arcb-2009-activities-of-the-commission-bancaire-and-its-general-secretariat by qingyunliuliu



1. Supervision of credit institutions and investment firms

1.1. On-site inspections and subsequent action

In 2009, based on the schedule established by the Commission Bancaire, the
General Inspectorate of the Banque de France carried out 137 inspections of
credit institutions and investment firms 1, including two inspections conducted
                 ´            ˆ
by the Autorite de Controle des Assurances et des Mutuelles. While these
inspections had a variety of targets, reflecting the diversity of the French
banking sector, they concentrated on businesses and institutions presenting
risk factors that called for on-site investigations to follow-up on the continuing
off-site inspection conducted by the General Secretariat of the Commission
In addition to general audits covering all the activities of the institutions under
review, the 2009 programme included inspections targeted on a variety of
topics, aimed at analysing and measuring in greater detail the effects of the
financial crisis on the banking sector.
Some of these targeted inspections assessed the impact of the crisis on
calculations of capital requirements for market risk and operational risk
using internal models. Emphasis was also placed on the management of
liquidity and refinancing, exposures to real estate professionals, and more
generally on the credit risks generated by the second-round effects of the
financial crisis. Furthermore the Commission Bancaire reorganised its
inspection programme to carry out a series of investigations into the
compensation of market professionals, with the aim of providing input for a
report ordered by the Minister for the Economy, Finance and Employment.
The ongoing implementation of the Basel 2 framework gave rise to several
inspections to authorise the use of internal models developed by institutions to
calculate their capital requirements, or to monitor compliance with
recommendations made by the Commission Bancaire in light of previous
Inspections of France’s main institutions were often expanded to include visits
to their foreign establishments in order to ensure that their risk monitoring and

1 This   figure is comparable to the figure for the preceding year (149).

Annual Report of the Commission Bancaire . 2009                                       9
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       control procedures were applied properly. Roughly 20 such assignments were
                       conducted during 2009, including nine in countries outside the European
                       On-site inspection also covers the different types of business conducted by
                       specialised institutions, both French and foreign. Accordingly, as in previous
                       years, the 2009 programme included inspections of a broad range of
                       institutions specialising in one of the following areas: lending to
                       professionals, consumer credit, and management of employee savings plans.
                       The number of inspections at investment firms was unchanged year on year.
                       The assignments focused in particular on firms whose risk profiles were most
                       likely to increase as a result of the financial crisis, owing to their weak financial
                       position or narrow business base.
                       Increasing attention was given to examining institutions’ anti-money
                       laundering programmes. Inspection teams were aided in this task by the
                       development of IT tools for in-depth risks analysis.
                       Inspections were also conducted at the request of the French securities
                                          ´            ´
                       regulator, Autorite des Marches Financiers (AMF), to verify the proper
                       enforcement of its General Regulation, particularly the provisions related to
                       the transposition of the Market in Financial Instruments Directive. Nine such
                       inspections were carried out at credit institutions or investment firms, all of
                       them coinciding with inspections conducted on instructions from the
                       Commission Bancaire under its own jurisdiction.
                       The General Inspectorate of the Banque de France also carried out five on-site
                       inspections of Bureaux de change in 2009 after consulting the Customs

                         BOX 1
                                              Inspections of compensation for traders

                              In a letter dated 5 August 2009, Christine Lagarde, Minister of the Economy, Finance
                              and Employment, requested a report by the end of the year on how institutions were
                              applying market rules on the compensation of market professionals.
                              This request followed up on an earlier report, approved by the Commission Bancaire on
                              18 May 2009 and submitted to the minister on 28 May 2009. The earlier report was
                                                                                                             ´ ´
                              based on responses to a survey of institutions receiving financing from Societe de
                                                 ´              ¸
                              Financement de l’Economie Francaise and on responses received from industry
                              Under the programme presented to the Commission Bancaire on 3 September 2009,
                              on-site inspections were conducted at seven banking groups in September and
                              October 2009. These inspections focused mainly on the bank’s financing and
                              investment activities (including the related support and control functions), and, to
                              a lesser extent, on asset management, private banking and brokerage. To ensure
                              consistency, an on-site examination methodology was presented to the Commission
                              Bancaire at the 3 September meeting. It was designed to identify the starting
                              situation at the institutions – as a benchmark for assessing likely developments – and

       10                                                           Annual Report of the Commission Bancaire . 2009
  to assess existing and emerging practices in light of recent regulatory requirements
  and professional standards.
  These inspections focused on four main themes:
  u Governance. The inspectors assessed the degree of involvement of the institution’s
     decision-making body – either directly or through its specialised committees – in
     setting compensation policies. They also examined how risk was taken into account
     when setting and assessing compensation policies, and how the internal control
     function was involved in that process;
  u Setting total compensation pools. The inspections reviewed compliance with the
     institution’s general policies on variable compensation as well as the calculation of
     base values using quantitative measures of financial performance adjusted for all
     costs (i.e. risk-related, liquidity and capital costs);
  u Setting individual compensation. The inspections examined the arrangements
     envisaged by the institution for complying with new regulatory requirements and
     related industry standards concerning the split between the fixed and variable
     components of compensation; policies relating to guaranteed bonuses; the formal
     recording and documentation of the criteria used to set compensation (measures of
     individual collective performance; consideration of qualitative criteria, particularly
     with regard to risk management and internal control); and the process for
     individual performance appraisals;
  u Methods used to pay variable compensation. The inspections examined the
     institution’s practices relating to deferred payment of a portion of variable
     compensation, relative to the 50% threshold recommended in industry standards
     issued on 5 November 2009. They also examined the split between payment in cash
     and other forms of compensation, such as securities and equivalent instruments: a
     ratio targeted in the standards of the Financial Stability Board and in the
     aforementioned industry standards. Finally, the inspections examined the
     methods used for determining malus or clawback arrangements.
  These findings were included in a report sent to the minister on 29 December 2009.

1.2. Off-site inspection

The Commission Bancaire is responsible for supervising the compliance of
884 credit institutions and investment firms with applicable laws and
regulations and for ensuring that Bureaux de change comply with their anti-
money laundering obligations (they have been given two years, starting
31 January 2009, to obtain a business license from the Comite des      ´
´                    ´
Etablissements de Credit et des Entreprises d’Investissement – CECEI). Since
1 November 2009 the Commission Bancaire has also been responsible for a
new category of reporting institutions, namely payment institutions.
In 2009 the General Secretariat of the Commission Bancaire’s off-site
inspection activities, which relied in particular on the findings of on-site
inspections, analysis of institutions’ accounting and prudential reports and
dialogue between General Secretariat of the Commission Bancaire staff and

Annual Report of the Commission Bancaire . 2009                                               11
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       representatives of the institutions, were marked by closer monitoring of banks’
                       financial position and risk exposures. Attention was also focused on
                       implementation of Pillar 2 of the Basel 2 framework, and on enlarging the
                       supervisory colleges to gain a better understanding of the situation of French
                       banking groups with significant international business.

