IMF Publishes Reports Assessing Financial System Stability in France
IMF published a report on results of the Financial System Stability Assessment (FSSA) on France. Also published were the staff report and the selected issues report under the 2018 Article IV consultation with France. The FSSA report highlights that important institutional and policy changes have taken place since the 2012 Financial Sector Assessment Program (FSAP). At the national level, the authorities have strengthened the macro-prudential framework, enhanced monitoring of financial stability risks, prepared to manage the Brexit fall-out, and taken various financial reform measures and initiatives on digital finance, crypto-assets, and green finance. At the European level, significant changes relate to Banking Union, Capital Requirements Regulation/Capital Requirements Directive (CRR/CRD), Solvency II, and efforts toward Capital Markets Union.
The FSSA report notes that the financial system is more resilient than it was in 2012, with an improvement in capital positions and asset quality. Banking and insurance business lines, and the corporate sector, carry important financial vulnerabilities that need close attention. Banks have adequate capital and liquidity buffers to withstand a sizable shock. Banks could face liquidity challenges from large outflows of wholesale funding, including in U.S. dollars, and from any acceleration of fragmentation of international liquidity. Insurers are broadly resilient against market shocks, but vulnerabilities stem from the concentrated exposures, mostly to their parent banks. Solvency ratios of insurers have been stable and bolstered by the effective implementation of Solvency II.
The FSAP identified the following key policy priorities:
- Continue pre-emptive management of systemic risks. To address a buildup of systemic risk including private non-financial sector debt, the authorities have proactively used macro-prudential measures. The authorities should engage with ECB and other EU agencies on the possible use of bank-specific Pillar 2 measures to address bank-specific residual risks from the concentration of exposures to large indebted corporates. In addition, the authorities should consider the use of a sectoral systemic risk buffer (SRB) and the expansion of the macro-prudential toolkit for corporates and non-banks.
- Ensure adequate liquidity management and buffers. While aggregate bank liquidity buffers appear adequate, the supervisory authorities are encouraged to consider imposing additional liquidity buffers in all major currencies to minimize risks related to potential disruptions in wholesale funding in case of severe shocks.
- Further integrate conglomerate-level monitoring and oversight. Common guidance, reporting, integrated liquidity risk management requirements, and stress testing at the conglomerate level can help ensure that risks are promptly identified and addressed. Several of these gaps are universal in nature and would benefit from a broader international effort.
- Enhance governance, financial-sector policies, and financial integrity. In line with international best practices and critical for achieving their technical mandates in an accountable manner, governance and operational independence reforms are required to ensure that the oversight authorities are properly positioned and resourced to deliver their mandates effectively.
- Reinforce crisis management, safety nets, and resolution arrangements. Continued implementation of crisis management instruments created under the EU Bank Recovery and Resolution Directive is essential. Recovery and resolution planning for non-banks needs attention.
The staff report highlighted that IMF Directors commended the authorities’ progress in bolstering the financial system’s resilience, as reflected in the FSAP review, including by taking a proactive macro-prudential response to the buildup of systemic risk from corporate leverage. Directors emphasized the need to continue to monitor systemic risks closely and stand ready to deploy additional macro- and micro-prudential policies as needed. Given the global significance and complexity of financial system in France, Directors emphasized further integrating monitoring and oversight at the conglomerate level, strengthening liquidity-risk management in conglomerates, and ensuring adequate liquidity buffers.
Keywords: Europe, France, Banking, Insurance, FSSA, FSAP, Article IV, Systemic Risk, Macro-Prudential Framework, Solvency II, CRR/CRD, BRRD, Governance, Capital Buffers, Stress Testing, IMF
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Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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