizations, and exemptions for banks and investment firms (except asset management firms). When a license is withdrawn as a sanction, the CB is the competent authority. The CECEI may obtain advice from the CB on any prudential issues that come up in the licensing process. In practice, both bodies cooperate closely on a day-to-day basis. CECEI authorization must also be obtained in case of significant changes in the situation of the institution. The latter includes restructuring of the shareholder base, changes in corporate legal form, and the appointment of senior managers. The CECEI is consulted by the Conseil de la Concurrence with regard to any change in ownership structure in a bank or investment firm which could affect competitive conditions in the banking or investment industry. The CECEI is also responsible for the inward and outward implementation in France of the EU rules on a single EU banking passport (right of cross border establishment of branches and cross-border provision of services).
	Under the new legislative framework, overall surveillance of the financial markets in which banks and investment firms operate is shared between the AMF and the BdF. The AMF, an “independent public authority” with legal personality, issues authorizations to engage in the business of an investment firm. Supervision exercised by the AMF focuses on asset management companies, and supervision of compliance with rules of conduct by investment firms and credit institutions. It specifically, (a) verifies information published by companies; (b) issues authorizations for unit trusts and mutual funds; (c) approves the program of operations of banks and investment firms when these intend to provide asset management services; and d) monitors compliance with laws against insider trading and market manipulation. It also participates in the regulation and oversight of European and international markets of financial instruments (COMOFI L.621-1). The BdF has a residual supervisory role in the negotiable debt instrument markets and monitors the unregulated money market.
	Separate legislative and institutional arrangements have been made for supervision of the insurance sector. France does not have a unified system of financial sector supervision, although arrangements are in place to assure sufficient cooperation and coordination.
	The creation and functioning of a FGD is regulated by the COMOFI Articles L.312-4 through L.312-18. The FGD has legal personality and comprises a system for the reimbursement of deposits which have become unavailable due the illiquidity of the institution. The FGD also covers bank guarantees (cautions, Art. L.313-50), as well as certain forms of investments in securities (COMOFI Articles L.322-1 and L.322-2). The FGD is funded by the participating institutions through contributions and if needed borrowings or guarantees from the members. The FGD is overseen by a Conseil de Surveillance made up of bank members of the FGD, and managed on a day-to-day basis by a directoire appointed by the Conseil de Surveillance. The overall contribution levels are fixed by the MoE, but calculations for individual bank contributions are performed by the CB, as are the pay-out levels. The FGD has an excellent website (www.garantiedesdepots.fr) which provides very clear information how the FGD functions and can be accessed. The mutual banks are also mandatory members of the FGD, and contribute to its funds (COMOFI Art. L.312-7 III). Upon request of the CB, the FGD can intervene in a bank (COMOFI Art. L.312-5 II), when a bank is considered unable to meet its obligations when due. It may also lend to, or take an equity interest in a bank in distress, and is authorized to accept participations in a mutualist structure, in exchange for assistance
	A number of elements have been put in place in the interest of adequate coordination and cooperation between the agencies responsible for aspects of banking supervision, for instance: The Collegedes Autorités de Contrôle des entreprises du Secteur Financier (CACESF), replacing the former Comité de Liaison des Autorités Monétaires et Financières (CLAMEF), in which the chairs of the CB, AMF and the CCAMIP exchange information on cross-sector issues, prepare regulatory proposals to improve cross-sector supervision, and facilitate exchange of staff to enhance a cross-sector approach to financial sector supervision (COMOFI Art. L.631-2). Chairmanship of the governor of the BdF of the Boards of the CECEI and the CB (COMOFI Articles L 612-3, and L 613-3); Representation of the governor of the BdF on the Board of the AMF (COMOFI Art. 621-2); Membership of the Boards of the three main supervisory bodies overlaps to a considerable extent (see COMOFI, L.612-3, L.613-3, and L.621-2): all three boards comprise members of the judiciary (Cour de Cassation), representatives of the MINEFI and/or the Trésor; the president of the AMF is member of the CECEI, the MoE appoints representatives of the state in all three Boards, and civil society is represented on all three Boards; Staff regularly rotates between the department of the BdF which services the CB and CECEI and other departments of the BdF; Exchange of information between the CB, CECEI, AMF, CCAMIP, the Comité des Entreprises d’ Assurance (CEA), FGD, the guarantee fund for insurance companies, market enterprises and chambres de compensation (COMOFI, Art. L.631-1); and Joint meetings are organized twice a year between the CB and the CCAMIP, or more frequently as needed, to discuss issues of common interest (COMOFI, Art. L.613-3 (3).
	In addition, the CSF 2003 has reduced the number of supervisory agencies, and has provided for better sharing of information, coordination and cooperation, for instance by appointing the chairpersons of the CB and the CCAMIP to each others’ Boards.
	Taken together, while logical and consistent with the objectives of the authorities, i.e., a specialized system for the supervision and regulation of each of the main components of the financial markets, the institutional structure could be seen as complex. The specialized “columns” for each of the sectors (i.e., banking, insurance and securities) consists of a regulatory layer, a licensing layer and a supervisory layer. Coordination is, however, enhanced by the considerable overlap in the composition of the oversight bodies and the definition of responsibilities. Within each sector, the responsibility for supervision, including problem resolution, is clearly defined. Also, as described above, a number of coordination mechanisms have been put in place between supervisory authorities. The authorities point out that in most situations, including problem situations with regard to institutions active in more than one financial sector, it will be clear which of the bodies is to function as “lead supervisor.” It is also pointed out that in practice, the officials and staff of the three supervisory authorities work closely together to resolve issues of common interest. With regard to banks, there is no doubt that the CB takes the lead in resolving any stability issues related to banks. The authorities stress that in problem situations the actual channels of action and communication become much simpler in practice, and the “unofficial” structure is fully effective.
	Examples of how the structure functions in concrete cases of problems with regard to financial institutions are mentioned under BCP 1 (4) below (cases of banks which faced serious problems which ended in either re-organization of the shareholdings, transfer of the bank’s assets to other banks, and/or the closing of the bank). Bilateral meetings between the CB and the CECEI staff take place before every regular meeting of the board of the CECEI and multilateral meetings take place at least every month between CB, CECEI and AMF services to address individual and general issues of common interest.
	Art. L.613-1 of the COMOFI states that the CB is charged with monitoring compliance with the rules and regulations and is authorized to take sanctions against cases of compliance. This authority is delineated in more detail in COMOFI Art. 613-21. An institution that has infringed upon a legal or regulatory requirement, has ignored a recommendation or warning, has not complied with an order to reestablish the sound financial condition of the institution, or has not complied with conditions attached to the license or a previous decision of the authorities, can be subject to sanctions by the CB which can include issuance of a warning, a reprimand, a prohibition to engage in specific activities, to suspend one or more managers, appoint a temporary administrator, remove one or more managers with or without simultaneous appointment of a temporary administrator, and have the institution stricken from the register, with or without appointment of a liquidator. In specific cases, payment of dividends can be prohibited, and money penalties imposed. The CB can disclose to the public sanctions taken against an individual institution.
Assessment	Compliant
Comments
Principle 1(2).	Each such agency should possess operational independence and adequate resources.
Description	Operating as an “independent administrative authority,” i.e., placed outside the regular administrative structures, the CB is a Collège of seven members, i.e., the governor of the BdF (or his/her representative), “chairman ex officio,” the president of the CCAMIP (or his/her representative), the Director of the Trésor of the MINEFI (or his/her representative), and four members appointed by the MoE, including a member of the Conseil d’Etat, a judge of the Cour de Cassation, and two members chosen for their individual expertise in banking and finance. The oversight of the CB is therefore subject to considerable checks and balances. The CB can independently issue instructions to implement regulations set by the MoE, and take a broad range of remedial actions against banks. Licensing authority is vested in the CECEI, which is also the competent authority for a number of administrative decisions with regard to banks, for instance approval of new establishments of banks, changes in management and share ownership. The CECEI is also chaired by the governor of the BdF (or his/her representative). Other members of the board of the CECEI include the Director of the Trésor of the MINEFI (or his/her representative), the Chairperson of the AMF (or his/her representative), the Chairperson of the Managing Board of the Deposit Guarantee Fund (FGD) (or his/her representative, member of the Managing Board), and eight members, including a member of the Conseil d’État, a member of the Cour de Cassation, a senior manager or ex-manager of a credit institution, a senior manager or ex-manager of an investment firm, two trade union officials representing the staff of credit institutions, and two individual experts. Also here, elaborate checks and balances have been put in place with regard to the governance of the agency. Although the chairmanship of the CECEI and the CB is by law performed by the governor of the BdF, who is appointed by the Council of Ministers for a term of six years, once renewable, the secretaries general of these two bodies are appointed for an open term by the MoE, on a proposal of the Governor of the BdF. It is thus assumed, although the COMOFI does not make this explicit, that the Secretaries General of the CB and the CECEI can be removed from their position at any time, for just cause and following the same process. The grounds for removal would not be disclosed.
	The BdF plays a pivotal role in the overall governance and the day to day operations of the CB and the CECEI. The governor also has a seat on the AMF and the CCAMIP. The CB and the CECEI are staffed and provided with logistical support by the BdF, according to an agreement between the BdF and the CB (COMOFI Art. 613-7), thus removing direct budgetary interference in the resources of the CB. The governor and two deputy governors of the BdF are appointed by the Council of Ministers for an irrevocable six year, once renewable, term. The remaining six members of the Governing Council of the BdF are also appointed by the Council of Ministers for an irrevocable renewable nine-year term. The fixed term appointments help assure the independence of the BdF, which provides the chair, primary resources and coordinates the oversight of the CB and the CECEI. Decision making within the CB is by simple majority.
	The Director of the Trésor of the MINEFI, also appointed by the Council of Ministers may, as a member of the oversight bodies of the CECEI, request that any matter for decision by the CECEI be postponed for further consideration, thus giving the MINEFI a degree of power over the agenda of the CECEI. In practice, however, there is no significant evidence of interference by the authorities in the operational independence of each agency. Both have the resources needed to carry out their mandate. The budgets of the CB and the CECEI are part of the budget of the BdF, and are thus independent from direct political interference.
	Currently, there are almost 1,200 institutions under supervision of the CB, and the CB and CECEI together have some 585 staff to perform this task. The staff of the CB and of the CECEI are highly respected by the industry. They are well trained and the CB has attracted staff with university degrees in the disciplines necessary for the work of the CB (economists, lawyers, accountants). Effective IT systems are in place to facilitate the work of the CB with regard to individual institutions and in aggregate. Salaries offered, career prospects and benefit levels seem to be sufficiently competitive to withstand competition from the private sector. Furthermore, the CB has allocated funds for training and inspection travel abroad, and has been able to attract for temporary as well as permanent assignments senior level staff from commercial banks and academic institutions to help develop its expertise on certain issues.
Assessment	Compliant
Comments	The CB and the CECEI are independent administrative authorities, and their governance is subject to checks and balances that help maintain its operational autonomy. However, they are clearly not independent from the BdF. Based on the requirements of the Maastricht Treaty, and reflected in the Charter of the BdF, “the BdF, represented by its governor, deputy governors or any other member of the Monetary Policy Council shall neither seek nor accept instructions from the government or any other body in the performance of the tasks arising from its participation in the European System of Central Banks.” The dependence of the CB and the CECEI on the BdF is not a matter of concern.
	Also, given the statutory membership of the governing bodies of the CB and the CECEI, in particular the role of the Director of the Trésor, and the role of the MINEFI in setting regulations, it is difficult to assert that policies, plans and processes are set entirely independently from the government, and that the latter is not involved in operational supervisory and regulatory activities. Privatization of the government-owned banks has reduced the scope for conflict of interest, and there is no clear evidence that the participation of the Trésor in supervision and regulation has been a substantial issue in the past. Nevertheless, this involvement contrasts with the recent trend in many European countries toward greater institutional independence of the supervisory and regulatory agencies.
	In view of the size of the French banking system, the staff of the CB and the CECEI appears somewhat limited. Nevertheless, senior management of the CB and the CECEI are firmly of the view that budgets and staff are adequate, and that excessively rapid expansion could lead to problems of absorption.
Principle 1(3).	A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision.
Description	The COMOFI (Articles L 612-1, L 511-10 and L 511-15) clearly grants the CECEI the exclusive authority to issue and withdraw banking licenses. The CECEI may attach conditions to the license, that go beyond minimum standard prudential requirements. Based on compliance with the terms and conditions of the original license, or when the institution requests, the CECEI can withdraw the license. Only the CB is authorized to withdraw the license as a sanction.
	The COMOFI also sets out the conditions that must be met for the issuance of a license, including the program of operations (business plan) of the bank, its proposed technical and financial resources, the suitability (fit and properness) of the managers and contributors of the bank’s capital and where applicable their guarantors. Any substantive change in the way a bank meets the condition must receive prior approval of the CECEI. This can include the acquisition of capital shares that cross or fall below a threshold of 10, 20, 33, and 50 percent (the latter as a measure of full control over the bank), changes in the legal form of the institution, and redefinition of the scope of operations.
	The CECEI is to be notified in advance of intentions of banks outside France to open representative, liaison or information offices in France, must be informed immediately when persons are appointed to positions with powers to determine the policies of a bank, and after any changes to the capital structure of the bank.
	The CECEI is also the implementing agency for France of the single European banking passport, vets French banking institutions’ plans to set up branches in other EU countries, and must be notified in case of cross border provision of services in other EU countries.
	Based on the COMOFI (Arts. L.613 vv), the CB has full supervisory powers over licensed institutions, including the powers to gather information from banks in the form of periodic reports, ad-hoc information requests, off-site analysis, on-site inspections, and imposition of sanctions including withdrawal of the license.
	Under COMOFI Art. L.611-1 vv., the key regulatory powers are granted to the MoE. The MoE may issue regulations on capital of banks, acquisition of shareholdings, setting up of networks, acquisition of equity participations, solvency, liquidity, financial condition, disclosure of information to be sent to the supervisory authorities, rules on types and conditions of credit, deposit protection, rules on accounting, internal controls, IT, and safety of information.
	Regulations are adopted after consultation of the CCLRF. In case the CCLRF issues a negative opinion on the proposed regulation, the MoE is obliged to seek a second opinion of the CCLRF before the regulation can be adopted.
Assessment	Compliant
Comments	New regulations are generally prepared in close cooperation with the banking industry and thus implemented smoothly.
Principle 1(4).	A suitable legal framework for banking supervision is also necessary, including … powers to address compliance with laws as well as safety and soundness concerns.
Description	The legal framework for banking supervision in France is laid down in a number of statutes and regulations, primarily the COMOFI, which authorize the CB, the CECEI and the MoE to perform regulatory, administrative and supervisory functions with regard to the banking sector in France. Art. L.612-1 charges the CECEI with the issuance of bank licenses or exemptions from the licensing requirements as provided for in the law and regulations. Art. 613-1 charges the CB with monitoring compliance with the legal and regulatory requirements for banks and to apply sanctions against compliance. The CB inspects the business operations of the bank, monitors its financial condition, and watches over the proper conduct of the banking business.
	Supervision is applied at three levels: (a) continuous supervision by data analysis (“off-site”); (b) supervision by inspection visits “on-site”); and (c) general oversight of the banking system. Techniques designed and implemented through both off-site and on-site supervision pursuant to those powers enable the CB to assess institutions’ compliance with the applicable statute and regulations, as well as prudential and safety and soundness concerns.
	The CB has unrestricted access to all aspects of an institution’s operations, its subsidiaries and direct and indirect controlling shareholders (COMOFI, Articles L.613-8, L.613-10 and L.613-11) and to require corrective action when necessary (COMOFI, Articles L.613-15 and L.613-16). Failure to implement the necessary remedies exposes the bank to progressively harsher sanctions, which the CB may disclose to the public (COMOFI, Art. L.613-21).
	The CB can issue a recommendation or an injunction to “take all necessary measures within a given period to restore or strengthen its financial equilibrium or to rectify its management methods.” It can also appoint a provisional administrator “to whom will be transferred all the powers for administering, managing and representing” the credit institution (COMOFI, Art. L.613-18); or appoint a liquidator (COMOFI, Art. L.613-22) in case an institution’s authorization is withdrawn. COMOFI Art. L.613-21 provides that where a credit institution has contravened a law or regulation relating to its business (including failing to respect commitments given at the time of the granting of an authorization by the CECEI), has not complied with an injunction or has not heeded a warning, the CB may impose sanctions, that is, a warning, reprimand, prohibition of certain operations, temporary or permanent removal of senior executives, with or without the appointment of a provisional administrator, and withdrawal of the institution’s authorization—with or without the appointment of a liquidator. These disciplinary sanctions may be appealed to the Conseil d’Etat.
	The FGD also plays a role in dealing with weak banks. Thus, “the FGD shall intervene at the request of the CB as soon as it (the CB) finds that one of the member institutions no longer able to repay funds received…” (COMOFI Art. L.312-5). Furthermore, at the proposal of the FGD may also take preventive action against a credit institution whose situation gives rise to fears that deposits… may become unavailable at some time in the future….” (COMOFI Art. L.312– 5). Moreover, the COMOFI Art L.613-34, provides that “The CB shall hear the Chairman of the managing board of the FGD for any matter concerning an institution in respect of which it envisages seeking the intervention of the FGD or proposing to the FGD that it should take preventive action. The CB shall also hear the Chairman of the managing board at his request.” The immediate closure of a troubled credit institution can be achieved once a temporary administrator has been appointed by the CB, the administrator himself having the capacity (and responsibility) to declare the closure.
	With the 1999 Savings and Financial Securities Act (SFSA), the framework for the orderly and transparent exit of troubled banks has been strengthened. In particular, the law enhanced the CB’s ability to enforce remedial actions (such as the removal of management) with minimum interference of the courts. It also authorized the FGD to provide financial support to a potentially insolvent institution. This should facilitate the rapid transfer of a troubled bank’s deposits to sound banks, thus limiting risks of contagion, and promoting more transparent management of its assets.
	Corrective actions can be preceded by a more detailed investigation by the CB including collection of additional information, or a full on site inspection, and a meeting with the manager and internal auditor. A second layer of action includes the formulation of recommendations addressing specific fields, and asking for corrective measures. Subsequently the CB examines the situation of the bank with a view to either; (i) issuing a formal injunction; or; (ii) taking a disciplinary sanction, ranging from a warning to the compulsory resignation of a manager, appointment of a temporary administrator, or withdrawal of the license and liquidation. Over the past years, the authorities have shown their ability to take strong action against banks: in November 1997 an institution whose sole business was the provision of guarantees, Mutua Equipement, was delicensed and liquidated. In the early 1990s, apart from its intervention in Crédit Lyonnais and in other public sector institutions such as regional development corporations, which were placed under temporary administration by the CB and in most cases liquidated, the CB had to intervene in banks with heavy exposure to the real estate sector, such as Banque Pallas Stern (1995) or with specific problems, such as, at the end of 1994, Banque Commerciale Privée. The business of the latter bank was transferred to a new bank, created for this purpose with an insurance company as its main shareholder. In 1997 the Banque Opera and Laficau were delicensed and ultimately their activities taken over by an insurance company, GAN. Transmedia was an institution specialized in the administration of means of payment. When its capital fell below the minimum, and shareholders failed to raise new capital, the institution was delicensed in November 1998.