                       1.2.1. Preventive action supported by close monitoring of institutions
                       The accounting and prudential statements provided by institutions, along with
                       their annual internal control reports, provide the General Secretariat of the
                       Commission Bancaire with a comprehensive database which inspectors use to
                       flesh out their analyses and assess the situation of each reporting institution
                       using the ORAP 2 methodology 1.
                       To provide additional input for analyses, meetings are held regularly with
                       institutions’ senior executives (top management, chief financial officers, risk
                       management directors, business line managers, internal auditors, etc.). In all,
                       950 such interviews were conducted in 2009, an increase of eight percent over
                       the preceding year.
                       In addition to interacting regularly with the CFOs and risk management
                       directors of major banking groups when they publish their quarterly results,
                       the General Secretariat of the Commission Bancaire has for several years used
                       ‘enhanced supervisory discussions’ to make a detailed assessment of their risks
                       (credit, market risk, operational risk, etc.), by line of business (retail banking,
                       specialised lending, corporate and investment banking, asset management,
                       insurance, etc.), and – for institutions that call for individual monitoring – by
                       legal entity. These meetings also provide an opportunity to examine the
                       organisation of internal control and compliance systems, particularly for
                       groups that have recently undergone major reorganisations; and to review
                       compensation policies.
                       Many of these meeting have dealt with the effects of the crisis and on
                       institutions’ risk control systems. Liquidity risk has been a particular focus of
                       attention; in the most critical cases, the General Secretariat of the Commission
                       Bancairehas conducted weekly monitoring. This was particularly the case at
                       the end of 2008 and during the first quarter of 2009, before the interbank
                       market returned to normal following the intervention of the European Central
                       Bank (ECB).
                       Implementation of the Basel 2 framework remained a major work area in 2009,
                       covering the evaluation of institutions’ risk profiles under Pillar 2 and, where
                       necessary, implementation of specific measures, as well as steps to improve the
                       reliability of the data in their COREP solvency reports.

                       1 See the 2007 ‘‘The Risk Assessment System Used by the General Secretariat of the Commission Bancaire’’,
                        in the Annual Report of the Commission Bancaire.

       12                                                             Annual Report of the Commission Bancaire . 2009
1.2.2. Cross-sectional analyses for improved assessment
       of institutions’ financial position and risk exposures
Alongside their individual analyses – the chief thrust of their assessments – off-
site supervisors also conduct cross-sectional studies that provide an overview
of the banking industry and permit comparisons between institutions that are
engaged in the same type of activity, are affiliated with the same central body,
or incur similar risks.
Specific studies, in some cases on an annual basis, have been conducted on
business trends, risks, and operating conditions at institutions specialising in
commercial real estate lending, housing loans, consumer credit, automobile
financing and factoring. Similarly, comparative studies have been conducted
on the affiliates of the central bodies of mutual banking groups, municipal
savings banks, foreign owned institutions operating in France, and
Monegasque institutions.
Comparative analyses of French major banking groups are also carried out on a
regular basis. The topics addressed in 2009 included the composition of
earnings, exposure to high-risk assets as defined by the Financial Stability
Board, and credit risk (on principal counterparties, by geographic region, etc.)
The purpose of this work, which relies mainly on accounting and prudential
data and specific questionnaires, is to make the Commission Bancaire’s
preventive measures more effective by identifying sources of weakness that
could affect one or more institutions and to target remedial action. In addition,
the General Secretariat of the Commission Bancaire participates actively in an
international working group 1 charged with increasing awareness of sound
practices in risk management observed in a sample of 20 large banks.
The conclusions of some of these studies have been published in the Official
Bulletin of the CECEI and the Commission Bancaire 2 or shared with the
institutions concerned.
In addition to these comparative studies, the General Secretariat of the
Commission Bancaire has conducted a number of stress tests over the past
several years. These exercises, based on complex macroeconomic scenarios
and sensitivity analyses, test the capacity of French banks – analysed
individually or as part of a representative sample of the banking system – to
withstand various shocks.
Some of these stress tests are conducted entirely by the General Secretariat of
the Commission Bancaire using prudential, accounting and macroeconomic
data in its possession (including data generated jointly with the General
Directorate of Studies and International Relations of the Banque de France);
others are conducted in conjunction with the banks. For example, in 2009 the

1 The   Senior Supervisors Group, composed of representatives of the supervisory authorities of seven
  countries (Canada, France, Germany, Japan, Switzerland, the United Kingdom and the United States),
  which has published reports (in April 2008 and again in June 2009) on the lessons learned from the crisis
  in the area of risk management at banks.
2 ‘‘Synthese de l’enquete du SGCB sur le financement de l’habitat en 2008’’ (Bulletin of July 2009), and
          `            ˆ
        ´´                                         ´ ´
  ‘‘Societes d’affacturage – Exercice 2008: activite, resultats et risques’’» (Bulletin of September 2009).

Annual Report of the Commission Bancaire . 2009                                                               13
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       major banking groups were asked to test the impact of several scenarios on
                       their portfolios, beginning with a sensitivity analysis of credit, market and
                       interest rate parameters and then stressing macroeconomic variables (for credit
                       risk and liquidity risk). The insights drawn from this two-stage exercise were
                       shared with the institutions, and those discussions will be pursued in greater
                       depth in 2010.
                       The General Secretariat of the Commission Bancaire also contributed to the
                       European stress testing exercise conducted over the summer under the
                       auspices of Committee of European Banking Supervisors (CEBS), also in
                       conjunction with several major French banking groups (see Box 2 in
                       Section 2.1.2).
                       In addition to the insights gained as regards the supervision of individual
                       institutions, for example in the context of Pillar 2, these exercises also provide
                       a forward-looking perspective that enhances the macroprudential assessments
                       of the banking system that are regularly conducted by supervisors.

                       1.2.3. Close attention to requests for early redemption of capital
                       At the end of 2008, the General Secretariat of the Commission Bancaire
                       provided technical support to the General Directorate for Treasury and
                       Economic Policy of the Ministry for the Economy, Industry and Employment
                       on defining and implementing the scope of action of the state-owned
                                                  ´´                                  ´
                       investment company Societe de Prise de Participation de l’Etat (SPPE). Faced
                       with the financial crisis and the difficulty of raising capital in the markets, the
                       principal banking groups benefited from capital injections in the form of
                       deeply-subordinated notes or preference shares so that they could continue
                       playing their essential role in financing the economy.
                       The crisis provided a stark reminder of the need for institutions to hold
                       sufficient, high-quality capital – the cornerstone of prudential regulation – to
                       cope both with contingencies in the banking environment and with mounting
                       risk. Accordingly, the General Secretariat of the Commission Bancaire carefully
                       scrutinised requests for authorisation for early redemption of capital
                       Between September and November 2009, all of the five banking groups that
                       had benefited from the financial rescue plan requested Commission Bancaire
                       approval to redeem all or part of the deeply-subordinated notes or preference
                       shares issued to the State through the SPPE. The possibility of early redemption
                       with the approval of the Commission Bancaire had, in fact, been envisaged
                       from the outset: the European Commission had made it a key condition for
                       accepting the government rescue plan for French banks.
                       As with any such request, the General Secretariat of the Commission Bancaire
                       undertook to verify that the redemptions would not undermine the institutions’
                       financial position, in terms of either the quality of capital or the level of the
                       capital ratio. The banking groups were expected to maintain ratios above

       14                                                   Annual Report of the Commission Bancaire . 2009
regulatory minimums – or above the levels set by the Commission Bancaire or
the CECEI – even in an uncertain economic environment.

The General Secretariat of the Commission Bancaire was able to confirm that
these conditions would be met and that the redemptions would actually
improve the quality of the institutions’ capital because they would be
accompanied by capital increases or share issuance. The Commission
Bancaire therefore gave its authorisation.

