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    IMF Publishes Technical Notes Under FSAP Assessment on France

    October 29, 2019

    IMF published several technical notes under the Financial Sector Assessment Program (FSAP) on France. The technical notes cover various topics in the banking and insurance sectors such as risk analysis of insurance and banking sectors, insurance supervision and regulation, resolution regimes for insurers, macro-prudential policy framework and tools, balance sheet risks and financial stability, and assessment of the less significant institutions sector. The notes also cover vulnerabilities in households and nonfinancial corporate sector as well as the analysis of the anti-money laundering and combating the financing of terrorism (AML/CFT) regime in France.

    The following are the key highlights of various reports:

    • Technical Note on Issues in Insurance Supervision and Regulation. The report provides an overview of the insurance sector in France, highlighting the high level of insurance penetration, particularly for life insurance, in the country. The total number of insurers in France is 742, with 339 insurers being subject to Solvency II at less than EUR 1 billion in assets. These small insurers are well-capitalized with all exceeding a 100% Solvency Capital Requirement (SCR), even if the transitional measures in Solvency II and the long-term guarantee package are not taken into account.
    • Technical Note on Key Attributes of Effective Resolution Regimes for Insurance Companies. The French authorities recently established a comprehensive resolution framework for insurers and agreed for the assessment to be conducted on the basis of the most recent version of the Methodology, which is still in draft form. ACPR is the French resolution authority, with the Resolution College having exclusive authority to take resolution actions against supervised entities within the remit of ACPR. France is one of the first jurisdictions of global systemic importance to establish a comprehensive resolution framework for insurers. The resolution framework is designed to apply to insurers that breach the Solvency Capital Requirement and the Minimum Capital Requirement coverage ratio, while remaining balance sheet solvent in a Solvency II sense. The main areas that need further development are funding for resolution, powers for the restructuring of liabilities (that is, bail-in), safeguards, and legal protection.
    • Technical Note on Risk Analysis of Banking and Insurance Sectors. This technical note contributes to the FSAP assessment of systemic risk with a comprehensive set of stress testing exercises. Four Global Systemically Important Banks (G-SIBs) are incorporated in France, in addition to a number of large insurers. The stress tests reveal that banks and insurers would be resilient against simulated shocks, although some challenges remain. For banks, solvency risks appear to be contained by capital buffers (including additional Pillar 2 requirements and guidance imposed by Single Supervisory Mechanism or SSM), though negative interest rates, dependency on wholesale funding, particularly in USD remain the key challenges to some banks in terms of profitability and liquidity. For insurers, under the adverse scenario, the median SCR ratio would decrease from 201% to 163%, though no company drops below the 100% regulatory threshold for SCR coverage.
    • Technical Note on Macro-Prudential Policy Framework and Tools. Macro-prudential policy in France is the joint responsibility with several European institutions. The note suggests that the macro-prudential policy toolkit should be strengthened further. The current European framework has limited tools to address corporate sector risks in a targeted way. The French authorities should actively engage at the EU level to broaden the toolkit. Similarly, enhancement of reporting, monitoring, and analytical capacity to address risks from interconnectedness within financial groups should be a priority. IMF also recommends that sectoral systemic risk buffer (SRB), calibrated to corporate exposures, could be considered if vulnerabilities intensify.
    • Technical Note on Balance Sheet Risks and Financial Stability. The note highlights that macro-prudential policy setting faces the challenge of identifying growth of financial and macroeconomic variables above and below potential. The gaps between actual performance and potential are crucial for policy makers but are unobserved. This is especially true for financial variables such as capital and risk of default of borrowers (firms and banks) and lenders (banks and households). It is found that default risk fluctuates during time between being too high and too low. The analysis also implies that firms should be encouraged to strengthen their equity capital base by retaining earnings or issuing equity. The note also attempts to better understand some issues on the interconnectedness within the French financial system and concludes that French banks are less inwardly vulnerable to cross-border interbank contagion since the last FSAP as well as less outwardly contagious. 
    • Technical Note on Select Topics in Financial Supervision and Oversight. The note examines the supervision and regulation of less significant institutions (LSIs) in France. The regulatory framework, based on the Capital Requirements Regulation (CRR)/Capital Requirements Directive (CRD) IV, is the same as for significant institutions but the supervisory framework under SSM is very different. ACPR remains the direct supervisor of LSIs but it is now subject to the oversight of ECB, which also has full responsibility for certain common procedures. ACPR has continued its comprehensive supervisory approach, both on-site and off-site, but reflecting the emphasis of SSM on greater harmonization, it has had to become more procedural and may have lost elements of flexibility. In response to SSM initiatives, ACPR has sharpened its focus on governance issues, although business model and profitability risk remains the main challenge for the LSI sector.
    • Technical Note on AML/CFT. The note sets out the findings and recommendations made in FSA) for France in the area of AML/CFT. ACPR is responsible for AML/CFT supervision of banks and has taken a risk-based approach to AML/CFT supervision. Currently, legislation is being discussed to strengthen regulation and supervision of activities involving crypto assets for AML/CFT. The authorities are recommended to continue their efforts to align the legal framework with fifth Anti-Money Laundering Directive of EU and the recently revised Financial Action Task Force (FATF) standard in a collaborative and inclusive manner and ensure effective implementation.
    • Technical Note on Vulnerabilities of Nonfinancial Corporations and Households. Stress tests show that under downside macro-financial scenarios, corporate debt may increase significantly (up to around 11 percent of GDP in the broad sample of firms) but would remain broadly manageable. However, banks’ large exposures to corporates with debt at risk would increase significantly under the adverse scenario and in aggregate would amount to a significant share of capital. The IMF recommends engagement with ECB and other EU agencies on use of Pillar 2 measures to address bank-specific residual risk from concentration of exposures to large indebted corporates. It also recommends to accelerate collection of more granular data to monitor and analyze housing loan trends and developments on balance sheets of households.

    Related Links

    Keywords: Europe, EU, France, Banking, Insurance, Resolution Framework, Stress Testing, Basel III, CRR/CRD, Macro-prudential Policy, ALM, Less Significant Institutions, AML/CFT, AMLD5, IMF

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