Assessment	Compliant
Comments
Principle 1(5).	A suitable legal framework for banking supervision is also necessary, including… legal protection for supervisors.
Description	The CB and the CECEI operate under general French administrative law. As neither are legal persons, they cannot incur liability in their own right. Actions against the acts or omissions of the CB or the CECEI need to be brought against the French state. In cases where a suit is brought against an official of the CB or the CECEI, the case is redirected against the state. Furthermore, the state may incur liability by the CB’s or CECEI’s acts or omissions which can be qualified as serious negligence (confirmed on two occasions in the last two years).
	Senior officials and employees of the CB, CECEI, and of the BdF’s Credit Institutions and Investment Firms Division are protected by general principles of administrative law applicable to the persons in charge of a public function. A Public Servant may not incur personal liability for an administrative error committed in the exercise of his/her public office. In those instances where such senior officials and employees are pursued for actions taken in the course of their duties, they are entitled to claim their costs from their employer. Only in case of an alleged personal fault (e.g., abuse of a client) or criminality, the Public Servant may be held liable. Nonetheless, should he/she be able to argue convincingly that no personal fault is involved, he/she may request the employer to cover the legal expenses.
Assessment	Compliant
Comments	The collegial nature of the CB’s decision-making provides a further layer of protection against suits aimed at any one of its members. Moreover, both the CB and the staff of its General Secretariat are adequately protected against the legal costs of defending legitimate actions. Thus, legal protection for supervisors is satisfactory at present.
Principle 1(6).	Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	Art. 60 of the 1999 SFSA strengthened cooperation between domestic supervisory authorities, by creating a joint body, the CACESF, comprising the Chairmen of the CB, the AMF and the CCAMIP, within which these agencies can exchange information. Operationally, cooperation has been enhanced and formalized by a charter signed by the CB and the CCAMIP in October 2001. Aside from facilitating the exchange of information, this cooperation has for instance led to a joint study on the development of credit derivatives and a joint survey (with the AMF and the BdF) on credit risk transfers. It has also provided a basis for coordinated on– site inspections in banking and insurance linked businesses.
	Art. L.631-1 of the COMOFI permits the CECEI, the BdF, the CB, the CCAMIP, the AMF and the FGD to exchange information, subject to the professional secrecy obligations of each organization. Under this provision, in conjunction with Art. L.312-5 of the COMOFI, the CB is authorized to notify the FGD of the weak condition of a bank and request the FGD to intervene.
	Art. L.613-12 of the COMOFI provides for exchange of information between the CB and the banking supervision authorities of a country within the European Economic Area (EEA). In particular, when the authorities of an EEA country wish to verify information concerning a “legal person” which controls a credit institution or investment firm registered in France, the CB is required to either perform this verification itself on behalf of the requesting state, or permit the foreign supervisory authorities to do so. Equally, where a “legal person” has its registered office in an EEA State, on-site supervision may be effected by the CB by requesting the foreign authorities to verify the information on its behalf or, with the country’s consent, by appointing its own representatives. In the interest of effective supervision, the CB may require branches of French banks in an EEA country to disclose all relevant information, and, after informing the country’s supervisory authorities, perform an on-site inspection itself.
	Exchange of information with the supervisory authorities of the EEA countries is facilitated by the harmonization of the rules on professional secrecy of supervisors within the EU, notably the Second Banking Coordination Directive. Within this framework, the CB and the CECEI have built an extensive network of Memoranda of Understanding (MoU) to facilitate the exchange of information. The Secretary General of the CB is a member (deputy-chairperson) of the new Committee of European Banking Supervisors and of the European Central Bank’s (ECB) Banking Supervision Committee, within which EU supervisory authorities exchange information. The General Secretariat of the CB takes part in technical working parties set up by both bodies.
	In the case of EEA supervisory authorities, since the adoption of the1999 SFSA, which has been codified in the COMOFI Art. L.613-13, the CB has been vested with the power to conclude bilateral agreements with the authorities of a state not party to the EEA entrusted with duties similar to those entrusted in France to the CB and provided that such authorities are themselves bound by an obligation of professional secrecy. The objectives of this provision are (i) to permit the CB to conduct on-site inspections of establishments abroad of French banks or financial holding companies; (ii) to permit the CB to conduct, at the request of foreign supervisory authorities, on-site inspections of establishments in France of foreign banks (such inspections may be carried out jointly); and (iii) to define the modalities of the transmittal, receipt and exchange of supervisory information.
	Art. L.613-20 also authorizes the CB to share information with authorities in EEA countries, even without a bilateral agreement, provided that; (i) the foreign authority is bound by an obligation of professional secrecy subject to the same guarantees as in France; and (ii) there is reciprocity.
	The CB has concluded a number of bilateral agreements with EEA countries, among which the Czech National Bank (June 2002), the Office of the Superintendent of Financial Institutions (OSFI) of Canada (July 2002), the State of New York Banking Department (July 2002), the National Bank of Slovakia (November 2002), the Bank of Slovenia (October 2002), the Commission Fédérale des Banques of Switzerland (November 2002), the Financial Supervisory Commission of Korea (September 2003), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (May 2004).
	In general—and subject to the disclosure mechanisms described above—the staff of French supervisory authorities are bound by a professional secrecy obligation, except in cases specifically stipulated by the law. The COMOFI Art. L.641-2 provides that breaches of that obligation may be subject to criminal prosecution. Furthermore, the COMOFI, in Art. L.613-14, requires that the CB refuse any request for assistance from a foreign supervisory authority where the result is likely to be prejudicial to French sovereignty, security, economic interests, or public policy, or when criminal proceedings have been initiated on the matter at issue.
Assessment	Compliant
Comments
Principle 2.	Permissible activities
	The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible.
Description	France has a broader definition of “credit institution” than other EU countries (the definition of a bank under the Second Banking Coordination Directive includes the elements deposit taking and granting of credits for the bank’s own account).
	In Art. L.611-1 of the COMOFI, “credit institutions” are defined as “legal persons carrying out banking operations as their usual business.” “Banking operations” are then defined as any of the following three main categories of activities: the “receipt of funds from the public, credit operations, and making available to customers or managing means of payment.” Art. L.511-9 then further refines the definition of “credit institutions,” by setting out the various types of banking operations in which each category (i.e., “banks,” “mutual or co-operative banks,” “savings and provident institutions,” “municipal credit banks,” “financial companies” or “specialized financial institutions”) is permitted to engage. The definition of credit institutions thus includes institutions that provide credits, but do not collect deposits. This helps to explain the rather high number of institutions licensed by the CECEI and supervised by the CB. Art. L.511-5 of the COMOFI states that “it shall be prohibited for any person other than a credit institution to carry out banking operations on a regular basis.” Art. L.531-10 of the COMOFI provides that “no one other than an investment service provider may provide investment services to third parties as its usual business.” The COMOFI, in Arts. L.511-8 and L 531-11, prohibit – under threat of criminal liability (see COMOFI Articles L.571-3 and L.573-2) – the use of business names, advertising or any expression wrongfully implying that, or causing confusion whether an institution is an authorized credit institution.
	The CECEI’s authority under Art. 511-10 of the COMOFI to impose terms and conditions on a banking license, and that of the CB to impose sanctions on an institution where such terms and conditions are not respected (COMOFI Art. L.613-21), allow considerable control by the authorities over the nature of a bank’s business.
Assessment	Compliant
Comments
Principle 3.	Licensing criteria
	The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization’s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.
Description	The CECEI reviews several hundred applications per year, including those for new licenses, changes of license, changes in ownership and approval of new managers. In 2002, the CECEI approved 20 new licenses, of which 14 related to new institutions and 6 related to restructuring operations or changes in category of institution, 97 withdrawals of licenses, of which 38 cases of cessation of business, and the remainder related to restructuring or change of category. In 79 cases the CECEI approved changes in shareholder structure of which 31 cases in which control over the institution changed hands, including the acquisition of Credit Lyonnais by Crédit Agricole in 2003. Almost 390 requests for approval of management appointments were received. The COMOFI (Art. L.511-10 – L.511-13) provides that before granting a license, the CECEI must: (a) ensure that the institution meets the minimum capital requirement (Art. L511-11) and CRBF Regulation 92-14 as amended); (b) ensure that there are two senior managers of integrity and experience responsible for the overall direction of the institution’s conduct of business (Art. L.511-13); (the CECEI describes in more detail in its annual report what requirements must be met by the managers of a bank); (c) review the business plan (in coordination with the CB) and the available technical and financial resources (Art. L.511-10); (d) assess the suitability (fit and properness) of the investors (or their guarantors) (Art. L.511-10); and (e) “assess the applicant undertaking’s capacity to achieve its development objectives in a manner compatible with the smooth working of the banking system and which offers sufficient safety for its customers” (Art. L.511-10). The COMOFI (Art. L.511-10), further provides that the CECEI “may withhold authorization when it is likely to be hindered in the exercise of its supervision of the applicant undertaking either by the existence of equity links, or links of direct or indirect control between the undertaking and other natural or legal persons, or by the existence of laws or regulations of a EEA country when one or more of the above– mentioned persons are governed by such laws or regulations.” The minimum capital requirement (Art. 1 of CRBF Regulation 92-14) is EUR 5 million, EUR 2.2 million, EUR 1.1 million or EUR 1 million, depending on the type and characteristics of the credit institution.
	Although there is no legal requirement to do so, the CECEI consults the CB on license applications, a practice underpinned by the fact that the governor of the BdF is the Chairman of both the CECEI and the CB. Similarly, an institution’s adherence in practice to a business plan submitted to the CECEI is determined by the CB during its ongoing supervisory activities. The information needed to take a decision on the granting of the license is largely collected through CECEI’s application form (“Authorization Dossier”) which requests specific information on: (a) management; (b) proposed management and control procedures; (c) strategy; and (d) the origin of the initial capital. The CECEI may insist on increased initial capital in light of the business plan. Part IV of the Authorization Dossier, entitled “Declarations to be forwarded by the Contributors of Capital” requires shareholders to confirm that they are aware of Art. L.511-42 of the COMOFI, which allows the governor of the BdF, in his capacity as chairman of the CB, to call upon shareholders to contribute further capital if needed, in light of the financial condition of a credit institution.
	A centralized database on “fit and proper” characteristics of banking and financial institutions managers (FIDEC) has been created and is operational.
Assessment	Compliant
Comments	Although a formal requirement to do so is not in place, the CECEI routinely requests evidence of a EEA home supervisor’s prior consent to establish a subsidiary in France. The introduction of a formal regulation on this matter would be desirable.
Principle 4.	Ownership
	Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties.
Description	CECEI’s prior authorization must be obtained whenever the result of the intended actions of a person, or a group acting in concert would be: (a) to acquire or relinquish effective control over the management of the institution or firm; or (b) to acquire or relinquish 33.3 percent, 20 percent or 10 percent of the voting rights of the bank (this requirement is omitted in the case of an internal restructuring by French or other EEA groups) (CRBF Regulation 96-16, Art. 2 (1)). Also, see description under BCP 3.
	CRBF Regulation 96-16 also requires that each bank files with the CB information on each holder of at least 10 percent of its outstanding capital stock and gives to the CB the right to exact all necessary information on holders of between 0.5 percent and 10 percent of such outstanding capital stock. In addition, any acquisition of 5 percent or more of the institution’s (or firm’s) voting rights must be immediately reported to the CECEI. The latter may also require that an institution (or firm) identify those shareholders declaring holdings of between 0.5 percent and 5 percent of an institution’s voting rights (Art. 3).
	A transaction effected outside France which changes the allocation of an indirect equity interest in an institution or firm subject to CRBF Regulation 96-16 (Art. 2.1) must be reported immediately to the CECEI, which may decide that the effect of the transaction is sufficient to warrant the re-examination of the regulatory position of the institution (or firm) (Art. 2.2). With respect to those credit institutions which are listed on regulated markets, the COMOFI (Art. L.511-10) states that where a natural or legal person intends to initiate a take over bid – friendly or hostile– over such credit institutions, this person is compelled to inform the Governor of BdF, as Chairman of the CECEI, eight business days before the take over bid is filed with the AMF and/or made public.
	If the CECEI does not render its decision within a period of three months, a positive decision is considered to have been taken. Where a transaction is completed without first obtaining the required authorization from the CECEI, the COMOFI (Art. L.611-2), provides that the CECEI may apply to the courts to have the voting rights applicable to the shares in the transaction suspended.
	CRBF Regulation 96-16 requires that the prior approval of the CECEI be obtained (or that it be notified) in the case of proposed changes that would result in a change of ownership or the exercise of voting rights over threshold levels or a change in controlling interest. Given the “collegiality” of the French system of banking supervision, there is close collaboration between the CECEI and the CB on any such proposed changes. The CECEI may reject any request for approval of a change in ownership changes, but must state its reasons.
Assessment	Compliant
Comments
Principle 5.	Investment criteria
	Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.
Description	A participation (i.e., an equity interest over 10 percent) in another corporation (except in a financial institutions or an EEA registered insurance company), may not exceed 15 percent of the bank’s own funds (CRBF Regulation 90-06, Art. 4; also see COMOFI, Art. L.511-2). The aggregate of such acquisitions may not exceed 60 percent of the bank’s own funds. These limits are applied on a consolidated basis. On the basis of CRBF Regulation 90-06 (Art. 4), the CB may authorize a credit institution to exceed one of the limits set out in Art. 2, although the excess over and above these limits are deducted from the bank’s regulatory capital.
	CRBF Regulation 90-06, Art. 3b, allows exceptions to this rule for limited periods of time, when a bank holds the stock as a result of a financial support operation, the shares are held for the account of a third party, as a result of a bought underwriting deal, or as a result of a purchase order executed on behalf of a third party.
	On the basis of CRBF Regulation 96-16, the CECEI must give its prior approval for any investments—also of banks—in a supervised institution when the acquisition leads to control over the institution, or shareholdings exceed or fall below 10, 20, or 33 percent of the votes. Any acquisition over 5 percent must be notified to the CECEI. It is also sufficient to inform the CECEI when the acquisition (i) takes place between subsidiaries of one and the same corporation; and (ii) is located within the EEA. Acquisition transactions between companies registered outside France, concerning companies subject to supervision in France but registered outside France, must also be notified immediately to the CECEI.
	There is no requirement under current French law and regulations to obtain approval from the French supervisory authorities for the acquisition of interests in banking business in EEA countries before such investments are implemented, but the CB relies on an annual survey of banking establishments outside France to identify any such transactions.
	The COMOFI, Art. L.511-7, limits in general terms the extent of nonbanking activities that may be carried by a credit institution. CRBF Regulation 86-21 further limits total revenues from nonbanking activities to 10 percent of net banking income.
	Although CRBF Regulation 90-06 sets quantitative limits on the acquisition of nonfinancial sector equity interests, it does not yet require the supervisor to review a planned acquisition below these limits beforehand. Where a transaction is viewed as unsound, the COMOFI Art. L.613-16, authorizes the CB to “issue an injunction calling upon (the credit institution) to take all necessary measures within a given period to restore or strengthen its financial equilibrium, improve its management methods or ensure the adequacy of its organization to its activities.”
	COMOFI Art. L.511-10, authorizes the refusal of a license when it is likely that the CB would be hindered in its supervision of the applicant undertaking…by the existence of equity links or links of direct or indirect control between the undertaking and other natural or legal persons…” CRBF Regulation 96-16, specifically the latter’s requirement for notification to—or prior approval by—the CECEI of acquisition of equity interests in supervised credit institutions, allows the CECEI to reject corporate structures that present undue risk to the credit institution or create an impediment against effective supervision by the CB. The CB is also aided by CRBF Regulation 90-06, in particular the quantitative limits set out with regard to nonfinancial sector equity interests.
Assessment	Largely compliant
Comments	With the implementation of Directive 2002/87/EC (“Financial Conglomerates Directive”), this prior consultation procedure will be extended to cover equity interests taken in insurance companies, either in France or in any other EEA country. In order to reinforce the French regulation in this respect, revision of the CRBF Regulation 96-16 is under preparation and will be adopted by the MoE once the new CCLRF is appointed, This amendment will require prior approval of the CECEI for the acquisition of nonfinancial equity holdings as well as for the opening by French banks of branches or subsidiaries outside the EEA. Improvement in compliance with this principle is therefore underway.
Principle 6.	Capital adequacy
	Banking supervisors must set minimum capital requirements for banks that reflect the risks the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord.
Description	Laws and regulations require credit institutions to maintain both an absolute level of minimum capital (CRBF Regulation 92-14, Art. 1) and a minimum ratio of own funds to risk weighted assets (CRBF Regulation 91-05 and 95-02). Art. L.511-40 of the COMOFI states that all credit institutions must be able at any time to prove that their assets exceed their liabilities by an amount at least equal to the minimum capital. Moreover, according to CRBF Regulation 91-05 and 95-02, credit institutions shall observe at any time a minimum 8 percent ratio of own funds to risk weighted assets, on a consolidated basis, also covering market risk exposure and off balance sheet exposure. The capital adequacy requirements apply to all types of credit institutions, whatever their legal form or their structure. Financial holding companies are also subject to the same capital requirements. In addition, the CB can require (an) institution(s) to meet requirements on a solo or sub-consolidated basis, when allocation of capital within the group is perceived to be unbalanced or inadequate (see Principles 18 and 20) and it may refuse to include certain resources in the calculation of own funds when certain conditions are not met.
	Components of capital and own funds and the method for their calculation are defined in CRBF Regulation 90-02 and further detailed in the CB Instructions 90-01 and 96-01. Tier 1 capital is restricted to core capital and general reserves. Provided they meet strict requirements with regard of stability and capacity of absorbing losses, certain subordinated debt instruments (Tier 2) are taken into account but are limited in importance. Tier 3 instruments are strictly limited to the coverage of market risks (transposition of the Basel market risk amendment of 1993).
	French requirements on capital adequacy are fully in line with the Basel Capital Accord and European legislation. The latter includes both balance sheet and off balance sheet commitments, weighted according to the Basel Capital Accord rules. The COMOFI (Art. L.613-16), moreover, enables the CB to take disciplinary action against institutions that fail to meet minimum requirements; the CECEI and the CB may also require higher solvency ratios than this legal minimum whenever they deem this justified by specific risk characteristics of a credit institution. This power can be exercised in full discretion, no binding policy or line of conduct having been published by the CECEI or the CB in this respect. Moreover, whenever overall weaknesses or negative trends should appear in the financial system or with regard to significant types of activity, the governor of the BdF can issue a formal warning to the profession (as happened for real estate financing).