During 2009, several institutions also requested Commission Bancaire
approval to cancel instruments included in their Tier 1 capital, that had been
purchased previously in the market, sometimes at deep discounts, and that
could therefore generate significant capital gains. The General Secretariat of
the Commission Bancaire reviewed these requests to ensure that the resulting
capital gains would not be distributed and that the institutions would maintain
Tier 1 capital at levels equivalent to or higher than before, without necessarily
increasing the overall cost of hybrid instruments.

1.2.4. Close monitoring of corrective measures ordered as a result
       of on-site inspections
Action letters sent by the General Secretariat of the Commission Bancaire
following inspections conducted by the General Inspectorate of the Banque de
France are one of the principal instruments in the off-site inspection of the
institutions concerned. Implementation of the corrective action demanded in
those letters, generally with a fixed deadline, is closely monitored.

In addition to the recommendations associated with institutions’
implementation of the new capital adequacy framework (Basel 2) and the
quality of their models for Internal Capital Adequacy Assessment, several other
areas received particular attention in 2009:

u management of liquidity and refinancing. In addition to monitoring
  institutions’ reliance on ECB facilities or on securities issues guaranteed by
       ´´                         ´
  Societe de Financement de l’Economie Francaise, the institutions most
  exposed to liquidity risk – particularly those that depended heavily on
  very short-term financing – were asked to shore up their refinancing capacity
  and to establish robust systems for measuring, monitoring and limiting
  liquidity risk based on proven methods of asset-liability management.

u control of operational risk associated with trading. Further to the
                      ´ ´ ´ ´
  report on the Societe Generale fraud, which the Minister of the Economy,
  Finance and Employment submitted to the Prime Minister on 4 February
  2008, the conclusions of on-site inspections led to calls for the institutions
  concerned to correct the shortcomings in their control systems without delay
  and to pursue the reforms already launched in this area. In particular, the
  Commission Bancaire directed institutions to ensure that all breaches of
  trading limits are reported, whether they result in a gain or a loss;

Annual Report of the Commission Bancaire . 2009                                     15
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       u trading. The principal weaknesses identified by the General Secretariat of
                          the Commission Bancaire relate to risk measurement, information systems
                          and the recording and accounting of transactions. The institutions concerned
                          were directed to correct these shortcomings promptly;
                       u valuation of complex financial products. Institutions were directed to
                          continue improving key processes such as model validation, control of
                          valuation systems, and the accounting treatment of day one profits;
                       u structured financing for local authorities. On-site inspections revealed
                          deficiencies in monitoring and managing risks related to structured products.
                          They also highlighted the need for stricter compliance with rules on
                          informing and warning clients.
                       Other topics reflected the headline news of 2009, such as the fallout from the
                       Madoff fraud and the implications of rogue trading for the calculation of capital
                       requirements for operational risk. Institutions were also directed – as they are
                       every year, notably through targeted inspections – to correct weaknesses in
                       their systems for combating money laundering and terrorist financing.

                       1.2.5. Review of the capital adequacy of all reporting institutions
                              in relation to their risk profile: Pillar 2 measures
                       Under Pillar 2 of the capital adequacy framework, as set forth in the Order of
                       20 February 2007 which transposed European Directives 2006/48/EC and
                       2006/49/EC into French law, the Commission Bancaire is required to ensure,
                       as part of enhanced prudential supervision, that reporting institutions have a
                       level of capital that is commensurate with their risk profile. With the financial
                       crisis, implementation of these provisions has become a major concern for the
                       Commission Bancaire and its General Secretariat.
                       The General Secretariat of the Commission Bancaire therefore undertook a
                       systematic evaluation of the risk profiles of all reporting institutions. This was
                       based on the ORAP methodology, which analyses all the risks to which an
                       institution is exposed, including credit risk, concentration risk, market risk,
                       operational risk, liquidity risk, and interest rate risk in the banking book, along
                       with the institution’s internal control systems.

                         BOX 2
                                                      Implementation of Pillar 2
                                                      of the Basel 2 framework

                              Following CEBS guidelines, the General Secretariat of the Commission Bancaire’s
                              approach to setting additional capital requirements under Pillar 2 is based on an
                              ORAP 2-based analysis.
                              In addition to examining the nature, volume and complexity of the institutions’
                              activities, the General Secretariat of the Commission Bancaire assesses:

       16                                                         Annual Report of the Commission Bancaire . 2009
  u credit risk, including the quality of the credit portfolio, the level of risk coverage
     and the amount of residual risk, the results of stress tests, and the allowances made
     for any imperfections in the models used to calculate capital charges for credit risk;
  u concentration risk in individual counterparties or groups of counterparties in the
     same economic sector or geographic region;
  u market risk, including exchange rate risk and intermediation risk, and the results
     of stress tests for market risk;
  u operational risk, including legal risk;

  u liquidity risk and the level of transformation, including settlement risk;

  u interest rate risk in the banking book;
  u quality of organisation of internal control systems, including the mechanisms for
     monitoring and controlling conflicts of interest, reputation risk and compliance
  u the institution’s business strategy and the quality of its organisation, particularly
     in the area of corporate governance;
  u earnings and returns generated by day-to-day business;

  u the amount, structure and permanence of capital, including the definition of
     economic capital used and the extent to which different types of risk are covered by
     economic capital. The scope of this analysis includes securitisations conducted by
     the institutions.
  Under the ORAP 2 methodology:
  u quantitative data are used to assess each institution’s risk profile and its financial
     position (i.e. profitability and capital structure). The data used in the analysis
     capture risk factors that are not taken into account, or, if so, only partially, under
     Pillar 1. Priority is given to data that permit a comparative analysis, and to data
     available for at least three years, in order to reveal structural factors;
  u qualitative data are used to evaluate the quality of risk management, monitoring
     and mitigation and the overall organisation of internal control systems.
  When the General Secretariat of the Commission Bancaire judges, on the basis of its
  overall assessment, that an institution needs to hold more capital than the minimum
  requirement under Pillar 1, it can – in addition to other measures – set a higher
  regulatory ratio for that institution based on a five-point scale, each point
  representing a level of risk.

In 2009 the Commission Bancaire began by assessing the risk profiles of major
French banking groups and their principal operating subsidiaries. Next it
reviewed other institutions that were already required to hold more than
more than the minimum required amount of capital, before finally conducting
an exhaustive review of all institutions subject to regulatory capital
These assessments were completed in 2009. The General Secretariat of the
Commission Bancaire then reviewed the situation of each institution and

Annual Report of the Commission Bancaire . 2009                                               17
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       assigned each one a minimum Tier 1 capital ratio sufficient to cover its risks
                       adequately. The Commission Bancaire organised an adversarial process with
                       the institutions concerned, ordering them to hold more capital than the
                       regulatory minimum, as provided in paragraph 3 of Article L613-16 of the
                       Monetary and Financial Code. The discussions with the banks have not all
                       been completed, but there will be 70 institutions or banking groups in all for
                       which the Commission Bancaire will set additional capital requirements.

                       1.2.6. Enlargement of the system of supervisory colleges to include
                              all cross-border European groups
                       In 2004, without waiting for the implementation of the new Basel capital
                       framework and the adoption of the European Directive based on it, the
                       General Secretariat of the Commission Bancaire set up a college of
                       European supervisors for the each of the internationally active French
                                                           ´ ´ ´ ´                ´
                       banking groups (BNP Paribas, Societe Generale and the Credit Agricole
                       group). The colleges meet semi-annually.
                       European Directive 2006/48/EC made such supervisory colleges mandatory,
                       beginning in 2010, for groups having at least one subsidiary in a European
                       country. Their purpose is to promote greater cooperation between the
                       authorities supervising the groups concerned. Their principal objectives are to:
                       u share information on a group’s overall situation in order to arrive at a
                          common assessment of its risk profile;
                       u achieve greater convergence in the approaches for applying prudential
                          regulations to different entities in the group;
                       u coordinate supervisory action, particularly for on-site inspection
                       The senior managers of the groups concerned are permitted to attend some of
                       these meetings to present their annual results, discuss likely changes in their
                       risk profiles and set out the strategies that they envisage.
                       The meetings of the colleges are organised by the General Secretariat
                       of the Commission Bancaire. In 2009 the colleges discussed five
                       principal topics concerning the above three banking groups:
                       u joint assessments of risk profiles for Pillar 2 of the Basel 2 framework;

                       u the results of stress tests, including those initiated by the groups themselves
                          as well as those conducted by the General Secretariat of the Commission
                       u the liquidity position of the groups and their systems for managing liquidity
                       u the quality of the group’s business continuity plans;

                       u the conclusions from on-site inspections conducted in 2008 and plans for the
                          2009 inspection programme.

       18                                                   Annual Report of the Commission Bancaire . 2009
The General Secretariat of the Commission Bancaire also participated, in its
capacity as host supervisor of the French subsidiaries of European groups, in
the meetings of the supervisory colleges organised by authorities in other
European countries: Belgium, Germany, the Netherlands, and the United
Kingdom. The meetings discussed topics similar to those concerning the
three French groups.
Broadly, the colleges generally authorities improve the effectiveness of their
supervision of cross-border banks, at least when the parent institution,
supervised by the home supervisor, conducts business itself. For one of the
foreign groups with French subsidiaries this is not the case, which presents
difficulties for the General Secretariat of the Commission Bancaire in its
capacity as host supervisor.

1.3. The General Secretariat of the Commission Bancaire’s
     programme to combat money laundering and terrorist

As part of efforts to combat money laundering and terrorist financing, the
Commission Bancaire supervises compliance with the laws and regulations
applicable to credit institutions, investment firms and Bureaux de change.
Its role is to ensure that these organisations implement due diligence
procedures that hinder the introduction or circulation of illicitly obtained
funds into the financial system.
As in other areas of off-site inspection, verification is based on a combination
of ongoing supervision and periodic inspections. Bureaux de change are
supervised mainly via on-site inspections conducted jointly with the Customs

 BOX 3
                        Supervision in off-shore centres

  The Commission Bancaire assesses the risk associated with business conducted in off-
  shore centres by French banking groups, assesses the quality of the groups’ anti-
  money laundering and internal control systems, and verifies that those systems cover
  all of the group’s activities – whether conducted directly or through an entity that it
  controls – and all of its risks.
  An important supervisory distinction must be made, depending on the way in which
  off-shore business is conducted:
  u when business conducted with counterparties registered in these centres is
     recorded on the balance sheet of the bank in France, or on the balance sheet of
     one of the group’s European subsidiaries, the Commission Bancaire ensures that the
     transactions are adequately supervised and verifies that the bank properly
     documents the nature of the risks and the methods for monitoring and

Annual Report of the Commission Bancaire . 2009                                             19
Activities of the
Commission Bancaire
and its General Secretariat
in 2009

                                measuring them. Regarding ‘know your customer’ (KYC) rules, the Commission
                                Bancaire verifies that the institution has conducted the due diligence necessary to
                                identify its customers and to identify the nature of their business, and, when
                                necessary, has collected information on the identity of the beneficial owners. In
                                several cases over the past few years, the Commission Bancaire has imposed
                                penalties for (among other violations) insufficient KYC documentation about the
                                true beneficiary of business with companies registered in off-shore centres;
                              u when business is conducted through branches or subsidiaries outside the European
                                Economic Area, solo supervision of the entity is the responsibility of the competent
                                authorities of the host country. The role of the Commission Bancaire, which is
                                responsible for consolidated supervision, is to ensure that the group’s internal
                                control systems adequately assess and monitor financial, operational, legal and
                                compliance risk in all of its foreign establishments. The Commission Bancaire has
                                imposed penalties on institutions for inadequate oversight, for failing to pass
                                along information from foreign subsidiaries, and for serious shortcomings in the
                                recommendations made to foreign entities on the subject of anti-money
                              The Commission, which has no jurisdiction in tax matters, closely follows the work of
                              its peers on the policy goals set by G20. This includes the work of the Financial Action
                              Task Force (FATF) on combating money laundering and terrorist financing and the
                              work of the Financial Stability Board in the area of prudential supervision. By the end
                              of 2010, this work should have resulted in the establishment of coordinated
                              countermeasures against countries that do not comply with recognised
                              international standards for cooperation.
                              Amendments made in 2009 to national regulations on internal control (Regulation
                              97-02), operational risk monitoring, incident reporting and risk mapping have already
                              strengthened the oversight of all the activities undertaken within a group. The
                              Commission Bancaire will be equally attentive to ensuring that the new disclosure
                              requirements introduced in 2009 by Article L511-45 of the Monetary and Financial
                              Code are implemented by institutions in accordance with the terms of the Order of
                              6 October 2009. These new provisions require institutions to publish, in the notes to
                              their annual financial statements, a list of their foreign establishments in non-
                              cooperative States and territories (within the meaning of Article 238-0 A of the Tax
                              Code), a description of the nature of the business of these establishments, and a
                              description of the process for approving them and for monitoring risk in these
                              Likewise the Commission Bancaire participates actively in work on revising the
                              recommendations published in 2006 by the Basel Committee in its report on
                              ‘‘Enhancing Corporate Governance for Banking Organisations’’. The report contains a
                              principle entitled ‘‘Know Your Structure’’, which seeks to strengthen supervision in
                              jurisdictions that impede transparency.

                       1.3.1. Supervisory methods and subsequent action
                       Off-site inspection consists of regular contacts with the managers of
                       institutions’ systems for anti-money laundering and counter-terrorism

       20                                                            Annual Report of the Commission Bancaire . 2009
financing (AML/CFT) and analysis of their internal control reports and, where
applicable, their internal procedures.
An important aspect of this work is reviewing institutions’ responses to the
anti-money laundering questionnaire introduced by Commission Bancaire
Instruction 2000-09 of 18 October 2000 1.
In 2009, after reviewing the responses to that questionnaire, the General
Secretariat of the Commission Bancaire sent letters requesting corrective
action to 50 or so institutions. The institutions’ managers return their
responses to the anti-money laundering questionnaire to the General
Secretariat of the Commission Bancaire electronically bearing a digital
The purpose of on-site inspections is to assess the institution’s AML/CFT
systems and internal controls, and to carry out test checks on customer files
and transactions in order to verify that due diligence requirements have been
properly implemented. Controls of anti-money laundering systems are
performed either as part of general inspections, which always include an
AML/CFT component, or in inspections targeted specifically at anti-money
In 2009, out of a total of 137 inspections of reporting institutions conducted by
the Commission Bancaire, more than 40 included an examination of systems
for preventing money laundering and terrorist financing, and four were
specifically targeted at this issue. In addition, General Secretariat of the
Commission bancaire inspectors or customs carried out six investigations of
bureaux de change.
Once the investigation reports have been examined, the institution may be sent
a action letter, or disciplinary proceedings may be opened. In the first case, the
action letter points out shortcomings, and orders corrective action to be taken
by a specific deadline. A total of 22 action letters dealing with AML/CFT issues
were sent in 2009.
Two of the four disciplinary sanctions imposed by the Commission Bancaire in
2009 involved at least one money-laundering complaint 2. These concerned
credit institutions and were accompanied by money penalties. The
Commission Bancaire has referred two cases to the prosecutor’s office, as
provided for in Article L561-36 III of the Monetary and Financial Code.