	Capital adequacy requirements for banks’ market risk exposures are set according to the standardized approach (CRBF Regulation 95-02). While most French banks use the standardized method to determine the capital charges incumbent upon their market risk exposures, major banks use their own internal models. The adequacy and effectiveness of these models must be assessed and approved by the CB, which has a specialist team for assessing their adequacy and effectiveness (see Principle 16).
	At least semi-annual comprehensive reporting on solvency to the CB is mandatory. In case a credit institution fails to meet the requirements, or whenever the evolution of ratios puts it at risk of shortfalls, the CB may require the bank to take corrective action.
Assessment	Compliant
Comments	France intends to implement the new Basel Capital Accord (Basel II) in due course, and to permit banks to apply the internal ratings based (IRB) capital adequacy calculation methods and advanced operational risk capital adequacy charge calculations envisaged in the new Accord. Several working groups involving on-site and off-site supervisors have been put in place in order to prepare future implementation of the Accord. In 2003, the CB has also engaged in a series of Information Missions with major French groups in order to evaluate the state of preparation of their IRB systems. French banks have participated in the quantitative impact studies of the Basel Committee to test the effect of the new proposals on banks’ capital adequacy levels.
Principle 7.	Credit policies
	An essential part of any supervisory system is the independent evaluation of a bank’s policies, practices and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.
Description	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 investment firms supervised by the CB. It indicates that it is a key responsibility for the bank’s management and board to provide for proper credit administration, risk measurement and monitoring, and to supervise the effectiveness of the policies and procedures established for this purpose (Art.s 18-24). Internal controls should include a control system for operations and internal procedures, the organization of accounting and information processing systems, risk and result measurement systems, risk monitoring and supervision systems, and a documentation and information system. Each credit institution must set up a consolidated system adapted to the nature and volume of its activities, its size, its establishments and the various types of risk to which it is exposed.
	Specifically, the regulation requires clear criteria to be set for the granting of loans according to their nature and importance, and to conduct a comprehensive forecast analysis of credit risk and verification after the fact of the profitability of credit operations. All operations must be analyzed by a unit that is independent of the operational entity, and lending or commitment decisions must be taken by two persons. For transactions of a certain nature or size, the two persons must occupy senior positions. Commitments must subsequently be subject to strict and frequent monitoring and analysis.
	The responsibilities of the decision-making body, executive body, and of internal and external auditors are clearly defined. Lending criteria should be set by top management and compliance controlled by the internal auditors. The regulation lays particular emphasis on the need to involve the decision-making body, with the optional assistance of an audit committee, in setting lending and loss limits, and to inform it of the extent of exposure, the main characteristics and concentration of risks, doubtful debts, and the results of the internal auditor’s work. Each year, credit institutions must provide to the supervisory authorities a report on the conditions in which internal control is conducted and on the measurement and monitoring of their exposure.
	The assessment of the credit process and risk management is conducted in large part through off-site supervision (including through a study of the abovementioned annual report), through the analysis of credit portfolios using the ratings produced by rating agencies and the BdF, and through regular meetings with bank managers. It is also a main area of attention in regular on– site supervision. As described below under Principle 16, several external sources (national credit register, ratings by the BdF and by rating agencies, access to a national register of published annual accounting statements) allow CB inspectors to use information from multiple sources to help assess banks’ systems and procedures, including bank’ own credit risk assessment. On-site inspections also give adequate attention to the total exposure of debtors and to large exposures.
Assessment	Compliant
Comments	For large segments of the credit market, especially for credit to small and medium enterprises, the toughness of competition between banks appears to have often impaired banks’ capacity to secure margins that adequately reflect the credit risk involved, particularly in the event of an economic downturn. While the BdF and the CB have repeatedly stressed such risks (including through the publication of a White Paper (Livre Blanc) on this matter), and have instituted a procedure for notifying all credits with abnormal margins to the CB, only limited results have been obtained so far. This issue is revisited under Principle 8.
Principle 8.	Loan evaluation and loan loss provisioning
	Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.
Description	CRBF Regulation 97-02, in particular Articles 18 and 24, requires banks to provide for an adequate system for assessing the quality of the loans, in particular through the classifications of loans into buckets according to their internal rating system. Provisioning is required on the basis of individual reviews of credit files or a statistical analysis of past losses. There is no harmonization as to the number of buckets or the standards for internal ratings, nor specific requirements for performing loans to be broken down into normal loans and special mention loans. Instead, credit institutions must use judgment, on a case-by-case basis (except for small customers loans with similar characteristics) for assessing their risk profile and determining the level of provisions. This approach is meant to induce banks to make their own assessments and seeks to avoid the potential pitfalls of excessively “mechanistic,” “by-the-book” loan classification and provisioning procedures.
	In addition, accounting rules (Comité de la Réglementation Comptable, CRC No. 2002-03) require more detailed information regarding doubtful, “compromised” and restructured debts. New subcategories have been introduced: within the category of standard debts, a new category of restructured debts with nonmarket conditions has been created; within the “doubtful” category, a new category of “compromised” debts including restructured debts with outstanding payments and doubtful debts for which reclassification as “standard” is not foreseeable. According to these accounting rules and the former CB instruction 94-09, a debt must be classified as doubtful when it is probable or certain that the creditor will not recover all or parts of amounts due according to the contractual terms, in one of the following circumstances: (a) payments are three months overdue (six or nine months respectively for property loans or loans to local authorities); or (b) the situation of the debtor presents such characteristics that, even if no payment is yet overdue, it is probable or certain that the creditor will not recover all or parts of amounts due according to the contractual terms; or (c) legal proceedings have been filed against the debtor. Classifications by the banks are examined by the CB on a regular basis, both on-site and off-site. An effort by the CB to assess the consistency of the ratings (and rating systems) across banks is currently under way in order to prepare for the implementation of Basel II.
	Banks must seek to obtain recent and reliable information on the financial situation of their customers. In particular, they have access to a detailed Credit Register at the BdF (see Principle 16), which they also have the obligation to update. France also has a well-developed rating industry, including an in-house rating system at the central bank (cotation BdF), which is generally well used by the banks in their credit decisions and assessments.
	The level of provisions must take account of all prudently valued security (collateral or guarantees) and the costs and likelihood associated with their recovery. Provisions must be constituted as soon as a risk of nonrecovery arises. Provisions must cover at least the amount of recognized but not yet collected interest income in relation to doubtful loans. Moreover, CRC No. 2002-03 requires determining provisions using the discounting method whenever discounting impacts are significant.
	Besides the day to day and regular review and assessment of credit quality by independent credit risk divisions within the institutions (pursuant to CRBF Regulation 97-02), the main responsibility for regularly reviewing and assessing asset valuation and risk provisioning lies with the internal controller and/or auditor and the external auditors (the Commissaire Aux Comptes, CAC), the latter of whom, if they do not agree with the accounts as presented, may issue an adverse opinion or refuse to certify the accounts. However, the CACs are not required to certify the loan classification as such. During regular on-site inspections, loan classification and provisioning are reviewed by CB inspectors (comprehensively or through sampling), making use of information obtained from the Credit Register, the rating agencies and various BdF sources. These inspections often result in recommendations for re-classifications and additional provisions. The board of directors, is empowered to draw up the accounts, which are reviewed by the auditors. Where relevant, the CB may make a deduction from regulatory capital to compensate for under provisioning or, if it deeply disagrees with the accounts as presented, demand the publication of rectified accounting statements.
	As part of the quarterly reporting, the CB obtains detailed information on the loan portfolio of each credit institution. To assist in checking the risk concentration features of the portfolio, the CB has access to comprehensive databases at the BdF, which cover, inter alia, capital links between companies, management and board functions, and outstanding loan balances. Moreover, the staff of local BdF agencies can provide more detailed information about companies and individuals whenever required. The CB has built an information system that aims at a flexible exploitation of these databases, used in preparing and performing local on– site inspections.
Assessment	Compliant
Comments	As the CB strives to encourage prudent provisioning, some banks build up, in addition to specific loan loss provisions relating to doubtful loans-the amount of which can be determined on an individual or statistical basis, according to Regulation 2002-03, different types of general loan loss provisions that are not expressly provided for in the accounting rules and which are intended to cover credit risk related to nondoubtful loans. These additions to reserves are mostly not tax-deductible.
	Some loan loss provisions are recognized on the liability side of the balance sheets and are classified as contingencies and loss provisions, based on comprehensive estimations rather than statistical calculations; these provisions comprise provisions related to overall risks linked to particular countries or economic sectors. Others are recognized as a reduction of the carrying amount of the assets and are statistical provisions relating to homogeneous groups of loans, particularly in the field of consumer credits; they constitute a form of dynamic provisioning. However, the build-up of general loan loss provisions is not systematic, nor uniform, especially on the liability side.
	A system of general forward-looking (dynamic) provisioning-favored by the French authorities for the large numbers of standardized credits, based on historical and statistical analysis of large credit portfolios, was discussed at the international level notably with the IASB, which introduced such a proposal in its exposure draft on amending IAS 39 issued in June 2002. France, which has been somewhat of a precursor in this area with discussions on this issue starting as early as mid–1998, published an exposure draft proposing to introduce this provisioning approach in March 2002. However, the IASB finally decided to maintain an “incurred loss model” in its final amended IAS 39 issued in December 2003. But it introduced the possibility to use bankers’ expert judgment to estimate or adjust amounts of impairment loss. This is a first step toward recognition of a more forward looking provisioning for banks.
Principle 9.	Large exposure limits
	Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.
Description	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. This limit is to be applied on a consolidated basis for on- and off-balance sheet exposures. The aggregate of such large exposures, defined as individual exposures of 10 percent or more of the bank’s own funds, may not exceed 800 percent of own funds. A large exposure is to be measured net of collateral, guarantees or other deductions. A “single borrower,” as the basis for defining large exposures, is formulated by CRBF Regulation 93-05 Art. 3 as: “persons connected in such a way that, were one of them to encounter financial problems, the others would probably experience payment problems.”
	Regulation 97-02 requires banks to put in place adequate monitoring procedures for large exposures, actively involving top-management in the assessment process. Notwithstanding these precise prescriptions, the CB has large discretion in assessing and adapting the notion of closely related exposures to deal with the complexity of relations between companies, groups and individuals acting as managers or directors. Moreover, while institutions are required to comply with the rules on a consolidated basis, the CB may require compliance on an individual or sub-consolidated basis, especially when it considers that the distribution of own funds within a group is unsatisfactory with regard to the exposure of the institutions concerned.
	The regulation also requires that monitoring of group exposures be backed by a sector-wide and geographical analysis of the portfolio. All exposures over 10 percent (see above) must be reported to the CB on a quarterly basis (5 percent in the case of exposure to a shareholder or manager). Moreover, quarterly reporting is mandatory bearing on all exposures in excess of 10 percent of the banks’ own funds and credit institutions must declare their principal risks on a gross basis if those risks exceed 10 percent of own funds or EUR 300 million (CB Instruction 2000-07 on large exposures and exposures on a gross basis).
	The CB obtains detailed information on the loan portfolio of each credit institution on a quarterly basis. To assist in checking the risk concentration features of the portfolio, the CB has access to comprehensive databases at the BdF, which cover, inter alia, capital links between companies, management and board functions, and outstanding loan balances. Moreover, the staff of local BdF agencies can provide more detailed information about companies and individuals whenever required. The CB has built an information system that aims at a flexible exploitation of these databases, used in preparing and performing local on– site inspections.
Assessment	Compliant
Comments
Principle 10.	Connected lending
	In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.
Description	The 1966 Commercial Companies Act regulates all transactions with related parties for all corporations and fully applies to all credit institutions. These transactions require arm’s length lending, full board authorization and reporting to the annual General Assembly of shareholders of transactions between the company and a director or senior manager (including their close relatives) which is not in the line of a company’s day-to-day business or not entered into under normal market conditions. Related parties, as defined by banking regulations (CRBF Regulation 93-05, Art. 3) are persons that have capital links such as one of them exercises, directly or indirectly, exclusive or joint control or that are subject to common management, or persons connected in such a way that, were one of them to encounter financial problems, the others would probably experience payment problems (see description of BCP 9).
	CRBF Regulation 97-02 (modified by Regulation 2001-01), Art. 21, and Art. 42 (f) provide that credit institutions and investment firms should set up adequate internal control in view of monitoring and controlling risks, including for connected lending. Lending to related parties and to their parent companies, subsidiaries, significant shareholders (or their partners) must be reported under the same regulations and procedures as that for reporting large exposures whenever they exceed 5 percent of the banks’ own funds. Under the discretionary powers available to them, supervisors may also require that exposure to borrowers between whom there is no apparent link be aggregated.
	To tighten up these regulations, the authorities introduced measures (CRBF Regulations 90-02, Art. 6 ter, and 2000-09), which impose a deduction from the bank’s regulatory own funds of all commitments to shareholders or linked staff exceeding 3 percent of own funds. Some exceptions, essentially for investment grade commitments to related parties, are allowed.
Assessment	Compliant
Comments
Principle 11.	Country risk
	Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks.
Description	Banks’ country risk exposure, including credit, market risk, is regulated in CB Instruction 2001-01 on international claims, which applies to all balance sheet and off-balance sheet exposures to private or public borrowers residing in non-G10 and non-EEA countries or having a non G10 or non-EEA nationality. Also included are local claims denominated in local currencies on the private sector and short term local commercial loans. Moreover, through the CRBF Regulation 97-02, banks are required to have information and management systems that allow for proper identification, monitoring and controlling of country-risk. These policies and procedures are reviewed during the regular on-site inspections.
	Annual (semi-annual for the share held by large or internationally active banks) reports on country risk exposure except to G10 and EEA countries, are sent by credit institutions to the CB, which closely monitors exposures. Exposures are broken down by type of borrower and type of credit. The CB carries out cross studies on the basis of prudential reports.
	Country-risk provisions are not mandatory, and each credit institution is entirely responsible for the level of its reserves. Nevertheless, the CB has strongly recommended, on a case-by-case basis and if the economic situation of a given country deteriorates, to constitute what it considers to be a minimum provision. Special attention is given to country risk provisioning by both the external auditors and the CB in the audit of financial reports. The CB also pays particular attention to large international groups’ internal control systems for country risk, especially as regards procedures for setting limits and channels for issuing authorizations and centralizing loans.
	The CB also carries out regular cross studies on emerging economies or countries at risk. It also performs stress tests in order to assess the resilience of French banks to a deterioration of economic or financial conditions in emerging countries and to evaluate the potential impact of an emerging crisis.
Assessment	Compliant
Comments
Principle 12.	Market risks
	Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposures, if warranted.
Description	CRBF Regulation 95-02 and its annexes contain detailed capital adequacy rules for banks. Banks are required to retain sufficient capital to cover trading portfolio risk, exchange rate risk, and settlement risk. The CB can authorize banks to use internal models for calculation of the capital requirement for market risk. The regulations also set criteria for risk measurement and prudential limits. Market risks are covered by appropriate own funds, namely residual own funds after the solvency ratio has been covered, and own funds specifically earmarked for coverage of market risks.
	Supervision, especially for large banks and trading banks, is based on the analysis of specific returns relating to compliance with prudential requirements and on verification of control systems. On-site inspectors verify these aspects within the framework of general assignments or assignments focusing specifically on trading activities. Credit institutions may use the standard method for calculating own funds requirements or their own internal models. In the latter case, the CB must give its explicit approval after the model has been validated by a specially assembled team of experts. Until now, five models have been validated by the CB. Institutions using their own models must also apply a multiplier, which has hitherto consistently been set at a higher level than the regulatory minimum.
	Semi-annual reporting to the CB is imposed by its Instruction 96-01. Regulation 97-02 (for both credit institutions and investment firms) on internal control define strict organizational internal control requirements and set strict conditions for the recording of information on market exposure, for the measurement and monitoring of market risk and for its supervision by top management and the board of directors. Internal control systems should record trading book and foreign exchange operations on a daily basis, contain all information for assessing the related risk, and assess the capital adequacy to cover these risks daily.
	Systems accepted by the CB can be both fully fledged models, specifically agreed to by the CB, and appropriate management information systems for banks with more limited market activities. Formal agreements on model validation rely on an extensive expert report from a specialist team at the CB. Model validation is based on state of the art statistical and mathematical analysis, using VAR approaches, Monte Carlo models and other techniques. Each agreement procedure also contains extensive stress-testing of the models. Consideration must be given to maximum potential loss and maximum limits must be set for each category of risk. The systems must also be able to aggregate positions in different products and markets, at both individual and group level.
	During on-site supervision, substantial attention is given to the adequacy of systems and controls (including at times renewed testing of models), to that of limits and segmentation and to the validity of assumptions for both day-to-day measurement and stress-testing. The model validation specialists are actively involved during such on-site inspections. As a result of such reviews, the CB often makes comments or asks for changes to be made. Similarly, bi-annual returns relating to the calculation of prudential ratios are carefully scrutinized, and disciplinary action may be taken in the event of an infringement.
Assessment	Compliant
Comments
Principle 13.	Other risks Banking
	supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks.
Description	CRBF Regulation 97-02 provides for rules on all major risks, including explicitly credit, market, interest rate, and settlement and liquidity risk. Furthermore, Regulation 90-07 addresses interbank risk, Regulation 88-01 deals with liquidity, while CB Instructions 88-03 and 89-03 regulate liquidity risk in more detail, providing a quantitative “liquidity ratio” banks must abide by.
	In addition to the follow-up of this liquidity ratio, the CB aims at ensuring that the bank has a general strategy, approved by top management and the Board of Directors, and that it is regularly audited by the internal auditor of the bank. Furthermore, the strategy should avoid over-reliance on the lender of last resort, in particular in the case of major banking groups, through adequate liquidity monitoring systems, and a detailed set of limits within each institution. Also, the CB ensures that adequate stress tests and contingency plans are developed and implemented. Banks are required to describe their liquidity and asset/liability management procedures in their annual reports. The CB has had intensive discussions with some institutions to increase their long term funding and to reduce their dependence on a limited number of funding sources, and has instituted specific monitoring requirements (on a daily or weekly basis) when serious doubts arose about a bank’s liquidity position. No liquidity squeezes have been reported over the past two years.
	At the time of licensing, the internal risk management systems are also reviewed by the CECEI in collaboration with the CB. Under the terms of Articles 32 to 37 of regulation 97-02, the systems must measure and monitor internal limits, both overall and operational. These must be reviewed at regular intervals. Furthermore, Articles 11 and 17 of CRBF Regulation 97-02 require banks to regularly review their risk measurement systems and their relevance to the risk profile of the bank. Under Art. 11, the bank must assure that the risk inherent in any new activity has been rigorously analyzed, that systems for measurement, limitation and control of the risk are adequate, and that improvements in the systems are made as needed.
	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. Banks’ supervisory reporting requirements imply that they register and monitor risk relevant data. Developments in the quality of assets must be analyzed rigorously and at regular intervals, in particular with a view to making any necessary reclassifications and determining the appropriate levels of provisions (see Principle 8). Under Art. 20 of the regulation, the bank must analyze the profitability of credit transactions before entering into the transaction, including an assessment of all operational and financing charges and costs, and remuneration of capital.
	Next to the detailed attention to credit risk and market risk, special attention is given to large exposures (see Principle 9), transformation risk (interest rate risk), foreign exchange risk and liquidity risk. With respect to liquidity and interest rate risks, precise and comprehensive guidelines and limits have been established by the CB. In the case of liquidity risk, institutions are required to maintain a minimum ratio between current liabilities and liquidity, determined according to precise rules that take account of the potential risk of withdrawal or immobilization of resources and exposures. As mentioned under Principle 6, the CB may impose additional capital requirement in relation to the individual risk profile of a bank.
	Articles 38 and 39 of Regulation 97-02 require that the non-executive board members meet at least twice a year to review the results of the internal audit (if an audit committee exists, this meeting shall be held only once per year), based on information provided by the executive management. At least once per year the executive management of the bank informs the nonexecutive members of the main risks the bank has incurred and the measures taken to limit the risks.
	Regular corporate law provides for general rules regarding the responsibility of the board of directors and individual directors. It has been amended in 2001 by the Loi sur les Nouvelles Régulations Economiques which contains provisions on the respective functions of Chairman of the Board and general director and rules governing plurality of offices. For example, no individual is allowed to hold more than five non-executive board memberships at the same time. Furthermore, the 2003 FSA introduces specific requirements to ensure that the board is able to exercise effective control over every aspect of the bank’s activity and risk management. In this respect, the Chairman of the Board of Directors is asked to produce a report to the shareholders’ meeting on internal controls. The external auditors are required to comment on this report.
	Banks are involved in the development of a more formalized approach to operational risk, under Basel II. A working group on operational risk has been established by the General Secretariat of the CB to prepare the implementation of Basel II.
	The CB monitors compliance with these regulations in the course of its off-site review and periodic on-site inspections. The largest six banking groups are monitored on a continuous basis.
Assessment	Compliant
Comments	In view of the adoption of the Loi sur les Nouvelles Régulations Economiques, and the 2003 FSA, improvements have been introduced in corporate governance since the previous assessment. Furthermore implementation of Basel II—which is already being prepared—will in general be a strong impetus for continued improvement of risk management practices in French banks. EU regulators are cooperating to develop a common approach to Basel II implementation.
Principle 14.	Internal control and audit
	Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations.
Description	Efforts have been undertaken to strengthen bank governance, particularly to ensure that the composition of the board of directors allows for a full understanding and assessment of all activities undertaken by a bank and the risks it assumes. Indeed, in two reports published respectively in 1995 and 1999, the Rapports Viennot, special attention has been drawn on the importance for financial institutions to conform to the principles and rules of corporate governance, expecting French performance in this respect to be enhanced. The Rapports Viennot have been followed by the Rapport Bouton in September 2002 which recommends an increase of independent board members and the strengthening of audit committee. Banks have taken important steps to introduce the necessary changes. Major French banks now have an audit committee. The establishment of a continuously updated database on bank managers with regard to whom “fit and proper” characteristics may be at issue, developed by the CECEI (FIDEC; see Principle 3), is helpful.
	CRBF Regulation 97-02 updates the existing rules introduced in 1990 and incorporates all the main recommendations relating to internal controls issued by the Basel Committee in recent years. A mandatory and comprehensive annual reporting system is in place on internal control systems of banks, and on auditors’ reports. The CB regularly requires banks to improve their systems, and to ensure that top management is capable of exercising full control and responsibility for the business.
	The general guidelines regarding the role and responsibility of corporate managers, also of banks, are covered by the Commercial Companies Act of July 24, 1966. Specific regulations for bank managers are more strict. Senior bank managers (Art. L.511-13 of the COMOFI) must fulfill certain conditions of competence, training and reputation. The CECEI ensures compliance with these requirements, and must approve management appointments. As a disciplinary measure, the CB is authorized to temporarily suspend or require the resignation of one or more senior managers (Art. L.613-21 of the COMOFI), and to appoint a provisional administrator as warranted.
	CRBF Regulation 97-02 modified by Regulation 2001-01 and 2004-02 gives a very comprehensive set of instructions, requirements and criteria to define, monitor and evaluate the overall internal control structure of banks and investment firms. Appropriate rules are provided on internal controls and the appointment of internal auditors, which are monitored by the CB through specific reports from the banks, which are regularly verified. All good practices such as segregation of duties, checks and balances, delegation of functions and responsibilities, reconciliation of accounts and information of senior management are properly provided for.
	The internal audit office is required to have unfettered access throughout the bank and its adequate staffing, independence and functioning are periodically reviewed during on-site inspections. Significant progress toward enhancing the responsibility and awareness of the boards of directors has been made by major banks by establishing incipient audit committees, as explicitly referred to by the said regulation.
	The CB pays close attention, both during on-site inspections and through the off-site analysis of internal control reports, to the independence of internal controllers within the firm, to the procedures for making decisions and delegating powers, the quality of internal control and the resources made available for it, and the practical procedures for informing the decision-making body. Supervisors may call for the reporting hierarchy to be changed or for additional staff so that internal controllers are fully independent of operational departments and can regularly review all areas of activity in a timely manner. Similar recommendations may also be made with regard to specific departments, such as accounts or information technology. These on-going measures have helped to focus the attention of managers on the importance of rigorous internal control. Systems to limit exposure are steadily being introduced and credit risk is being monitoring more closely.
	The external auditor and the CB are in regular contact. If the auditor encounters irregularities that could threaten the delivery of a “clean” opinion on the annual statements, the auditor is obliged to inform the CB. The auditor routinely receives the CB’s findings of an on-site inspection.
Assessment	Compliant
Comments	Further efforts are being made to generalize the use of internal audit committees. A next step could be to require that all boards include the participation of external, properly qualified members. CRBF Regulation 97-02 has been amended by a new Regulation 2004-02, to cover more specifically aspects such as operational risk and business continuity planning. This initiative is in line with the discussions within the Financial Stability Forum and of the on-going work at the European level.
Principle 15.	Money laundering
	Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.
Description	The COMOFI requires banks to identify their customers and verify their identity on the basis of a reliable document; they must identify and verify the identity of occasional customers with respect to transactions above EUR 8000 in a similar manner; they must also obtain information about the true identity of the persons on whose behalf an account is opened or a transaction conducted if there are any doubts as to whether the customer is acting on his or her own behalf. Décret No. 91-160, sets out additional requirements specific to the identification of legal entities.
	The COMOFI requires banks to retain records on the identity of their clients and on transactions for five years. It also requires banks to report to TRACFIN transactions that they suspect may be related to drug trafficking or organized criminal activity.
	Decree 91-160 requires banks to adopt written internal rules defining procedures for implementation of the AML provisions of the COMOFI and the Décret 91-160. They must ensure that all staff involved in combating ML are kept informed and receive training.
	Regulation 91-07 of the CRBF requires banks to establish internal controls and procedures to ensure compliance with the AML provisions of the COMOFI and the Décret 91-160, including an audit system to verify compliance with the above-mentioned procedures. Regulation 97-02 requires banks to appoint an officer to ensure the consistency and effectiveness of the internal audit for prudential purposes. There is no requirement to appoint an AML officer with explicit responsibility for AML compliance.
	The licensing authority for banks is the CECEI. The COMOFI provides that the CECEI may refuse authorization should the persons responsible for directing the bank’s activity lack sufficient integrity, skills and experience.
	The CB is responsible for regulating and supervising banks’ compliance with the legislative requirements applicable to them, including AML/CFT requirements, and to sanction breaches in compliance. The CB has authority to conduct on-site and off-site examinations. It also conducts special AML/CFT examinations. Banks are required to submit annually a detailed questionnaire on compliance with AML/CFT requirements, as well as a report on the state of their internal controls, including for AML/CFT.
	The CB appears to have a robust program of examinations and sufficient human and financial resources to carry it out. It prioritizes its activities for AML/CFT on a risk basis, focusing attention on entities engaged in riskier activities, those whose questionnaire responses are not satisfactory and on those with regard to whom TRACFIN has signaled lapses in the quality and quantity of suspicious transaction reports.
	The CB can impose adequate disciplinary sanctions on entities that fail to comply with their legislative and regulatory obligations, ranging from a warning up to the withdrawal of a license to operate or removal from the register. It can impose fines of up to an amount equal to the minimum capital of the legal entity. CB indicates that AML/CFT compliance levels are generally good and steadily improving. The CB has imposed sanctions for breaches relating to AML/CFT requirements. The sanctions ranged from a warning to removal from the register, but the most frequent sanction was a warning plus a fine. Decisions involving the imposition of sanctions mainly for failure to implement AML/CFT requirements were systematically publicized.
Assessment	Compliant.
Comments	A more comprehensive assessment of compliance against international AML/CFT standards can be found in the AML/CFT detailed assessment report.
Principle 16.	On-site and off-site supervision
	An effective banking supervisory system should consist of some form of both on-site and off– site supervision.
Description	The COMOFI, Art. L.613-6, states that the General Secretariat of the CB shall carry out off-site monitoring and on-site supervision. In 2003, the CB conducted 188 inspections in banks and investment enterprises. With regard to the largest banks, the CB conducts more focused inspections rather than comprehensive inspections. In 2003 the focus of the inspections in the largest banks was on credit risk and information systems. Foreign establishments of French banks were the object of 22 inspections, of which 17 outside the EEA.
	The Direction du Con trôle des établissements de crédit et des entreprises d’investissement (DC) of the CB counts approximately 160 staff and conducts off-site analysis both sector-wide (including for instance sector or geographical risks), and of each individual institution. Around 40 staff of the DC focus specifically on the six largest banking groups. The Délégation au Contrôle sur Place (DCP) numbers around 180 staff and conducts on-site inspections. The Direction de la Surveillance Générale du Système Bancaire (DS) numbers approximately 100 persons and is in charge of international relations, accounting matters, IT and macro-prudential studies and/or scenarios and research projects. For purposes of off-site analysis the supervised institutions are divided into four categories, allocated to four separate divisions within the DC: (a) “general” non mutual credit institutions; (b) “specialized” credit institutions; (c) mutual credit institutions and provincial banks; and (d) investment firms and market operators. Persons working in DC and DS participate periodically in on-site inspections, and vice versa. Off-site supervision is based on systematic, continual analysis of quantitative and prudential reports, including e.g., reports produced by the bank’s management and financial accounting systems, periodic reports on compliance with laws and regulations, and on the bank’s internal controls. Also publicly available documents, e.g., the credit institution’s annual report and accounts are included in the off-site analysis.
	Furthermore, off-site supervision is supported by a number of supervisory tools which help identify the need for corrective action or an ad-hoc inspection The Organisation et Renforcement de l’ Action Préventive (ORAP): a CAMELS-type risk analysis and rating system for individual banks. In ORAP, each credit institution is assessed on a series of 15 indicators covering: (i) the bank’s current activities; (ii) its observance of prudential ratios and the strength of its capital base; (iii) the current risk profile of each of its main business lines; (iv) earnings; (v) internal risk monitoring procedures, (vi) the appropriateness of its organizational structure; (vii) internal control system; and (viii) the professional capacities of its senior management. This assessment produces an overall rating of the bank, a rating for each major risk category, and, as applicable, identifies areas for corrective action. The Système d’Aide à l’Analyse Bancaire (SAABA), an automated early warning system focused on weaknesses in a bank’s financial condition. Combining data from twenty-five databases, SAABA produces: (i) a detailed loan quality analysis on each credit institution;; (ii) a partial analysis of the principal aspects of banking risk; and, as required; (iii) an aggregate overview of these aspects across the banking system. It can also be adapted to simulate the effects of various events, e.g., sector-specific economic shocks. Besides the BdF’s databases, SAABA also uses the product of special surveys (e.g., real estate risk, country risk) and external sources, such as rating agencies. The Base des agents financiers (BAFI), which is drawn from accounting and prudential returns filed by supervised institutions with the CB; The Service Central des Risques (SCR), which contains information on performance of all loans of more than EUR 75,000 to nonbank entities reported to the BdF by credit institutions; The Fichier Bancaire des Entreprises (FIBEN), which collects information on businesses and managing directors and contains accounting and financial data reported to the BdF by all nonbank businesses in France with annual gross revenues exceeding EUR 750,000. FIBEN covers 200,000 firms, and thus accounts for 90 percent of total bank credit to businesses in France. Thus, FIBEN provides a regularly updated rating system for most French businesses, that goes substantially beyond the capacity of the private rating agencies, and thereby plays a fundamental role in bank lending to small and medium businesses. Furthermore, the CB has access to databases maintained by the BdF.
	Further, the CB has developed a cross-industry methodology for “homogenous line(s) of business groups” (peer groups) enabling it to analyze profitability and capital structures of credit institutions with closely comparable line(s) of business profiles.
	The off-site supervision process also encompasses regular direct contact with the credit institution’s management by telephone or in meetings, to discuss with bank management the results of the off-site analysis.
	On-site supervision is especially important to determine the exact state of the credit institution’s loan portfolio or its system of internal controls. Various types of inspections are held: (i) a general, periodic inspection; (ii) inspections limited to a specific sector of the activity (especially used with regard to the largest banks); (iii) triggered by the bank’s perceived financial condition; (iv) “thematic” inspections, focused for instance on AML/CFT compliance; (v) preparedness for Basel II; and (vi) “follow-up” of compliance with earlier recommended corrective actions.
	In addition to the supervisory tools supporting off-site supervision an on-line Système d’Information de l’Inspection Générale (SIGAL) to retrieve financial information, accessible to inspectors on their laptops during inspections. SIGAL analyzes accounting statements and prudential reports, extracts statistical information concerning the structure and quality of a credit institution’s loan book and scans for connected borrowers.
	A wide spectrum of risks (credit risk, liquidity risk, operational risk, etc.) may be addressed in the course of on-site inspections, with particular focus on internal control systems, adequacy of regulatory and management reporting, internal and external audit and management capabilities. More specific areas of attention include capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk, as well as compliance with the law and regulations.
	On-site inspection “teams” are led by a Chief Inspector, assisted by two or more examiners, with the same “team members” remaining as a unit for several inspections. The “teams” are helped, as needed, by two groups of specialists, specifically on Information Technology and Model Risk Analysis.
	For the “Big Six” largest banking groups, on-site inspection is almost continuous, focusing on key risk areas, and on a consolidated basis, including foreign branches and subsidiaries where deemed necessary. Comprehensive on-site inspections of nonsystemic institutions and where off-site supervision has not revealed significant weaknesses, are conducted on a three-to-five year cycle. On-site inspections outside the “Big Six” may also have a specific focus (e.g., rapid growth in assets, marked deterioration in observance of prudential standards or, on a general basis, a specific activity, such as lending to particular segments of the economy).
	In addition to general licensing, prudential and supervisory rules which fully apply to this kind of credit institutions, the COMOFI, Articles L.511-31 and L.511-32, states that central bodies of mutualist credit institutions shall ensure that the laws and regulations applying to these institutions are implemented and exercise administrative, technical and financial supervision over their organization and management. On-site supervision may be extended to their direct and indirect subsidiaries and to those of affiliated institutions. Central bodies may take disciplinary action as authorized by the laws and regulations. Without prejudice to the powers conferred on the CB to exercise supervision, the central bodies shall assist in implementing the laws and regulations. The central bodies shall bring any noncompliance to the attention of the CB.
	On-site inspections are conducted on the basis of specific standardized, written procedures. The program of inspections is proposed by the DC, after input from on-site inspectors, and approved by the CB, and can be modified as needed. Approximately 240 on-site inspections per year are performed. On-site inspections are characterized by ongoing communication with the DC, the DS (accounting and prudential issues) or the DSJ (legal matters). During the inspections (especially when a credit institutions or an investment firm appears in distress) the team leader files progress reports to the CB, so the CB could be informed as quickly as possible.
	The DC sends letters with recommendations or requirements for action to banks with a “substandard” or “poor” rating. It can also ask for remedial action when a banks has been perceived as financially vulnerable, or sensitive to the deterioration of individual clients, sectors, geographical areas or macro-economic developments.
	To minimize misunderstandings, a draft inspection report is first discussed with the top management of the credit institution who may submit written comments. Where the inspection report contains matters of concern (e.g., regarding provisions, the organization and the management, the interpretation of the license or of the regulations) the Senior Inspector usually discusses its content in detail with the DC, so as to cross-check the technical or regulatory features. The final report is signed by the Senior Inspector and forwarded to the DCP. The result of the on-site inspection –i.e., the follow-up letter (lettre de suite) of recommendations and prescriptions– has to be communicated to the institution’s Board of Directors or the managing or supervisory board (or other similar decision-making body) and to the external auditors (COMOFI Art. L.613-10). The lettre de suite is drafted by the DC and signed by the CB’s Secretary General or, in certain instances, by the Governor of the BdF, as chairman of the CB. Follow-up of the required remedial actions is the responsibility of the DC. The Senior Inspector in charge of the inspection is kept informed of the bank’s follow up actions.
	Staff of the four divisions of the CB can exchange views in periodic working groups, e.g. on draft regulations or reviews of emerging risks. Monthly meetings between the senior management of the CB and the Senior Inspectors permit discussion of current issues. To foster collaboration, the four divisions of the CB regularly exchange personnel. Recruits to the other divisions are regularly seconded to DCP inspection teams to gain field experience. Heads of divisions periodically head on-site inspections. Conversely, inspectors are seconded to positions in the DC at various hierarchical levels.