1 Instruction 2000-09 has been amended by Instruction 2009-07 to adapt it to the new AML/CFT framework
  introduced by the Third Money Laundering Directive. The overhaul was undertaken in concert with the
  industry; it involved two members of the Commission Bancaire and representatives of the industry
  associations (the French Banking Federation, the Association of French Financial Companies, and the
  Association of French Financial Markets). The amended Instruction also reflects the provisions of
  Regulation 1781/2006/EC on information on the payer accompanying transfers of funds.
2 See the Compendium of Decisions published on the same date as this report.

Annual Report of the Commission Bancaire . 2009                                                          21
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       1.3.2. The Commission Bancaire’s programme to strengthen national
                              and international AML/CFT measures
                       European Directive 2005/60/EC on the prevention of the use of the financial
                       system for the purpose of money laundering and terrorist financing was
                       transposed into Members States’ legislation in 2009. The first stage in the
                       transposition of the Directive in France took place on 31 January 2009 with the
                       publication of Administrative Order 2009-104 of 30 January 2009 on the
                       prevention of the use of the financial system for the purpose of money
                       laundering and terrorist financing. Several more regulations were published
                       in the following months, including Decree 2009-1087 of 2 September 2009 on
                       due diligence and reporting requirements for preventing the use of the
                       financial system for the purpose of money laundering and terrorist
                       financing. The laws and regulations are codified in Title VI of Book V of the
                       Monetary and Financial Code. The Order of 2 September 2009 defined the
                       reporting requirements on KYC and business relations.

                       The second stage involved sector-specific measures related to the application
                       of Article R.561-38 of the Monetary and Financial Code on procedures and
                       internal control. An Order dated 29 October 2009, amending Regulation 97-02
                       of 21 February 1997 on internal control in credit institutions and investment
                       firms, was published on 31 October. As amended, Regulation 97-02 now
                       applies to payment institutions authorised to operate in France. This was the
                       culmination of a collaboration involving two members of the Commission
                       Bancaire, industry associations (the French Banking Federation, Association
                            ¸              ´´          `
                       Francaise des Societes Financieres, and Association Francaise des Marches
                                                                                   ¸               ´
                       Financiers) and several of their members, in coordination with the General
                       Directorate for Treasury and Economic Policy of the Ministry for the Economy,
                       Finance and Employment.

                       This collaboration has continued, with the drafting of guidelines clarifying the
                       legal and regulatory provisions resulting from the transposition of the Third
                       Money Laundering Directive. The first guidelines to be completed deal with
                       suspicious activity reporting; they were adopted jointly by the Commission
                       Bancaire and Tracfin and were published in December 2009.

                       At the EU level, the General Secretariat of the Commission Bancaire took an
                       active part in the work of the Committee on the Prevention of Money
                       Laundering and Terrorist Financing. The Committee considered France’s
                       request that transfers of funds between Saint-Pierre-et-Miquelon, Mayotte,
                       New Caledonia, French Polynesia, and Wallis and Futuna be treated as
                       transfers within France, in accordance with Regulation (EC) 1781/2006. The
                       European Commission approved this request on 26 November 2009.

                       The General Secretariat of the Commission Bancaire participated actively in
                       the work of the Anti-Money Laundering and Terrorist Financing Task Force,
                       which is led by CEBS in liaison with the European Committee of Securities
                       Supervisors (CESR) and the European Committee of Insurance and
                       Occupations Pensions Supervisors (CEIOPS). In 2009 this task force worked

       22                                                  Annual Report of the Commission Bancaire . 2009
on a document summarising Member States’ practices concerning customer
due diligence and the criteria for identifying and verifying customers.
The General Secretariat of the Commission Bancaire also took part in the work
of the Basel Committee, co-chairing (with South Africa) the Basel Committee’s
expert group on money laundering and terrorist financing. To promote
consistency with FATF standards, particularly Special Recommendation 7,
the group’s work is discussed with the FATF. The expert group developed
the guidelines on due diligence and transparency regarding cover payment
messages related to cross-border funds transfers which the Basel Committee
published in May 2009. These guidelines define the responsibilities of the
banks in the chain of payment: originators’, intermediary, and beneficiaries’
The General Secretariat of the Commission Bancaire continued to share its
expertise with the FATF. 2009 was marked by work in response to a call from
the G20 leaders for the FATF to publish a list high-risk jurisdictions. The FATF
repeated its call for effective countermeasures against the threat to the financial
system from Iran. A study of the risk of money laundering and terrorist
financing in the securities sector was published. The FATF undertook work
on measuring the impact of the financial and economic crisis on AML/CFT
efforts. Finally, as part of the preparations for the fourth cycle of the FATF’s
mutual evaluations, two working groups were established, including one co-
chaired by the General Secretariat of the Commission Bancaire.

2. Participation in modifying the banking and financial
   prudential framework

In 2009 the General Secretariat of the Commission Bancaire played a
particularly active role in international work on strengthening the prudential

2.1. International cooperation in prudential matters

2.1.1. Basel Committee work on strengthening prudential regulation
The Basel Committee added a number of countries to its ranks in 2009 in order
to play its full role in strengthening global supervisory practices and standards.
The new members include the G20 countries that were not already members,
i.e. Argentina, Indonesia, Saudi Arabia, South Africa and Turkey, as well as
Hong Kong SAR and Singapore.
Implementing the decisions made by the G20 at its London and Pittsburgh
summits (on 2 April 2009 and 24 to 25 September 2009, respectively), the Basel
Committee announced a series of measures to strengthen financial regulation
and supervision.

Annual Report of the Commission Bancaire . 2009                                      23
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       In July 2009 the Committee issued new rules to strengthen Basel 2 in the areas
                       of prudential coverage of market risks and the treatment of securitisations (for
                       implementation at the end of 2010), risk management under Pillar 2 (for
                       immediate implementation), and transparency under Pillar 3 (for
                       implementation at the end of 2010).
                       These measures were followed by a second round of proposals for
                       strengthening prudential regulation, published in the form of a consultation
                       document on 17 December 2009. The final content of these measures, which
                       will include transitional arrangements, will not be known until after the
                       completion of an impact study to be conducted in parallel with the public
                       consultation during the first half of 2010.

                         BOX 4
                                                 Outline of the measures proposed
                                             by the Basel Committee for strengthening
                                                        prudential regulation

                              The Basel Committee published a consultation document on 17 December 2009
                              proposing measures to strengthen prudential regulation and supervision in light of
                              the recent financial crisis.
                              The Committee first proposed to harmonise the definition of regulatory capital at
                              international level and to strengthen banks’ loss-absorbing capacity, in particular by
                              improving the quality of the instruments eligible as capital.
                              Capital structure would be simplified, with just two broad categories:
                              u Tier 1, capable of absorbing losses on a going-concern basis;

                              u Tier 2, capable of absorbing losses on a gone-concern basis.