	Staffing numbers have increased considerably since 1995 in order to cope with the growing demands of banking supervision. Currently the CB and the CECEI together have some 585 staff at their disposal. In addition, in response to the growing complexity of banking, the CB has recruited specialists, for instance on derivatives.
	The CB continues to complement its micro economic analysis by strengthening its capacity to assess macro-prudential risks and to take early action to limit systemic risks. In particular, DC and DS use databases, and collect detailed information from the banks when needed, to analyze what impact a macro-economic or sectoral deterioration could have on the financial soundness of the credit institutions. The CB is developing a module in the SAABA system to simulate the impact of for instance a deterioration in the housing and construction sectors, or fluctuations in macroeconomic variables such as the interest rates, exchange rates, or growth rates.
	Over the past years reinforcement of the supervision of large systemically important groups has been one of the main objectives of the CB, and has led to the design of a “reinforced surveillance program,” including a significant increase in staff supervising these groups. A yearly or semi-annual meeting takes place with top executives of the groups (including heads of business lines, financial officers, risk managers), more specific meetings on issues identified by the off-site analysis performed by the CB, with the objective of assessing the risk profile of the institution more precisely, and the ability of the institution to monitor the risks. The results of these contacts serve as input to the on-site inspection program. A number of inspections take place with regard to each group per year, for instance different types of risk, risk management regulatory compliance and audit functions. CBRF Regulation 97-02 on internal controls is to be amended soon to include a requirement for business continuity planning by banks.
Assessment	Compliant
Comments	Analytical tools are improved continuously to stay abreast of the changing environment and emerging issues, and to introduce macro-prudential approaches to supervision. Ongoing work on macro-prudential issues within the ECB’s Banking Supervisory Committee comprising the 15 banking supervisory authorities and national central banks, remains of great importance.
Principle 17.	Bank management contact
	Banking supervisors must have regular contact with bank management and a thorough understanding of the institution’s operations.
Description	Also see the description under BCP 16. In general, the CB enhances its understanding of the bank’s operations and management through meetings with senior management. These meetings are an integral part of the supervisory process.
	Overall, with a degree of variation depending on the significance of the institution, contacts between the bank and the CB are frequent, including for instance the quarterly discussion of the results, some ten meetings annually of the CB’s and the bank’s specialists on technical matters, and a yearly meeting between top management of the banks and the CB. The inspection process with regard to the big six groups in practice is virtually an ongoing process, with some four to five inspections per year, covering different topics. The CB meets regularly with the CACs of the banks to discuss broader issues relative to the banks.
	During an on-site supervision working meetings take place with senior management and external auditors, permitting the supervisory authority to convey its impression of the standard of performance achieved by both. Off-site supervisors also hold regular contacts with banks’ senior management and are kept well-informed by on-site supervisors, as well as through the outputs of the analytical tools at their disposal.
	On-site inspections also give the opportunity to meet with management and the external auditors, to convey the ongoing findings of the inspection, listen to explanations and, where required, resolve matters of interpretation. On completion of the examination, inspectors discuss the draft report with the bank before the final report is officially forwarded to the CB and the chairman of the bank.
	The inspection process helps to inform the CB’s assessments of top managers, especially their ability to define and implement a consistent and sound strategy for the institution, and of the quality of the management team. Inspection assessments are taken into account in the ORAP criteria. If serious operational deficiencies or statutory infractions are encountered, the CB may take disciplinary action against the Chairman and/or the executive officers.
	Also outside the inspection process, periodic contacts take place between the bank’s key officers and top management and the DC and the DS, but also with the Secretary-General of the CB and his/her deputy. The agenda of these meetings depends on the size and risk profile of the institution and may include discussions with such key executives as the chief financial officer, the chief risk manager, the head of internal audit, the external auditors and the senior officers responsible for the critical risk areas, as established by the CB’s risk-based approach to supervision. Discussions include remedial actions, amendments to corporate strategy, operational performance, changes in asset quality and any other significant issues that have arisen in the period under review.
	CRBF Regulation 96-16, requires that banks notify the CECEI of any significant changes in their circumstances, including the appointment of senior managers (Articles 9-11). The CECEI can inform the bank that a modification of the license is needed, or that a proposed management appointment is not acceptable.
Assessment	Compliant
Comments
Principle 18.	Off-site supervision
	Banking supervisors must have a means of collecting, reviewing and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis.
Description	Under Principle 16 an extensive description is provided of the review and analysis function of the CB.
	In accordance with the COMOFI, Art. L.613-8, “the CB shall draw up a list of the documents and data to be submitted to it and determine their form and the deadlines for filing. In addition, it may require the credit institutions and investment firms to provide any information, clarification or proof necessary to the exercise of its functions. It may ask to receive the auditors’ reports and, in general, all accounting documents (and, when necessary, for them to be certified), as well as all other relevant information and data.” Accordingly, the CB’s database is compiled from documents that include off-balance sheet transactions, doubtful loans and the corresponding provisions for loss. Large institutions file monthly reports on their activities and situation in France, and they must, like other institutions, file quarterly reports, which include their foreign branches. Profit and loss accounts must be filed twice a year. Consolidated accounts must be filed annually (see above), but the larger institutions now publish consolidated data on a quarterly or semi-annual basis, as expected by the market. Filings made to the CB that are repeatedly found to be in error or late may subject the bank to sanction.
	Specifically, the CRBF and the CB have issued a series of regulations and instructions on prudential standards, which include statistical and prudential reporting requirements. These include for instance regulations on Own Funds (Regulation 90-02, and CB Instruction 90-01); Solvency, (Regulation 91-05; CB Instruction 91-02); Large Exposures (Regulation 93-05; CB Instruction 2000-07); Capital Adequacy for Market Risks (Regulation 95-02; CB Instruction 96-01); Liquidity (Regulation 88-01; Regulation 92-06; CB Instruction 88-03); Own Funds and Permanent Capital Ratio (Regulation 86-17; CB Instruction 87-03).
	Most of the CRBF Regulations and most of the CB’s instructions require institutions to provide reports or statistical returns on both a solo and a consolidated basis. In particular, credit institutions must comply on a consolidated basis with Management Standards on Solvency, Large Exposures and Internal Control. Further, should the CB consider that the distribution of an institution’s own funds within a financial group is unsatisfactory from the standpoint of safety and soundness, it may require that the institution complies with certain regulatory standards on an individual or sub-consolidated basis.
	The CRC’s Regulation 99-07 applies consolidation rules according to the nature of the activity carried out by the consolidated entity and the level of control. Thus, institutions constituting an economic group must prepare and publish audited consolidated annual accounts, a copy of which must be sent to the CB. In accordance with the COMOFI, Art. L.511-37, the CB ensures that periodic publication takes place.
	CRBF Regulation 2000-03 on consolidated supervision, as modified by Regulations 2001-03 and 2001-05 to explicitly include the mutualist groups, reflects the new accounting rules introduced by CRC Regulation 99-07. Regarding the particular case of mutualist groups-in which, typically, local banks hold the capital stock (and elect the Board of Directors) of regional banks and the latter, in turn, hold the capital stock of the central institution-the CRBF Regulation 2001-03 clearly obliges such groups to provide fully consolidated accounts. It must also be pointed out that new reporting obligations have been set, for each mutual or non mutual group, concerning subsidiaries and branches abroad.
	The data received though the reporting system provide the input for a number of supervisory tools, i.e., the SAABA system, which analyses each bank’s risk profile, ORAP, which grades the individual banks and serves as an early warning system. Furthermore, the CB may require banks to provide any information the CB considers necessary for its supervision.
Assessment	Compliant
Comments	Since the 2001 assessment, measures have been taken to ensure that the mutualist groups report on a consolidated basis,
Principle 19.	Validation of supervisory information
	Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors.
Description	Under CRBF Regulation 91-01, banks are under an obligation to publish annual financial statements. The statements must be certified by a registered public accountant (CAC). This system provides an important means of verification of the supervisory information provided by the bank.
	Furthermore, the supervisor has access to all information concerning the supervised institution’s affairs and, where necessary, to its Board of Directors, senior management and staff. The COMOFI, Art. L.613-8, authorizes the CB to require supervised institutions to deliver to it all information the CB considers necessary, and in the format and with the frequency that it deems appropriate. Included in this broad power is the CB’s capacity to “require delivery to it of the official auditors’ reports and, in general, all accounting documents (and, when necessary, for them to be certified).” Art. L.613-9 also authorizes the CB to ask for any clarification from the bank’s external auditors with regard to their work for the bank. If the CB strongly objects to the bank’s financial statements, it can demand that a rectification be published (Description of BCP 8).
	As noted in the discussions of Principles 16 and 17, the CB operates a highly developed system of off-site and on-site supervision, the latter providing—as part of its mandate—a means of verification. Integral to the supervision process is the practice that the CB inspectors hold two meetings with the CAC in the course of an on-site inspection.
	The external audit is entrusted to a CAC, who is required to be a member of the CNCC. In order to reinforce the supervision of this profession, the 2003 CSF created the Haut Conseil du Commissariat aux Comptes (HCCC), which is in charge of monitoring the CACs activities and, together with the CNCC, has established a code of conduct for CACs. Decree 84–709, as modified by decree 2002-30, provides (Art. 29) that a credit institution must advise the CB of the external auditors that it proposes to nominate and that the CB has two months to give its opinion on such a nomination. This opinion has to be brought to the attention of the institution’s shareholders meeting.
	Under COMOFI Art. L.613-9, the CAC is required to inform the CB of any cases of noncompliance with the rules and regulations, which could impact the financial condition, the profits or the own funds of the bank, could endanger the continuity of the institution, or lead to a qualified auditors’ opinion on the annual financial statements. The CB may also provide the external auditors with information for them to accomplish their assignment. There is no barrier of professional secrecy between the CB and the CAC. In practice, contacts between the CB and the CAC are frequent and informal, and there are no statutory barriers of professional secrecy between the CB and the CAC.
	The CB has the right to designate a supplementary CAC when it considers this necessary (COMOFI Art. L.511-38) and may ask the Court or the CNCC to dismiss or suspend a CAC (Art L.613-9), and/or inform the CAC’s professional governing body of any infraction of the COMOFI, as amended, or where the external auditors appear to be insufficiently independent of the client. Though the CB is not involved in the evaluation of the quality of the work of the auditor (or of the firm to which he/she belongs), nor in the definition of his/her mission, the 2003 CSF now specifies that the Ministry of Justice, when deciding to conduct an inquiry on a CAC, can ask the CB’s cooperation. On a case by case basis, the CB has been able to require an audit firm, other than that nominated by the credit institution, to conduct a specific mission in that credit institution. This occurs several times per year.
	Given its resource limitations, and the three to five-year examination cycle, the CB has under review the means by which it may derive greater benefit from the work of the external auditors in the execution of its own mandate. Important reforms have been made in this regard, through close consultations between the CB, the AMF and the CNCC and the assessment of the external auditors is often asked for by the supervisory authority. Should the CB have some doubts about the quality or the level of the works done by the CAC of a credit institution or an investment firm, it has the capacity to nominate an additional external auditor.
Assessment	Compliant
Comments	Following the adoption of the 1999 SFSA, France has acquired a corpus of legislation that should enable external auditors and supervisors to develop more effective relations within the framework of their respective legal responsibilities. The implementing decrees concerning the CAC nomination proceedings toward the CB are now in force. Decrees of application of the 2003 FSA remain to be adopted, and the new Code of Ethics of the accountancy profession confirmed.
Principle 20.	Consolidated supervision
	An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis.
Description	According to the rules set out in CRBF Regulation 2000-03 (which codified previous regulations), as amended by Regulations 2001-03, and 2001-05, banking regulations taken as a whole (see below) require regulatory filings to be prepared on a consolidated basis. The CRBF Regulation 98-03 (Art.) provides that the CB may insist that an entity be excluded from the scope of consolidation where there exist obstacles to the transfer of information necessary to determine accurately the level of exposure, or in those cases where consolidation would be misleading or inappropriate from the standpoint of prudential supervision. As noted in Principle 18, the applicable CRBF Regulations and CB instructions require that institutions provide to the supervisory authority their reports or statistical returns on both a solo and consolidated basis.
	The CB is well aware of the overall structure of banking organizations or groups (i.e., the credit institution and its subsidiaries) and has an understanding of the operations conducted therein. The COMOFI, as amended, empowers the CB to supervise the entire activities of a credit institution, whether those activities are carried on directly (including branch operations located outside France), or by means of subsidiaries and/or affiliates. At the same time, the CB’s on-site and off-site supervisory processes enable it to evaluate the risks that nonbanking activities conducted by a credit institution or the other elements of the banking group may pose for the institution or group as a whole.
	The CB’s risk-based approach to supervision encompasses the evaluation of all significant activities of the institution, whether or not these constitute “banking operations” within the meaning of the term given by the COMOFI, as amended (Art. L.511-1) (see Principle 2). As discussed above, the CB has access to all the records of a credit institution or investment firm. In addition, the COMOFI (Articles L.613-10 and L.613-11) requires that the CB has on-site access to the business and records of the corporate entities controlled by the institution, including subsidiaries or affiliated companies, as well as to the business and records of “the legal persons directly or indirectly controlling it (i.e., the institution) and to their subsidiaries.” For corporate entities located outside France, the CB has all powers necessary to collect data and information from the group’s corporate headquarters in France and to extend its supervisory activities (including on-site inspections) to those entities when necessary. In that regard, the CB has signed a large number of MoUs with supervisory bodies within and outside the EU. When no MoU has been concluded, on-site inspections will require the permission of the host country. In addition, the CB monitors the relationships of credit institutions with regulatory bodies in other jurisdictions to ensure that the credit institution complies with all regulatory requirements, on a globally consolidated basis.
	The CRC Regulation 99-07 contains new rules for the drawing up of consolidated accounts for credit institutions. It includes a definition of exclusive control and introduces consolidation criteria for special-purpose entities, including the possibility for networks affiliated with a “central body” (as defined in the COMOFI, as amended, Articles L.511-31 and L.511-32) to draw up consolidated accounts comparable to those of other bank groups. Thus, as indicated under Principle 18, the CRBF Regulation 2001-03 obliges the mutualist groups to report fully consolidated accounts, and all mutualist groups now prepare a form of consolidated accounts.
	Under COMOFI Articles L.613-10 and L.613-11, the CB may inspect the activities of a bank’s direct or indirect parent and sister companies. Protection of the credit institution against adverse developments at the parent or nonbank affiliate companies would be achieved through application of the general provisions of the COMOFI on sanctions (Articles L.613-15, L.613-16 and L.613-21).
	In respect of owners of parent companies, the CRBF Regulation 96-16 requires the prior authorization—by the CECEI—of the acquisition of defined levels of direct—or indirect—equity interests in credit institutions. Indirect acquisitions of French credit institutions through acquisition of parent companies by acquirers domiciled outside France require immediate notification to the CECEI, which may find reason that the credit institution’s authorization be reexamined. Given the close operational links between the CECEI and the CB, the supervisor thereby has a means of establishing and enforcing “fit and proper” standards for owners.
	For senior managers, the COMOFI, as amended (Art. L.517-1), makes “financial holding companies” subject—inter alia—to the “four eyes” principle, laid down in Art. L.511-13 of the COMOFI, under conditions set out in Regulation. CRBF Regulation 96-16 (Art. 9) requires notification of changes in senior management to the CECEI, affording the latter the opportunity to state whether an appointment is seen as compatible with the credit institution’s authorization. This provides an oblique means of establishing and enforcing “fit and proper” standards for senior managers of parent companies of credit institutions.
	Information exchange mechanisms with other domestic and foreign regulators allow the CB to adequately access information on the financial condition and the risk management practices and controls of business vehicles within a banking group. In non-EEA countries, bilateral agreements are strengthening this aspect of supervision, though the scope of competence is a frequent stumbling block in certain countries with a tradition of opacity (see Principle 24).
Assessment	Compliant
Comments	The authorities are encouraged to continue attempts to obtain access to information from all countries where French banks have business units.
Principle 21.	Accounting standards
	Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.
Description	The COMOFI (Arts L.511-36 and L.511-37), refers to the CRC the competence and responsibility to issue accounting regulation for banks and investment firms, after formal consultation with the CCLRF. Before 1998, the CRB, then (after 1996) the CRBF was the only body enabled to regulate accounting matters for banks (and then investment firms).
	Between 1998 and 2003, the CRC was entitled to issue accounting regulation for banks and investment firms, after formal consultation with the CRBF.
	Most of the current regulations were defined by the CRB, then the CRBF, before the CRC was created. The CRB, in particular in Regulation 91-01, has elaborated extensive accounting and valuation rules for the financial sector, thus providing for a framework specifically adapted for keeping bank records and for publishing statutory accounts for financial institutions. In particular, French regulations (88-02, 90-01 and 90-15) allow for “mark to market” valuation for the trading book under the conditions that it concerns assets that are likely to be traded, and that appropriate management and control procedures are in place. Moreover, CRBF regulation 97-02 on internal control issues strict rules regarding internal control procedures in accounting aiming specifically at ensuring the “auditability” of accounts (audit trail). CRC Regulations 99-07 (for banks, financial holdings and most investment firms) and 99-02 (for some investment firms) further specify the modalities for the preparation of consolidated accounts.
	As explained under Principle 19, the CACs play a fundamental role in certifying banks’ accounts and the 1999 FSFA has strengthened the CB’s capacity to request the assistance of the CAC in monitoring the activities of the credit institutions and investment firms and ensuring the reliability of their reports.
	A joint white paper (Livre Blanc) issued by the COB (now the AMF) and the CB in December 1998 noted that much remained to be done toward strengthening the transparency of reporting by French banks and making it comparable to practices prevailing in many other G–7 countries. In particular, the report stressed the more limited and less standardized disclosure by banks of information on credit risk, including information allowing an assessment of the quality of the bank’s assets, provisioning and treatment of interest on nonperforming loans.
	The report also noted some weaknesses with regard to reporting of market risk, including disclosure of derivatives activities and counter party risk. The quality of the notes to the financial statements could be improved in view of the practices in other G7 countries. Moreover, the heterogeneity of presentation of financial statements across banks hindered comparison across banks.
	In its Annual Report of 2001, the CB compares 15 large U.S. and European banking groups’ disclosure practices. with a view to setting a disclosure agenda for the French banking system in 2005, when the IAS will become the standard for financial disclosure in the EU (although IAS 39 is still a contentious issue between the IASB and the EU, and France in particular.)
	Since the issuance of the Livre Blanc, in 1998, the authorities have undertaken a number of measures to improve the quality of financial disclosure by banks. Decision 98.05 and recommendation 98.R.01 of the Conseil National de la Comptabilité (CNC), on market risk disclosure; Joint recommendation of the COB, precursor of the AMF, and the CB of January 2000, on credit risk disclosure, which recommends that banks’ financial disclosure break down credit risk by economic sector, counterpart (government, banks, businesses, individuals, etc.) and geographical area, as well as provide information on bad loans and provisions, and the ratio between general provisions and overall credit risk; Joint Recommendation of the COB and the CB of November 2002 on deconsolidation and separation of assets; Regulations of the Comité de la Réglementation Comptable (CRC) No. 2000-03 on solo accounts, and No. 2000-04 on consolidated accounts; Regulation of the CRC No. 2002-03 on disclosure of credit risk.
	Furthermore, the annual analysis by the Transparency Group of the Basel Committee, for the accounts of major French banks (BNP Paribas, SG, CASA, CL) over bookyear 2002 shows that major improvements have taken place since 1999, although the improvements relate to different aspects across banks. In its 2001 Annual Report, the CB published a study on financial disclosure by banks, summarizing the main international developments on bank accounting, and foreshadowing the need for change in the French financial accounting system.
	Again in its Annual report over 2002, the CB performs a preliminary analysis of the coming changes to the international accounting system. Clearly, the CB wishes to keep the debate alive, and to sensitize the French financial institutions to the need to adapt to more internationally recognized standards. Specifically with regard to credit risk, the Report states on page 173 that “current French standards appear to be too restrictive and insufficiently conservative with regard to credit risk provisioning, to the extent that provisioning often takes place rather late” Under current rules, provisioning seems to depend on classifying a loan as “doubtful,” which requires occurrence of a concrete event. The CB expects that implementation of IAS 39, a main component of which relates to credit risk, would lead to earlier and smoother provisioning.
	However, these comments were issued in a context where the exposure draft of IAS 39 published at this time was based on an “expected loss” model, incorporating a concept of “dynamic provisioning” largely suggested by the CB. The final version of IAS 39 is based finally on an “incurred loss” model which appears to be a bit more restrictive than the actual French Regulation (see comment on Principle 8). French banks are making progress toward meeting the requirements of Pillar 3 of the new Basel Capital Accord. A survey conducted by the CB in May 2003 shows that French banks have fulfilled the majority of the Pillar 3 requirements for market risk disclosure, but still need to continue work on credit risk disclosure.
	Nevertheless, CRC Regulation 2002-03, of December 2002, addresses a number of important areas of credit risk disclosure. It requires banks to make a distinction in their accounts between standard and doubtful loans, dividing the latter into two categories, “non compromised” doubtful loans and “compromised” doubtful loans, the latter of which where payment is not expected, assuming that loans for which a loss occurs are derecognized from outstanding amounts in the balance sheet to the extent of the loss amount (Articles 3 and 9). Banks are required to disclose in their financial statements the gross amounts of standard, restructured, doubtful and compromised loans, as well as the criteria used to define these categories (see Articles 22 and 24). The rules applied by the banks to determine the level of provisions need to be disclosed (Art. 26) as well any changes made in these rules since the last set of statements.
	All loans need to be broken down into categories relative to the most significant sectors (within geographical, economic sector, counterparty (also interbank)), and by residual maturity. The doubtful and compromised loans, as well as the provisions taken must be broken down into the same categories (see Articles 28 through 30, and Chapters 3 and 4).
	The CNC envisages to resolve one area of divergence concerning the choice offered to French banks in the calculation of the present value of restructured loans by proposing to the CRC to allow only the calculation of the present value on the basis of the original loan conditions. However, no formal decision has been announced yet by the CNC, which prepares the future regulations to be adopted by the CRC.
	The issuance of regulations since 2000 by the CRC, in particular Regulation 2002-03 that ensure broader disclosure “on a uniform and internationally comparable basis,” have thus contributed to the improvement of disclosure by the French banks. Financial statements have also been improved by harmonization of key ratios that facilitate the comparison of banks’ performances.
	The most delicate matter concerns communication by banks of problem situations. Notwithstanding clear evidence, as noted in the report on financial transparency, of the beneficial effects of timely crisis communication, most bankers remain reluctant to accept regulations or to make firm commitments in this respect. While the CB has encouraged banks to adopt a policy of open and timely communication on any significant difficulties and on relevant external events that affect their risk-exposure, results so far have been mixed.
Assessment	Compliant
Comments	Progress is being pursued toward greater convergence with IAS, and the authorities clearly stimulate greater convergence, in the interest of greater comparability of financial statements.
Principle 22.	Remedial measures
	Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation.
Description	As noted with regard to Principle 1(4), the COMOFI, Articles L.613-1, L.613-15–19, and L.613-21–23 confer a broad range of enforcement and sanctioning powers upon the CB.
	Measures range from a recommendation (Art. 613-16) to an injunction both aiming at making the credit institution take appropriate corrective action within a given period of time in order to improve its financial situation, enhance its management methods or insure the adequacy of its organization to its activities or development targets up to the withdrawal of the license (Art. L.613-21). The most common and effective means to obtain remedial measures are the lettres de suite following an on-site inspection. They call on the responsibility of both management and Board of Directors to ensure correction of the situation.
	Under COMOFI Art. 613-21, if a bank ignores a recommendation or is in breach of a law or regulation, the CB can: (i) issue a warning; (ii) issue a supervisory reprimand; (iii) prohibit to perform certain activities; (iv) suspend one or more managers, with or without appointment of a temporary administrator; (v) remove one or more managers, with or without appointment of a temporary administrator; (vi) withdraw the license, with or without appointment of a liquidator.
	Pecuniary sanctions may also be imposed upon the bank in addition to these measures. Moreover, the CB may impose the withdrawal of the voting rights of certain or all shares, the prohibition to pay dividends or other form of remunerations to shareholders and the obligation for the credit institution to disclose, at its own expenses, the disciplinary sanctions. The CB may mention infringements or criminal offenses to the Public Prosecutor’s Office.
	Whenever a bank is deemed to be at risk of not being able to meet its commitments toward its customers, the CB can request intervention of the FGD (COMOFI Art. L.312-5). Given that the primary concern in such case is the optimal protection of the interest of private customers covered by the FGD, the CB and the FGD cooperate closely both in the decision-making and the implementation of the measures.
	When imposing sanctions, the CB is an administrative judiciary authority (Art. L.613-23 of the COMOFI), and its decisions and sanctions can therefore only be challenged before the Conseil d’Etat, the highest administrative judicial authority. In particular, bank customers and/or management and directors can contest the appointment of temporary administrators by the CB. They can also contest the decisions and actions of these administrators. In urgent cases, appeals against the decisions of CB to appoint an administrator or a liquidator do not suspend their implementation (Art. L.613-23 II).
	Moreover, under Art. L.613-21, the CB may prohibit payment of dividends or other form of remunerations to shareholders and the obligation for the bank to disclose, at its own expenses, the disciplinary measures.
	In 2002, the CB issued one injunction against a bank, 8 warnings, 15 supervisory complaints (some of which with a pecuniary penalty), ordered one bank to limit its activities, and delicensed three investment companies for disciplinary reasons. Five disciplinary actions were initiated against money changers.
Assessment	Compliant
Comments
Principle 23.	Globally consolidated supervision
	Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures and subsidiaries.
Description	CRBF Regulation 2000-03 specifically obliges banks and their holding companies to comply with the prudential standards on a consolidated basis, without distinction whether consolidated entities are located abroad or not. Furthermore, with regard to internal controls and banks’ management of specific types of risk, CRBF Regulation 97-02 requires that banks view their risks on a consolidated basis, including all its foreign subsidiaries and branches, and its controlling entity and to the subsidiaries of the latter. One of the key-features of Regulation 97-02 on internal control is that each institution must ensure that its organization and procedures are adequate for its activities and that of the group it belongs to. This covers the inclusion of foreign branches and subsidiaries in management information, the internal control structure of the organization and the daily oversight responsibility of management. During on– site inspections on internationally active banks, the CB ascertains that the organization and internal control of the French parent fully meet this requirement. Part of the on-site inspection is in many cases carried out at the premises of foreign branches (and in some cases even jointly with the local supervisor) of French banks. Even when rules, regulations and requirements are not fully equivalent to those for the parent bank, the CB requires fully consolidated prudential information on all entities of a group, both purely national groups and those also operating abroad, on the basis of the groups’ internal accounting and external prudential norms.
	The French regulations make a distinction between EEA branches and other entities. In the case of EEA branches, which have to be notified to the CECEI prior to their establishment, the “home” supervisory authority retains all its sanctioning powers and can withdraw the authorization to run a branch that is deemed to be unsound or in violation of the home regulations. The home authority should advise (and consult with) the “host” authority. In the other cases, if the branch does not comply with the host country’s regulations, only the host supervisor can directly sanction it. However, as home supervisor, the CB could sanction the parent bank or require it to stop or limit its activities, making use of the powers specified by COMOFI Art. L.613-21.
	As noted in Principle 1(6), the CB and CECEI have established an extensive network of MoUs with supervisory authorities Within the EEA, specific directives require the supervisory authorities to cooperate by mutually allowing each other to properly exert consolidated supervision. Thus, France has a wide range of MoUs in place to implement these directives. Wherever a significant presence of French banks abroad (or vice versa for foreign banks) exists, these MoUs give rise to regular consultations, both formal (MoU meetings on a regular basis) and informal. For a limited number of international financial conglomerates, involving French banks, these consultations are frequent and intense and are covered by special, sometimes multi-party MoU agreements. It should be noted that the EU Directive 2002/87/EC on the supplementary supervision of financial conglomerates further expands the scope of consolidated supervision.
	For some non-EEA countries, similar bilateral agreements have been established following the 1999 SFSA vesting the CB with the power to conclude bilateral agreements with the authorities of a state not party to the EEA entrusted with duties similar to those entrusted in France to the CB. Apart from this formal aspect, the CB already engages in close cooperation with all the main G10 or industrialized countries’ supervisory agencies. In this framework, regular individual sharing of information is carried out between the CB and non-EEA supervisors, periodic meetings take place and stand alone or joint on-site inspections of French branches and subsidiaries are usual, especially in North America and Asia where most French foreign operations are located.
	These bilateral agreements, regarding mutual cooperation and exchange of information in the performance of prudential supervision, provide for arrangements for the collection and sharing of information, in particular through on-site inspections. In this case, information should be shared in support of the objective to facilitate and meet the requirements for effective consolidated supervision. However, for countries for which the scope for cooperation is limited by the opacity of local rules on establishment, supervision and professional secrecy, the CB asks the institutions themselves, on a case by case basis, to provide the information it requires in order to carry out its supervisory duties on a consolidated basis.
	Any inspection carried out by foreign supervisory authorities representatives may only concern compliance with the prudent management standards of the State concerned so as to permit assessment of the financial situation of a banking or financial group. A report on the inspection must be provided to the CB, which alone may impose sanctions with regard to the branch or subsidiary inspected in France.
	In addition, the 2003 FSA has broadened the scope of cooperation with non-European banking groups. In particular, it enables undertakings established in France that are part of the financial group or mixed group to which belong credit institutions or investment firms having their registered office in a State with which France has concluded a bilateral agreement of sharing of information, to transmit the necessary information to undertakings of the same group having their registered office in the State party to the bilateral agreement. These exchanges of information can cover, in accordance particularly with COMOFI Art. L.511-34, all matters related to the consolidated supervision of the financial situation of a cross-border establishment as well as the organization of the fight against money laundering and the financing of terrorism.
	In order 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.
Assessment	Compliant
Comments
Principle 24.	Host country supervision
	A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities.
Description	French laws and regulations provide a comprehensive framework for cooperation with foreign authorities. As already mentioned in Principle 1 (6), the 1999 SFSA has extended the power of the CB, which may now conclude bilateral agreements with the authorities of a country that is not an EEA Member State, in order to: (a) perform on-site inspections on entities in the jurisdiction of the signing authorities; (b) allow the national authorities to perform on-site inspections, upon request of the co-signing authority or jointly with them, on subsidiaries or branches of institutions under the supervision of the said foreign authority; and (c) lay down conditions and modalities for the exchange of information. The main conditions for exchange of information are that the counterpart authority be subject to the same professional secrecy regulations as the CB, that regulation and supervision in the country concerned be reasonably equivalent to those in France, and that the reciprocity principle be fully respected. For some countries, where the elaboration of a formal agreement is still under negotiation, pragmatic arrangements for informal information sharing are in place and appear to function reasonably well. Whenever French banks have the intention to branch out to a country or acquire or establish a banking activity there, the CB must approve the project and negotiate the cooperation on supervisory matters of the authority concerned. For EEA or OECD member countries, the CB is authorized to rely on these counterparts having faithfully implemented EEA legislation or OECD recommendations and, thus, fulfilling all the requirements and conditions set by the French laws. The CB establishes with the competent authority the practical means and ways of cooperation. For other countries, the CB investigates whether acceptable terms for cooperation can be agreed on. In case of unsatisfactory supervision or unacceptable conditions for supervisory cooperation, the CB can oppose a proposal to branch out.
	As explained under Principle 23, the CB and CECEI have in place a number of MoU agreements with EEA authorities. For these MoUs, a practice of regular consultation and cooperation has been established, frequently exceeding the minimum frequency of meetings prescribed in the MoUs, certainly with regard to countries with important financial markets.
	For a heterogeneous financial conglomerate, a more elaborate three-party MoU has been prepared, which allows for far-reaching cooperation and for a clear sharing of responsibilities and information between the supervisors concerned. For heterogeneous international financial conglomerates the CB has in place arrangements for cooperation and exchange of information with other domestic supervisors, such as the AMF (see above) and the CCAMIP.
	In addition, EU Directive 2002/87/EC provides for a set of rules on the supervision of financial conglomerates. The Directive establishes the principle of supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate. Supplementary supervision should cover all financial activities identified by the sectoral financial legislation. This directive obliges to increase collaboration between authorities responsible for the supervision of credit institutions, insurance undertakings and investment firms, including the development of ad hoc cooperation arrangements between authorities involved in the supervision of entities belonging to the same financial conglomerate. France is planning to bring into force the laws, regulations and administrative provisions necessary to comply with this directive before August, 2004.
	For all foreign establishments of French banks and vice-versa, satisfactory agreements for supervisory cooperation are in place and operational. Furthermore, informal exchanges of information have been taking place for several years now with other supervisors of the world’s leading financial markets. Other formal bilateral agreements are under preparation. However, the CB wishes to limit the formal bilateral agreements to countries which share the same concern for transparency in the communication of information, professional secrecy and, more generally, compliance with and effective application of the criteria developed by the Basel Committee.
	In the context of international arrangements for the exercise of supervision over cross border financial institutions or conglomerates, the arrangements include names and coordinates of contact persons, to facilitate and expedite the establishment of contact between home and host supervisors, of which there could be several, between countries as well as within countries.
	At present, the activities of French banks in other EEA countries are generally small when compared to their domestic activities (by contrast, operations in the United States and in several Asian countries account for a significant part of the consolidated balance sheet of the largest banking groups). Thus, the coordination of France’s supervisory activity with that of its counterparts appears to be sufficient, based on bilateral MoUs, and discretionary exchanges of information. The active participation of the French authorities in both European and international consultation forums on matters of cooperation places them in the forefront of international cooperation.
Assessment	Compliant
Comments
Principle 25.	Supervision over foreign banks’ establishments
	Banking supervisors must require the local operations of foreign banks to be conducted to the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision.
Description	As stated under Principle 24, the CB has full power to enter into any agreement or arrangement to mutually share information with its peers abroad concerning internationally active banks. For branches of EEA banks, European regulation entrusts full supervisory responsibility to the home-country supervisor, with the exception of liquidity supervision and the compliance with rules of conduct and money laundering provisions. Branches of non-EEA banks are subject to the same rules and regulations as are French banks. The CB may, however, accept that these branches meet different requirements (e.g., with regard to solvency and large exposures) provided that: (a) the home-country regulations require full consolidation of the risks taken abroad by the mother-bank; (b) the latter commits itself to supervise the operations and the situation of its branch on the same basis and principles as for a home-based institution and this under the supervision of its national supervisory authority; and (c) an equivalent treatment is granted to the branches of French banks in the country concerned.
	For subsidiaries, France, as the host-country, must provide for the full respect of its rules and regulations, as such institutions are incorporated under French law, and hence are subject to full CB-supervision, with both on-site and off-site examinations, on the same basis as French banks. The CB also has the same sanctioning powers over such subsidiaries as over French banks, inclusive of the right to close their operations. Unlike branches of foreign banks, French subsidiaries of foreign banks are also covered by the FGD. Since branches of EEA banks are covered by the deposit guarantee scheme of their home country, in accordance with EEA directives on deposit guarantees, the coverage of their customers is equivalent to that under the French regime.
	Cooperation with the home-country supervisor ensures that the latter is enabled to perform fully consolidated supervision and that it can be called upon to take supervisory action whenever serious problems might occur. In addition, for licensing, the CECEI, before making any decision, may seek the advice from the home-country supervisory authority and its assessment of the project.
	Overall, the prudential norms applied to foreign banks are as stringent as those applied to French banks. Within the EEA, prudential rules are harmonized. Nevertheless, the CB may allow exceptions for branches from countries whose regulations are at least as stringent as in France. Furthermore, the CB does not rule out the possibility of asking such branches to increase their own funds if they appear insufficient in relation to their exposure. Off-site supervisors regularly verify the rules that apply to foreign institutions. Likewise, the CB frequently organizes on-site supervision of the branches of foreign banks, as for branches of French banks. In the event of a serious deficiency, the matter may be referred to the home country authorities, a practice which has become more widespread with the possibilities offered by the 1999 FSFA.
	The annual report of the CECEI describes in more detail its practices with regard to cooperation with foreign supervisory authorities, including obtaining in all cases of establishment of a foreign bank in France the approval of the supervisory authority charged with the supervision on a consolidated basis of the group.
Assessment	Compliant
Comments