                              The Tier 3 category, used exclusively to cover market risks, would be abolished.
                              Tier 1 capital would be improved in terms of quality. It would have to consist
                              predominantly of Core Tier 1, comprising common shares, reserves and retained
                              earnings. The other elements of Tier 1 that are not accepted as Core Tier 1 would need
                              to satisfy certain quality-related conditions: they must be subordinated and undated,
                              carry no redemption incentives, and have fully discretionary noncumulative dividends
                              or coupons. Instruments accepted in Tier 2 will be subject to a single set of criteria,
                              i.e. be subordinated to general creditors and have an original maturity of at least
                              5 years.
                              Regulatory adjustments (prudential filters and deductions) would also be harmonised
                              and applied entirely to Core Tier 1, instead of 50% to Tier 1 and 50% to Tier 2 as at
                              present. Finally, new limits on instruments eligible for inclusion in Tier 1 and Tier 2
                              and new regulatory minimums would be set following the completion of the
                              aforementioned impact study.
                              The second part of the proposals would strengthen the coverage of counterparty
                              credit risk, which is present in derivative instruments, repurchase transactions and
                              corporate actions. Capital requirements would be calculated using stressed inputs and
                              would include a charge for potential losses due to valuation adjustments to

       24                                                           Annual Report of the Commission Bancaire . 2009
  instruments, and a more conservative treatment of collateral netting agreements and
  other hedging instruments. These reforms would reduce the systemic risk associated
  with these activities by encouraging institutions to clear transactions through central
  The third part of the proposals introduced a leverage ratio, i.e. the ratio of capital to
  non-risk-weighted exposures, to supplement the capital ratio. To ensure the
  comparability of the leverage ratio, its definition would be harmonised and its
  calculation method calibrated to take differences in accounting policies into
  consideration. The ratio would incorporate off-balance sheet activities, which the
  financial crisis has revealed to be a major source of leverage. It remains to be seen
  how such a simple standard would interact with the other proposals. In particular, the
  treatment of certain balance sheet items will have to be determined in the context of
  all prudential measures in order to avoid negative interactions with other provisions,
  particularly concerning the holding of liquid assets, which the Committee does not
  wish to interfere with.
  The fourth part of the proposals seeks to dampen the procyclical tendencies of the
  financial system by recommending:
  u a move to forward-looking provisioning in accounting standards. The Committee
     worked in close collaboration with the International Accounting Standards Board
     (IASB) to develop an expected-loss approach to provisioning;
  u the application of downturn probabilities of default (PD) reflecting loss rates at the
     bottom of the economic cycle;
  u the constitution of two capital buffers. The first would be based on a ratio set
     above the regulatory minimum; failure to reach it would trigger restrictions on the
     payment of dividends and share buybacks. The second buffer would be
     macroprudential, varying as a function of macroeconomic variables; it would be
     a flexible measure, outside Pillar 1.
  The Committee also proposed making better use of external ratings, including the
  requirement for institutions to conduct their own internal risk analysis; and
  incorporating the main elements of the code of conduct for rating agencies
  developed by the International Organization of Securities Commissions (IOSCO)
  into the eligibility criteria for using internal ratings.
  The fifth part of the proposals would strengthen prudential requirements for the
  management of liquidity risk. The Committee proposed establishing a quantitative
  liquidity standard in the form of two ratios, which would be harmonised
  u a short-term (one month) Liquidity Coverage Ratio, which would require holding
     large quantities of very high quality liquid assets in an amount to be determined
     through a stress test combining systemic and specific shocks.;
  u a Net Stable Funding Ratio (one-year horizon), which would require a certain level
     of stable funding sources in relation to long-term assets in order to limit excessive
     transformation strategies. The measure would include graduated risk weights
     applied to the numerator (reflecting the relative stability of funding sources)
     and to the denominator (reflecting the relative liquidity of assets).
  Some of the parameters of these ratios would remain at national discretion to allow
  national supervisors to allow for the specific characteristics of local markets.

Annual Report of the Commission Bancaire . 2009                                               25
Activities of the
Commission Bancaire
and its General Secretariat
in 2009

                              The Committee has also proposed the development of a harmonised set of tools for
                              monitoring liquidity risk so as to provide supervisors with an array of quantitative
                              indicators of liquidity shortfalls, concentrations of funding sources, unencumbered
                              assets, and the state of the markets.

                       The Basel Committee has also been working on:
                       u developing practical approaches for reducing the risk and mitigating the
                          impact of the failure of systemically important institutions. In particular, the
                          Committee considered the advantages and disadvantages of i) applying an
                          additional capital charges to such institutions, ii) introducing additional
                          liquidity requirements, and iii) other prudential measures. This work was
                          coordinated with the work of the Financial Stability Board on the risk posed
                          by systemically important financial institutions;
                       u strengthening the international framework for resolving banking crises. Core
                          principles for effective deposit insurance funds were developed jointly with
                          the International Association of Deposit Insurers (IADI) and published in
                          June 2009. They addressed a range of issues, including deposit insurance
                          coverage, funding and prompt reimbursement. The IADI also published a
                          consultation document in September 2009 containing a set of
                          recommendations on policies for rescuing troubled cross-border banking
                          groups; the consultation period ended in December 2009;
                       u developing a set of high-level principles to guide the IASB in addressing
                          issues raised by provisioning, fair-value measurement, and disclosure
                          requirements in the update to IAS 39. These guidelines were published in
                          August 2009;
                       u identifying sound practices for stress testing by banks and their supervision
                          by competent authorities. A set of principles, published in May 2009,
                          reflected the lessons learned from the financial crisis concerning
                          governance, methodologies and use tests;
                       u intensifying work on operational risk, with the publication of two studies on
                          this subject. The first presented the results of a data collection exercise
                          conducted in 2008; the second reported the results of a survey of practices
                          for managing advanced approaches for measuring operational risk.

                       2.1.2. The work of the Committee of European Banking Supervisors
                       The work done by CEBS in 2009 focused mainly on strengthening cooperation
                       between supervisors. The template for cooperation agreements tested in 2008
                       was brought into general use in 2009. Ten common principles on the
                       functioning of supervisory colleges were published by CEBS and the
                       Committee of European Insurance and Occupational Pensions Supervisors
                       (CEIOPS) in January 2009. The principles are designed to apply to all cross-

       26                                                          Annual Report of the Commission Bancaire . 2009
border groups, be they banking groups, insurance groups or financial
conglomerates. In addition, a college composed of national supervisors is
about to be set up – and in some cases, has already been put in place – for each
of the 36 largest cross-border groups.

CEBS also contributed to the analysis of the stability of the European banking
system, organising a stress testing exercise on a representative sample of
national banking systems. The national supervisors involved in the exercise
used a common methodology. The results of the tests were presented to
representatives of the European finance ministers in September. This exercise
will be repeated in 2010.

 BOX 5
                    European stress testing exercise:
              an example of cooperation between supervisors

  In the summer of 2009, under a mandate from the Economic and Financial Committee
  (EFC), CEBS organised a stress testing exercise on a sample of the 22 largest European
  cross-border banking groups in ten countries. The General Secretariat of the
  Commission Bancaire’s work on stress testing in 2009 consisted largely of
  participating in this exercise.
  The exercise’s organisation was decentralised, with each banking group analysed
  independently. Its objective was to assess the stability of the European financial
  system in the event of a severe deterioration in the economic environment (the stress
  scenario was a severe recession in a country or a geographical region) accompanied by
  large declines in stock prices.
  To ensure consistency in the stress tests conducted in different jurisdictions, the
  baseline and stressed economic scenarios for 2009 and 2010 were calibrated for
  Europe as a whole and then translated to the national level using multi-country
  macroeconomic models. This approach made it possible to capture national
  differences in the nature of bank counterparties, while maintaining overall
  consistency at the European level. The simulation of the different scenarios at the
  level of individual institutions also permitted the exercise to take into account the
  portfolio and business structure of each of the banks in the sample.
                                                                                    ´ ´
  Three major French banking groups were involved in the exercise: BNP Paribas, Societe
   ´ ´                ´
  Generale and the Credit Agricole group. The exercise combined top-down methods
  based on prudential data and methodologies specific to the supervisor with bottom-
  up methods using the institutions’ data and simulations.
  The exercise covered both credit risk – with both cyclical and structural fluctuations –
  and market risk – with price declines in different markets (equities, bonds). Particular
  attention was paid to securitisation exposures, including an assessment of the
  increase in the associated counterparty credit risk.
  The impact of the scenarios was measured in terms of both the numerator of the ratio
  (impact on net banking income, risk-related costs, forecast earnings, and deductions
  from capital) and its denominator. The results highlighted European banks’ resilience
  in response to the shock of a severe recession.

Annual Report of the Commission Bancaire . 2009                                              27
Activities of the
Commission Bancaire
and its General Secretariat
in 2009

                              However, this finding should not overshadow the substantial increase in risk-related
                              costs and the markdowns on instruments in the trading book. The stress scenario
                              resulted in approximately EUR 400 billion in markdowns in 2009 and 2010 for all of
                              the 22 banks in the sample.
                              Even so, the aggregate Tier 1 ratio would remain about 9% in the event of an extreme
                              stress scenario thanks to a solid cushion of profits.
                              It should be remembered, however, that these results are based on assumptions which
                              are subject to a number of uncertainties, particularly regarding earnings forecasts and
                              economic and market interaction.
                              In addition to its direct value in assessing the stability of the European financial
                              system, this exercise, conducted jointly by the supervisor and the principal banking
                              groups in each country, contributed to advances in banks’ stress test methodologies
                              and practices.
                              The Economic and Financial Committee has directed CEBS to organise a new stress
                              testing exercise in 2010, covering the period 2010-2011. The General Secretariat of
                              the Commission Bancaire and the major French banking groups will again be asked to
                              participate in this exercise. It will focus on the withdrawal of government support,
                              which is currently still substantial in some countries.

                                                     Principal macroeconomic assumptions

                                                           Actual              Baseline           Stress scenario

                                                      2008       2009       2009      2010       2009       2010
                               27 countries of the
                               European Union
                               GDP growth             0.7%      – 4.2%     – 4.0%     – 0.1%     – 5.2%     – 2.7%
                               Unemployment rate      7.6%        8.9%       9.4%      10.9%       9.6%      12.0%
                               Euro area
                               GDP growth             0.9%      – 4.1%     – 4.0%     – 0.1%     – 5.2%     – 2.7%
                               Unemployment rate      8.2%        9.4%       9.9%      11.5%      10.0%      12.5%
                               United States
                               GDP growth             1.1%      – 2.4%     – 2.9%     0.9%       – 3.7%     – 0.3%
                               Unemployment rate      7.2%        9.3%       8.9%     10.2%        9.2%      11.2%

                       At the institutional level CEBS has contributed to discussions on a new
                       European architecture based on complementary powers of and coordination
                       between the various bodies making up the new system.

       28                                                           Annual Report of the Commission Bancaire . 2009
 BOX 6
                    The de Larosière report and subsequent action

  A high-level group chaired by Jacques de Larosiere, former Governor of the Banque de
  France, published on 25 February 2009 a set of proposals for improving the
  supervision of the European financial system in the wake of the recent financial crisis.
  The proposals are innovative in that they constitute a significant advance in thinking
  on the future form of European financial supervision; they are also realistic because
  they are accompanied by concrete measures and specific implementation deadlines.
  These proposals laid the foundations for the new institutional landscape for European
  financial supervision adopted by the European Council of heads of state and
  government on 10 and 11 December 2009. The speed of this process is a sign of
  the political will for Europe to respond fully to the G20 recommendations in this area.

                       Simplified diagram of the new European architecture

                                                   European Systemic Risk Council (ESRC)
                                                                [Chaired by President ECB]

                Macro-prudential              Members of
                supervision                   ECB/ESCB                    Chairs of                  European
                                            General Council          +    EBA, EIA           +      Commission
                                            (with alternates               &ESA
                                            where necessary)

                                       Information on micro-prudential                       Early risk warning

                                            European System of Financial Supervision (ESFS)

                supervision                     European                  European                    European
                                                Banking                   Insurance                   Securities
                                                Authority                 Authority                   Authority
                                                 (EBA)                      (EIA)                       (ESA)

                                                National                   National                   National
                                                Banking                   Insurance                   Securities
                                               Supervisors               Supervisors                 Supervisors

   Source: de Larosiere report. The composition of the various bodies are under discussion. Regarding the composition of ESRC the
   proposed Regulation of the Commission, published on 23 September 2009 considers the presence of the EFC.

  The main advance contained in the reforms is the creation of a European Systemic Risk
  Council (ESRC) which will strengthen the macroprudential dimension of supervision.
  This dimension was already reflected in supervision, but in a less focused fashion.
  Henceforth the ESRC will be responsible for detecting risks to the financial system,
  alerting the authorities concerned, and issuing recommendations to ensure that
  appropriate measures are taken if the European Union’s financial stability is
  threatened. The ESRC will rely on the expertise of central banks and national
  supervisors to cover the banking, insurance and securities sectors. The creation of
  this new organisation will improve the effectiveness of European policies relating to
  financial stability while strengthening the representation of the European Union in

Annual Report of the Commission Bancaire . 2009                                                                                     29
Activities of the
Commission Bancaire
and its General Secretariat
in 2009

                              international bodies: the International Monetary Fund, the Bank for International
                              Settlements and the Financial Stability Board.
                              Regarding the supervision of credit institutions, the objective is to move forward with
                              the harmonisation drive initiated by the ‘Lamfalussy process’, which led to the
                              creation of the committees of supervisors responsible for promoting cooperation and
                              convergence in supervisory practices: the Committee of European Securities
                              Regulators (CESR), the Committee of European Insurance and Occupational
                              Pensions Supervisors (CEIOPS) and the Committee of European Banking Supervisors
                              The European System of Financial Supervision (ESFS) is designed as a decentralised
                              network of supervisors working together to harmonise the rules of the three European
                              Supervisory Authorities (ESAs), and remaining in charge of the supervision of
                              individual financial institutions.
                              At the institutional level, three new European supervisory authorities – the European
                              Banking Authority (EBA), The European Insurance Authority (EIA) and the European
                              Securities Authority (ESA) will replace the existing committees. They will have legal
                              personality and will be granted expanded powers and resources. In the banking
                              sector, the EBA will be able to enact technical standards which, once approved by the
                              European Commission, will constitute the exclusive body of prudential rules. If a
                              national supervisor fails to apply Community law, the EBA will be empowered to make
                              decisions that will apply directly to credit institutions.
                              The ESFS is also charged with ensuring better coordination between supervisors. To
                              enhance its role in promoting convergence in supervisory practices, its functions as a
                              mediator between national authorities has been strengthened, and it has been given
                              a coordinating role in crises.
                              Day-to-day supervision of credit institutions will remain the responsibility of national
                              supervisors, who are best placed to monitor them closely and effectively. The
                              establishment of supervisory colleges for all cross-border groups will highlight best
                              practices and promote convergence.
                              Finally, the new architecture provides for a high degree of integration between the
                              SESF and the ESRC. For example, the SESF will provide a centralised source for the
                              microprudential information needed by the ESRC to accomplish its macroprudential
                              duties and add to its range of stress tests.
                              The foundations of the new European architecture have now been laid. Once the
                              architecture has been officially adopted, four sets of proposed rules, currently being
                              reviewed by the European Parliament, will permit the reform to take effect at the
                              beginning of 2011. A full review is scheduled after three years, to make an initial
                              assessment of the results of the reform and determine whether to carry it further.