Table 2.

Summary Compliance of the Basel Core Principles

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

Table 2.

Summary Compliance of the Basel Core Principles

Core Principle	C1/	LC2/	MNC3/	NC4/	NA5/
1. Objectives, Autonomy, Powers, and Resources	X
1.1 Objectives	X
1.2 Independence	X
1.3 Legal framework	X
1.4 Enforcement powers	X
1.5 Legal protection	X
1.6 Information sharing	X
2. Permissible Activities	X
3. Licensing Criteria	X
4. Ownership	X
5. Investment Criteria		X
6. Capital Adequacy	X
7. Credit Policies	X
8. Loan Evaluation and Loan-Loss Provisioning	X
9. Large Exposure Limits	X
10. Connected Lending	X
11. Country Risk	X
12. Market Risks	X
13. Other Risks	X
14. Internal Control and Audit	X
15. Money Laundering	X
16. On-Site and Off-Site Supervision	X
17. Bank Management Contact	X
18. Off-Site Supervision	X
19. Validation of Supervisory Information	X
20. Consolidated Supervision	X
21. Accounting Standards	X
22. Remedial Measures	X
23. Globally Consolidated Supervision	X
24. Host Country Supervision	X
25. Supervision Over Foreign Banks’ Establishments	X

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

View Table

Table 2.

Summary Compliance of the Basel Core Principles

Core Principle	C1/	LC2/	MNC3/	NC4/	NA5/
1. Objectives, Autonomy, Powers, and Resources	X
1.1 Objectives	X
1.2 Independence	X
1.3 Legal framework	X
1.4 Enforcement powers	X
1.5 Legal protection	X
1.6 Information sharing	X
2. Permissible Activities	X
3. Licensing Criteria	X
4. Ownership	X
5. Investment Criteria		X
6. Capital Adequacy	X
7. Credit Policies	X
8. Loan Evaluation and Loan-Loss Provisioning	X
9. Large Exposure Limits	X
10. Connected Lending	X
11. Country Risk	X
12. Market Risks	X
13. Other Risks	X
14. Internal Control and Audit	X
15. Money Laundering	X
16. On-Site and Off-Site Supervision	X
17. Bank Management Contact	X
18. Off-Site Supervision	X
19. Validation of Supervisory Information	X
20. Consolidated Supervision	X
21. Accounting Standards	X
22. Remedial Measures	X
23. Globally Consolidated Supervision	X
24. Host Country Supervision	X
25. Supervision Over Foreign Banks’ Establishments	X

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

Recommended action plan and authorities’ response to the assessment

Recommended action plan

26. The system in France for banking regulation and supervision is of high quality, and only one BCP has been assessed largely compliant and not fully compliant. However, notwithstanding this conclusion, the authorities might usefully consider taking additional steps to address two issues which the mission wishes to bring to the attention of the authorities.

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Investment criteria (BCP 5)	Introduce the obligation to obtain prior approval of the CECEI for acquisitions of equity in nonfinancial enterprises by banks (measures have been developed but not yet enacted)
Accounting Standards (BCP 21)	Continue to strive toward convergence between French accounting standards and IAS

View Table

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Investment criteria (BCP 5)	Introduce the obligation to obtain prior approval of the CECEI for acquisitions of equity in nonfinancial enterprises by banks (measures have been developed but not yet enacted)
Accounting Standards (BCP 21)	Continue to strive toward convergence between French accounting standards and IAS

General

28. This assessment examines France’s observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP) on the effective supervision of the insurance sector. The assessment was performed according to the new October 2003 ICP methodology by a two person team as part of the IMF FSAP.³

Information and methodology used for assessment

29. The assessment of observance of the IAIS Core Principles involved the review of: (i) an extensive self-assessment prepared in 2000 prepared by the former Commission de Contrôle des Assurances (CCA) based on the old methodology; (ii) comparison with the Core Principles and the Core Principles Methodology; and (iii) a review of the relevant laws governing the insurance sector in France. The legal basis regulating insurance is the Code des Assurances (as amended), which is supported by numerous decrees and implementation regulations, and the recent Loi de sécurité financière (Financial Security Law, LSF).

30. In addition, through the period of January 29–February 11, 2004, a series of meetings and discussions were held in France with officials from the insurance supervisory authority,⁴ the MINEFI, the BdF, the CB, the insurance industry associations (Fédération francaise des sociétés d’assurance–FFSA and the Groupement des Entreprises Mutuelles d’Assurances–GEMA), the actuaries association (Institut des Actuaires), private insurance companies, associations of intermediaries, auditors (the Compagnie Nationale des Comm issaires aux Comptes–CNCC), and other financial institutions. On this basis, the assessors attempted as far as possible to evaluate whether the legal framework is implemented faithfully and effectively.

31. The supervisory staff at the insurance supervisory authority and other concerned agencies cooperated fully with the assessment, providing answers to an extensive questionnaire, preparing the self assessments against the IAIS Core Principles, meeting additional requests for information, and being available for a wide variety of meetings. In addition, the insurance supervisory authority and MINEFI staff assisted with logistical arrangements for the meetings with industry bodies and companies, for which the mission expresses its gratitude.

32. The assessment was undertaken during a period of transition. On the one hand, the ICP are relatively new. The old version dating from 2000 was revised in 2003.

33. On the other hand, the French supervisory environment has been significantly modified by the Financial Security Law of August 1, 2003. This legislation created the joint insurance supervision body, called Commission de Contrôle des Assurances, des Mutuelles et des Institutions de Prévoyance (CCAMIP), as the result of the merger of the CCA, responsible for the supervision of companies regulated by the old insurance code, and the Commission de Contrôle des Mutuelles et des Institutions de Prévoyance (CCMIP), responsible for the supervision of certain mutual insurers. The provisions of the law also gave financial independence to the CCAMIP, strengthened coordination with the banking sector supervisors, and extended the powers of the supervisory authorities to request and receive information from supervised entities and auditors. The implementation orders (décrets d’application) for the new law were under review by the Conseil d’Etat at the time of the assessment; the transition period ended as of July 2004 with the publication of outstanding orders.

Institutional and macro prudential setting—overview

34. The French insurance sector is large and of systemic importance. With a 5 percent market share of gross premiums in the OECD in 2001, France’s insurance sector was ranked the fifth largest in the world and the third largest in Europe.⁵ In terms of density (premiums per capita), France ranks slightly lower at the tenth position in the OECD. With an insurance penetration ratio (premiums as a percentage of GDP) slightly over 10 percent, France ranks eighth in the OECD.

35. The French insurance industry includes a variety of insurance companies, including life, and health and accident (henceforth referred to as “mixed”) (126), nonlife (295) and reinsurance (33).⁶ In 2002, the French insurance sector was largely dominated by the life and mixed sectors, accounting for over 80 percent of total assets (30 percent for life and 53 percent for mixed). Non-life insurance represented only 14 percent of total assets. Reinsurance plays only a minor role, accounting for 4 percent of total insurance assets.⁷ By legal form, stock companies accounted for 80 percent of premium income, mutual insurance companies 11 percent, public-owned institutions 9 percent, and the branches of foreign companies (outside the EEA) less than 0.1 percent.⁸

36. The insurance industry seems to be supported by a healthy level of competition. Market concentration is higher in the life insurance sector, where at end 2002 the three (10) largest insurance companies represented 29 percent (60 percent) of total assets. In nonlife, the three (10) largest companies represented 22 percent (45 percent) of total assets. A notable feature of the industry is the prevalence of bancassurance: a large minority (by assets) of insurance companies are subsidiaries of banks, which also offer policies from nonsubsidiaries. The French insurance market is notable for its broad range of distribution channels, which include tied agents, insurance brokers, salaried sales forces (as in the case of bancassurance), direct writing mutuals, and financial institutions.

37. In life sector, the most common product is a type of savings product (assurance à capital différé avec contre-assurance en cas de décès or “mixed capital insurance” product), accounting for almost 65 percent of total life premium income. This product is subsequently paid out in the form of a lump-sum benefit or multiple payment if the insured dies or outlives the term of the policy. This product can be taken out directly by the individuals or through an employer or association (group policies account for 7 percent of pure endowment premium income). Such policies have a guaranteed rate of return which is used to calculate technical provisions. The second largest type of life insurance policies (representing 15 percent of total life premium income) is a unit-linked contract. This type of policy is expressed in the units of an investment vehicle, such as shares of a mutual fund or a real-estate partnership. Since the contract benefits fluctuate with the market values of the underlying investment instruments, the investment risk is entirely borne by the policyholders, unless there are linked to some minimum guarantees.

38. The regulatory framework for life insurance companies relies on three pillars: (i) solvency requirements (approximately 4 percent of total mathematical provisions for endowment products and 1 percent for unit-linked contracts);⁹(ii) regulations on the measurement of liabilities (i.e., technical provisions); and (iii) regulations governing investment policies (including conservative accounting principles applied to asset valuation). At end-2002, the solvency margin (including unrealized capital gains) was estimated at 9.3 percent of provisions, or 2.4 times the required minimum. Non-life insurance companies are required to have a minimum regulatory ratio equal to 18 percent of annual premiums (16 percent for large companies), or 26 percent of average claims paid out in the preceding three years (23 percent for large companies), whichever amount is higher.¹⁰ At end-2002, the solvency margin (including unrealized capital gains) was estimated at 39.3 percent of provisions, or 4.8 times the required minimum.¹¹ In addition, the CCAMIP is promoting a sound level of asset-liability management expertise on the industry-wide basis. Since 2001, insurers are required to conduct periodically a series of stress tests, aimed at monitoring the ability of insurance companies to model and anticipate the consequences of various financial market shocks (such as movements in interest rates, or equity or real estate prices) on their asset-liability match.

39. Overall, the condition of the French insurance industry suggests that systemic vulnerabilities are well contained. The sector seems to have demonstrated its resilience in the face of a number of significant shocks in recent years (including, among others, a significant fall in international equity prices in 2001–2003, historically low interest rates, and international and national natural catastrophes, including September 2001 and major storms or flooding in France in 1999 and 2000).

40. Sources of stability include: (i) the ability of the life sector to reduce progressively the level of guaranteed interest rates (to zero percent for most new contracts) and shorten the contract duration, in an effort to reduce interest rate risks borne by the insurers; (ii) greater product mix diversification with unit-linked products, where the investment risk is fully borne by the policyholders (even after the recent poor equity market performance, unit-linked products continue to represent 18 percent of life and mixed insurance premiums); (iii) a conservative investment portfolio, with over three quarter of total assets invested in fixed-income instruments (in life, equity represents only 12 percent of total assets and real estate less than 5 percent, leaving the remaining 84 percent invested in fixed-term instruments; this asset composition has helped shield the French insurance sector from the consequences of the recent fall in international equity prices); (iv) despite the presence of large bancassurance groups, limited risk transfer between the banking and insurance sectors; and (v) a relatively small reinsurance activity, accounting for only 3 percent of total assets in the French insurance sector.

41. The insurance industry is facing a number of challenges. These include: (i) the demographic trend (longer life expectancy and decline in working population), which creates concerns about financial sustainability of the currently fully state-funded pension and medical plans; (ii) the up-coming implementation of the new International Accounting Standards (IAS) norms in 2005, which expose the insurance industry to vulnerable accounting risks; and (iii) a possible sharp and sustained increase in interest rates, which could generate a wave of contract repurchases, which in turn would force insurance companies to sell some of their assets (fixed-income instruments) at loss-making values in order to pay out the surrender values. However, the authorities seem aware of these challenges and are considering how to take preemptive measures, including the promotion of a new generation of private retirement products or ensuring a sound and sophisticated system of asset-liability management at the industry-wide level.

General preconditions for effective insurance supervision

42. The supervision of insurance companies in France is based on the EU Directives and French insurance law, ordinances, codes and circulars. The legal requirements governing insurance companies originate in both company law and insurance law. In France, the regulation of insurance falls under the jurisdiction of the MoE, while the supervision is under the responsibility of the CCAMIP and the CEA.

43. The legal system in France operates effectively. The auditing and accounting professions in France are well developed and follow best international practices. In the case of large companies, the accuracy of the financial statements must be confirmed simultaneously by two sets of external auditors. The auditing and accounting rules applicable to insurance companies generally comply with international standards. Further harmonization will be achieved in 2005 when the whole EU area will implement IAS. The actuarial profession is large and well-developed in France.

44. The French economy is well large, well diversified, and generally relatively stable in both real and nominal terms. These conditions not only contribute to the growth of the insurance sector, but also facilitate effective supervision.

Principle-by-principle assessment

45. The legal, regulatory and supervisory framework observes a large majority of the essential criteria of the IAIS Principles Methodology. The assessment reveals that most of the 28 ICP of the IAIS are observed. ICP 9, 10, 17 and 18 are largely observed, and ICP 3, 24 and 28 are partly observed.

46. The level of observance for each principle reflects the assessments of the essential criteria established by the IAIS. A principle is considered “observed” whenever all the essential criteria are considered to be observed or when all the essential criteria are observed except for a number that are considered not applicable. For a criterion to be considered “observed,” it is usually necessary that the authority has the legal authority to perform its tasks and that it exercises this authority to a satisfactory standard and ensures that requirements are implemented. The existence of a power in the law is insufficient for full observance to be recorded against a criterion except where the criterion is specifically limited in this respect. In the event that the supervisor has a history of using a practice for which it has no explicit legal authority, the assessment may be considered as “observed” if the practice is substantiated as common and undisputed.

47. A principle is considered to be “not applicable” when the essential criteria are considered to be “not applicable.” A criterion would be considered ‘not applicable’ whenever the criterion does not apply given the structural, legal and institutional features of a jurisdiction.

48. For a principle to be considered “largely observed,” it is necessary that only minor shortcomings exist which do not raise any concerns about the authority’s ability to achieve full observance with the principle. A principle will be considered “partly observed” whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance. A principle will be considered “not observed” whenever no substantive progress toward observance has been achieved.

Table 4.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

Table 4.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

Principle 1.	Conditions for effective insurance supervision Insurance supervision relies upon a policy, institutional and legal framework for financial sector supervision, a well developed and effective financial market infrastructure, and efficient financial markets.
Description	The environment in which the French insurance supervisory authority operates is conducive to effective supervision and the achievement of its objectives.
	1. Financial sector policy framework
	France pursues policies, at the national as well as at the international level, aimed at ensuring financial stability, including through the effective supervision in insurance and other financial sectors. An example of this policy is the Financial Security Law of August 1st, 2003 (Loi de securité financière, LSF), which is designed to strengthen the efficiency of financial sector supervision.
	The legal and institutional framework is mostly enshrined in the form of codes (the Code des Assurances, for instance), which are comprehensive, carefully drafted, and publicly disclosed. The laws and regulations are updated, as necessary, to maintain consistency with developments in national and international standards and best practices.
	2. Financial market infrastructure
	The infrastructure necessary for effective supervision is in place. The general legal system (civil law, administrative law, penal law, tax law, etc.) is accountable and reliable; the court system is generally reliable and transparent; accounting, actuarial and auditing standards are consistent; qualified and experienced actuaries, accountants, auditors and lawyers are available; general and special statistics are accessible; professional associations are available to assist and protect persons and companies in their various different functions for the insurance sector.
	Macroeconomic policy promotes overall stability and the conditions under which the population and industry have incentives to make use of insurance (for example, by maintaining low and stable inflation rates). Tax policy is also used to encourage demand for insurance.
	3. Efficient capital market
	Paris is one of the most important and sophisticated financial centers of the world, with well functioning money and security markets.
Assessment	Observed.
Comments	None.
Principle 2.	Supervisory objectives
	The principal objectives of insurance supervision are clearly defined.
Description	The supervisory objective is clearly defined in Art. L.310-12 Code des Assurances. The main objective is the protection of the interests of the insured. These interests are defined in a broad sense that includes the interests of the policyholder, the insured person, the beneficiaries and—in the case of third party liability insurance—the interests of the victims.
	There are no other legal objectives which could conflict with the attainment of the main target.
Assessment	Observed.
Comments	None.
Principle 3.	Supervisory authority
	The supervisory authority:
	has adequate powers, legal protection and financial resources to exercise its functions and powers is operationally independent and accountable in the exercise of its functions and powers hires, trains and maintains sufficient staff with high professional standards treats confidential information appropriately.
Description	Supervisory bodies
	Most supervisory responsibilities are allocated between the Comité des Entreprises d’Assurance (CEA) and the Commission de Contrôle des Assurances, des Mutuelles et des Institutions de Prévoyance (CCAMIP).
	The new LSF assigned to the CEA some of the responsibilities that had been the responsibility of the MoE. Hence, the CEA is responsible for the issuing of authorizations (see ICP 6), for the test of whether owners, board members and senior managers are fit and proper to fulfill their roles (see ICP 7), and for authorizing portfolio transfers and mergers of undertakings (see ICP 8).
	The Financial Security Law mandated the merger of the CCA with the CCMIP, which was the authority supervising mutual health insurance societies and professional protection schemes. The new CCAMIP will supervise all insurance undertakings as defined in Art. 8 of the First EU Non-Life and the First EU Life Insurance Directives.
	The MoE has retained some functions in insurance supervision (e.g., power to issue rules by administrative means, and the possibility of asking the CEA to postpone any of its decisions; see Art. L.413-5 Code des Assurances).
	The CEA is composed of a chairman (appointed by the MoE), the director of the treasury, the chairman and the secretary general of the CCAMIP and eight members whom the Minister of the Economy, Finance, and Industry appoints for terms of three years. These comprise: two representatives of insurance companies; one representative of the staff of insurance companies; one representative of the health mutual societies and professional protection schemes (the last without voting right); two members representing the Conseil d’Etat and the Cour de Cassation; and two are individuals selected for their knowledge in the insurance sector.
	The CCAMIP is composed of nine members: the chairman; the governor of the BdF; one member of the Conseil d’Etat; one member of the Cour de Cassation; one representative of the Cour des Comptes; and four individuals selected for their competence in insurance.
	The CCAMIP has a secretariat headed by the Secretary General, to whom responsibility for on-going operations is assigned. The Secretary General attends meetings of the CCAMIP but has no voting power.
	Legal framework
	The Code des Assurances clearly fixes the allocation of authority in insurance supervision.
	Neither the CCAMIP nor the CEA have the power to issue rules by administrative means. The legal framework provides sufficient and appropriate powers to the supervisors for effective discharge of supervisory responsibilities.
	Independence and accountability
	Internal governance requirements are in place, but they are dispersed in several laws and regulations (Code Pénal, Code des Assurances, etc.). The CCAMIP has prepared a Code of Conduct for its staff, which is expected to come into force after approval by the new Commission. This Code contains the legal requirements (e.g., requirements regarding professional secrecy), principles of the jurisprudence, prohibitions (e.g., regarding the holding of shares of insurance companies), and guidelines on staff conduct, internal information sharing, etc.
	Procedures regarding the appointment and dismissal of the head and members of the CCAMIP are in place. The chairman and the other members of the Commission cannot be removed during the period they are appointed, except in a case they commit a crime.
	Institutional relationships between the supervisory authority and other organizations of the executive, legislature and judiciary are clearly defined.
	The supervisory authority and their staff are free from undue political, governmental and industrial interference. For example, the Minister of the Economy, Finance and Industry does not have the power to give directions or guidelines to the supervisor. The supervisory authority is financed in a manner that does not undermine its independence (see below).
	Supervisory processes are transparent. The decisions are consistent across similar cases, and need to be justified. Proposals for new legislation or regulation are normally subject of prior hearings with market participants. New legislation or regulation as well as changes in supervisory policy must be publicly explained by the supervisory authority. The disclosure of information limited only by the confidentiality principle and the need to protect the interests of policyholders.
	Powers
	The supervisory authority has nearly all the powers needed to exercise its function efficiently (preventive measures as well as corrective ones); some limitations are mentioned below in ICP 9, 10 and 18.
	The supervisory authority is mandated to ensure that insurance companies are able at any moment to fulfill their obligations to the policyholders (Art. L.310-12 §2 Code des Assurances). Where there is no regulation or poor regulation, or where a certain function is not prescribed by law (see for instance ICP 9 or 10), the CCAMIP cannot intervene. In these cases, the supervisor can give only recommendations, on the basis of an assessment that it would be more in the interests of the policyholder for the company concerned to change policies or to establish relevant functions or systems.
	Financial and human resources
	The secretariat of the CEA is provided by the MINEFI.
	The CCAMIP has budgetary independence and its own budget. The budget is proposed by the secretary general of CCAMIP (Art. L.310-12-3 Code des Assurances). It needs to be approved by the CEA.
	The expenses of the CCAMIP are paid by the supervised entities (Art. L.310-12-4 Code des Assurances). At the time of the assessment, a decree determining the implementation details regarding this provision in the LSF was still under review by the Conseil d’Etat.
	Legislation on public service (which covers the civil service) provides legal protection to the supervisory authority and its staff.
	At the moment the CCAMIP has a staff of around 130 persons. Of these, 50 are commissaires-contrôleurs, that is, working in the operational supervision. They have to supervise about 500 insurance companies. In addition, more than 1,000 health mutual societies and professional protection schemes must be supervised now according to the stricter standards defined in the insurance code and enforced by the former CCA. So far, these mutual institutions were supervised by local civil servants and the 6–7 members of the former CCMIP according to a special mutual code, which was not fully compliant with EU Directives; the staff of this Commission will be transferred to the new CCAMIP. However, the CCAMIP is optimistic that it will be possible to attract and to maintain highly skilled staff and rely upon an adequate supervisory infrastructure, since it will be able to provide more and better training; it will also be possible to contract specialists in insurance.
	Confidentiality
	The staff of the supervisory authority must observe requirements of confidentiality, which are established in the relevant EU Directives.
Assessment	Partly observed.
Comments	The supervisory authority lacks powers to issue rules by administrative means. This power belongs exclusively to the MoE. This situation is not compliant with ICP3: while the laws lay down the principles of supervision, the details within the legal framework must be determined by regulations of the supervisory authority. The latter has better knowledge and more experience, and above all, the supervisor is responsible for the achievement of the legally fixed supervisory objectives. It is indispensable that only this authority and nobody else should have the power to issue the necessary indications of how the legal supervisory principles have to be interpreted and respected. This duty can be fulfilled not only by regulation, but also by circulars, guidelines, codes of conducts, etc.12
	The number of staff has to be increased. The CCAMIP has staff of very high quality and motivation, but effective supervision under the high standards of the current regulatory and supervisory regime of the CCAMIP is not possible with the existing staff of the former CCA and CCMIP. First, in recent years, the complexity and scope of activities of the CCA expanded significantly, with little additional staff, in a broad range of activities, such as the supervision of conglomerates, cross-border activities, reinsurance, anti-Money laundering. In the near future, the CCAMIP will also have to supervise thousands of intermediaries due to the implementation of the EU Intermediaries Directive. Second, the activities of the mutuals, which used to be regulated and supervised under a less stringent regime, are now to be conducted in full compliance with EU directives according to the higher standards and stricter prudential rules of the former CCA. Furthermore, the LSF strengthens insurance supervision and provides more responsibility for the supervisory agency. Finally, the CCAMIP aims to intensify on-site inspections so that each company is inspected every three to five years. This objective can be reached only if the number of commissaires-controleurs will be increased from 50 to at least 75–80.
	The new organization of the supervision seems to be segmented with four different functions responsible for insurance supervision and regulation: the MoE for regulation; the CEA for licensing issues and withdrawals, fit and proper tests of managers and owners as well as for portfolio transfer; the CCAMIP for sanctions; and the general secretariat, which is part of the CCAMIP, for other on-going supervision issues. There is a concern that this system might operate slowly and therefore handicap efficient supervision. The French authorities downplay this risk and refer to their experiences in the banking supervision.
	The insurance industry is involved in the supervisory functions of the CEA. This can be a source of conflicts of interests and may impair the work not only of this body but of the insurance supervision as such. The French authorities argue that persons with practical experience need to be represented on the CEA. As this experience can be provided by the new advisory bodies (the CCSF and CCLRF), there seems to be no need for the participation of insurers in the supervisory process. In addition or alternatively, representatives of policyholders might be introduced to act as counterweigh to the representatives of the industry.
	Compliance with this Principle, and operational efficiency, would be improved if the CCAMIP and CEA were merged, while retaining the segregation of duties within CCAMIP between monitoring and decision making on sanctions. The decision making body should be balanced, independent from industry and have adequate insurance expertise. The splitting of responsibilities within the CCAMIP is considered necessary by the French authorities to ensure compliance with the jurisprudence of the French Conseil d’Etat in relation to Art. 6 of the European Convention of Human Rights. Moreover, if CCAMIP acquired the powers to issue regulations by administrative means, then it would be imperative that its decision making body be properly constituted. The merging of CCAMIP and CEA would streamline supervisory processes and allow the planned increase in staff to be deployed in the most efficient manner possible. The current arrangement (four functional units) is, however, very new and its performance should be closely monitored, and a date set for reviewing the structure.
	In view of the fact that three of the main essential criteria (no administrative regulation power, possible conflicts of interests in the CEA and not enough staff) are not fulfilled, the ICP must be considered as only partly observed.
Principle 4.	Supervisory process
	The supervisory authority conducts its functions in a transparent and accountable manner.
Description	The supervisory process is established in the Code des Assurances and in the associated regulations. These are updated regularly following discussions with the insurance industry.
	Measures taken by the supervisory authorities are consistent and equitable. Insurance companies have the right to appeal to the relevant court against decisions of the supervisory authority. An action against a supervisory measure does not lead to its suspension.
	A full description of the role, objective and activities of the supervisory authorities is published on the internet, in annual reports and other media (see also Annex III of the Annual report of the former CCA). Information about the situation of the insurance market, national and international developments, the most important decisions, cooperation with other national and international institutions, and other current issues is contained in the CCAMIP’s annual report and its tableaux de synthèse des entreprises d’assurance et de réassurance.
Assessment	Observed.
Comments	None.
Principle 5.	Supervisory cooperation and information sharing
	The supervisory authority cooperates and shares information with other relevant supervisors subject to confidentiality requirements.
Description	The CCAMIP is allowed to exchange information with other French financial supervisors without any restrictions. In October 2001, the CCA and the CB concluded a Charte relative à la coopération en matière de contrôle et d’échange d’information.
	As regards the relations between the French supervisor and foreign supervisors, a distinction must be made between supervisors in the EEA and non-EEA supervisors, since for the latter the possibilities of cooperation are more limited.
	Cooperation between EEA insurance supervisors, including information sharing, is regulated through several directives and multilateral protocols of application. These arrangements allow for the unrestricted exchange of information, including on a cross-sector basis in the case of supervision of insurance groups or financial conglomerates. The French legislative has transferred these arrangements into French law.
	As regards non-EEA insurance supervisors, the CCAMIP has the authority to enter into agreements with foreign competent authorities on the exchange relevant information (provided the foreign supervisor is subject to professional secrecy constraints); allowing the French supervisor to carry on on-site inspections in foreign branches of French undertakings; and allowing, under certain conditions, foreign supervisors to participate in the on-site inspections carried on by the CCAMIP in French branches of foreign companies (Art. L.310-21 Code des Assurances.)
Assessment	Observed.
Comments	None.
Principle 6.	Licensing
	An insurer must be licensed before it can operate within a jurisdiction. The requirements for licensing are clear, objective and public.
Description	Carrying out insurance business in France without a license is prohibited.
	This principle is not valid for companies having their home office in the EEA because the member states of EEA have agreed to mutual recognition. That is possible because nearly all conditions required for licenses in the insurance sector are coordinated in the relevant EU
	Directives. Freedom of services rules therefore imply that all companies with a home office in one of the member states can carry on business in France through a branch or without setting up a branch. Hence, a license from the French authorities is necessary for French companies and branches of companies coming from outside the EEA (some exceptions are granted to Swiss companies under European conventions). Subsidiaries from foreign companies are considered as French companies. Freedom of services is not granted to companies having their head office outside the EEA.
	Licenses were issued by the MoE before the Financial Security Law came into force. Now the new CEA is responsible for the licensing process. The CCAMIP, which is in charge of conducting on-going supervision, advises the CEA, which ensures that the legal and prudential criteria which are applied in the process of checking a license application are in line with the criteria on which on-going supervision is based. If the CCAMIP has objections to the granting of a license, the CEA must refuse the application. This is, however, an informal arrangement and CCAMIP have no legally enforceable power to over this aspect of supervision. After the granting of a license, the CCAMIP makes a special check of whether the commitments of the insurance undertakings toward the policyholders are fulfilled.
	Licensing requirements transpose the criteria laid out in the relevant EU Directive, which in turn are reflected in the essential criteria of ICP6.
	The Insurance Code distinguishes several permitted legal forms.
	Owners and managers have to submit information adequate to assess their suitability. The authorized representatives of a foreign branch are submitted to the same controls as the directors of French firms.
	Regarding owners, the provisions require that the CEA is informed of the names of the natural and legal persons holding a direct or indirect qualifying participation in the applicant company.
	The insurance supervisor is authorized to ask for submission of audit reports and other key information such as extracts from the register of commerce. The insurance supervisor has the power to exchange information with other relevant authorities inside and outside its jurisdiction which respect minimum reciprocity and confidentiality requirements. In the case of licenses for branches of companies from outside the EEA, or in the case that French companies intends to provide insurance outside the EEA, the supervisor shares information with the competent authority in the other country, provided that confidentiality requirements are met (information is also shared among supervisors of the EEA.)
	The supervisor may refuse to grant the license if the applicants are deemed not fit and proper with regard to their possession of the necessary knowledge (such as commercial experience) and integrity; relevant evidence includes whether the applicants have a criminal records and their complete curriculum vitae. The license can also be refused if facts exist from which it can be deduced that the holders of a qualifying participation: (i) are in an economic situation which may endanger the soundness of the applicant; or (ii) do not have sufficient resources to keep the company solvent on an on-going basis; or (iii) have been directly or indirectly involved in illegal transactions affecting their suitability; or (iv) intend to abuse the insurer for criminal purposes (e.g. money laundering); or (v) are connected with the applicant company in a way that would obstruct effective supervision.
	The applicant is required to submit a business plan outlining the proposed business of the company for five years ahead. In particular, the business plan should provide information on the types of obligation the company proposes to incur (in the case of life insurance); the types of risk it proposes to cover (in the case of nonlife insurance); the basic principles of the company’s insurance and reinsurance program; the estimated installment costs and the financial means to be used for this purpose; and the projected development of business (forecast balance sheets and profit and loss accounts, including the underlying assumptions, coverage of technical provisions (liabilities toward policyholders), solvency margins, cash situation). A minimum amount of capital is required for all insurance companies. The supervisor can request and check information on the products offered by the insurer (general policy conditions, technical basis for the calculation of premium rates and provisions). The articles of incorporation as well as information on actuaries and auditors are also to be provided.
	A company licensed to operate life insurance may not be licensed to operate nonlife insurance, and vice versa. There are, however, restricted cases of licensed companies operating both life and some limited nonlife insurance activities (health and disability), as permitted by the EU Directives and the Insurance Code. In such cases, the supervisory authority checks that there are clear provisions ensuring that risks and related assets are handled separately. In accordance with the EU Directives, insurance companies are not allowed to carry on noninsurance business.
	The refusal of a license application has to be motivated and notified to the applicant company.
	The CCAMIP has the right to withdraw a license on the grounds of substantial irregularities, notably if the company no longer meets the licensing requirements with regard to solvency, provision requirements and the investment rules, and thus threatens not to fulfill its commitments toward the customers.
Assessment	Observed.
Comments	None.
Principle 7.	Suitability of persons
	The significant owners, board members, senior management, auditors and actuaries of an insurer are fit and proper to fulfill their roles. This requires that they possess the appropriate integrity, competency, experience and qualifications.
Description