                       At the regulatory level, work aimed at ensuring the consistent application of
                       European regulations continued in 2009.

                       Principles on compensation methods implementing the recommendations of
                       the Financial Stability Board were developed as the result of work begun in
                       April 2009.

       30                                                            Annual Report of the Commission Bancaire . 2009
In addition to the liquidity risk management guidelines published in 2008,
CEBS identified the methodologies that credit institutions should use to
estimate the volume of liquid assets needed to withstand a liquidity shock.
CEBS also worked on determining the information needed to assess the
liquidity risk of cross-border groups, with a view to providing input for
discussions between supervisors, notably within supervisory colleges.
After having provided technical advice in 2008 which served as the foundation
for amendments to the Capital Requirements Directive (‘‘CRD 2’’), CEBS helped
with convergent implementation of the new provisions, proposing common
interpretations for several of them, including eligibility criteria for hybrid
instruments included in Tier 1 capital, the composition of capital at credit
institutions, and supervision of large exposures. CEBS also provided technical
advice on two topics: limiting the number of options and national discretions,
and methods for calculating the minimum retention requirements for
securitisations under CRD 2.
In addition to the work related to prudential and financial reporting discussed
in Section 2.2.5 below, CEBS has developed recommendations on operational
risk management and has completed work on guidelines for passport
notifications within the EU.

2.1.3. Risk assessment by the Banking Supervision Committee
       of the European System of Central Banks
In 2009 the General Secretariat of the Commission Bancaire played an active
part in the work of the Banking Supervision Committee of the ESCB, one of
twelve committees through which representatives of the supervisory agencies
and central banks of the Eurosystem contribute to the work and decisions of
the ECB Governing Council.
The main aim of this committee is to assess financial stability in Europe, which
it does through cross-cutting analyses and forecasts concerning the principal
risks borne by European financial institutions whose activities are likely to
engender systemic risk.
The Banking Supervision Committee played a key role during the financial
crisis in aggregating and analysing information on European institutions. For
example, it examined banks’ exposures in risky geographical regions and
businesses, as well as their exposures to structured products.
The General Secretariat of the Commission Bancaire, in conjunction with
financial institutions, contributed to assessing risks at the European level based
on ad hoc statistical surveys and existing prudential reports, which the Banking
Supervision Committee presents in the semi-annual meetings of the Economic
and Financial Committee’s Financial Stability Table, or directly to the ECB
Governing Council.
Through its two principal working groups – the Working Group on
Macroprudential Analysis (WGMA), which considers macroprudential issues,

Annual Report of the Commission Bancaire . 2009                                     31
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       and the Working Group on Banking Developments (WGBD), which considers
                       issues of a more structural nature – the Banking Supervision Committee
                       conducted several projects which resulted in the publication of reports or
                       the implementation of common analytic standards.
                       For example, the ECB published a report on banks’ funding structures and
                       policies and how they were affected by the increased stress on bank liquidity
                       during the financial crisis (prepared by the WGBD and published in May 2009),
                       and a report on the credit default swaps (CDS) market and its implications for
                       financial stability (prepared by the WGMA and published in August 2009).
                       Other work was launched on the assessment of bank performance, seeking to
                       draw lessons from the recent financial crisis, and also on post-crisis financial
                       structures in Europe.

                       2.1.4. The work of the Joint Committee on Financial Conglomerates
                              and the Joint Forum
                       In 2009 the work of Joint Committee on Financial Conglomerates (JCFC), set
                       up in 2006 1, focused on two main areas.
                       First, as part of the European Commission’s review of the Financial
                       Conglomerates Directive, the JCFC provided technical advice in October
                       2009 on several issues. These included the application of thresholds for
                       identifying financial conglomerates, the prudential treatment of equity
                       investments in evaluating concentration risk, intra-group transactions, and
                       internal control. The JCFC also updated the list of groups identified as
                       financial conglomerates and the list of competent authorities 2, within the
                       meaning of the Financial Conglomerates Directive.
                       The JCFC’s second main area of work involved analysing the contribution of
                       conglomerates to financial stability and conducting a study on transfers of
                       liquidity within conglomerates.
                       The Joint Forum is an international body providing a forum for dialogue and
                       interaction created in 1996 by the three international organisations charged
                       with developing standards for the financial sector: the Basel Committee on
                       Banking Supervision, the International Association of Insurance Supervisors,
                       and the International Organization of Securities Commissions. France is
                                                                      ´           ´
                       represented on the Joint Forum by the Autorite des Marches Financiers, the
                               ´          ˆ
                       Autorite de Controle des Assurances et Mutuelles and the Commission
                       In 2009 the Joint Forum completed the work set in train in 2008 at the request
                       of the Financial Stability Board on the use of external credit ratings by
                       supervisory authorities in the banking, insurance and securities sectors. In
                       June 2009 it published a report (Stocktaking on the Use of Credit Ratings)

                       1 The JCFC, originally created for a limited period of time, was transformed into a permanent committee at
                         the beginning of 2009.
                       2 These lists are available on the website of the European Commission:

       32                                                             Annual Report of the Commission Bancaire . 2009
which, in its discussion of the banking sector, described the role of credit
ratings in the Basel 2 framework and highlighted the importance of banks
conducting their own assessments of credit risk.
In September 2009 the Joint Forum published a report (Report on Special
Purpose Entities) on the use of ad hoc entities by institutions in the three
sectors for risk transfer, accounting deconsolidation, refinancing and capital
raising, and offering new classes of assets to investors. The report highlighted
the multiple risks associated with the use of such entities and made
recommendations to supervisors and the industry for managing and
monitoring them more effectively.
At the request of the G20 and the Financial Stability Board, the Joint Forum
undertook work in 2009 that led to the publication in January 2010 of a report
(Review of the Differentiated Nature and Scope of Financial Regulation – Key
Issues and Recommendations) on the differences, in terms of their nature and
scope, between regulations in the three sectors. The main objectives of this
work was to identify areas where systemic risks may not be fully captured by
the current regulatory framework and to formulate proposals for increasing
harmonisation and strengthening regulation so as to eliminate those
shortcomings. The proposals concerned five areas: key regulatory
differences between the three sectors; supervision and regulation of financial
groups, particularly those that include unregulated entities; mortgage
origination; hedge funds; and credit risk transfer products.
Also in 2009 the Joint Forum continued to analyse developments in the
methods used by financial groups to model risk aggregation and in the way
those models are assessed by supervisory authorities. The results of this work
will be presented in a report to be published in the second quarter of 2010.

2.2. Reform of accounting standards following the financial

At the London Summit in April 2009 and again at the Pittsburgh Summit in
September, the G20 leaders called for reforms to reduce the complexity of
accounting standards for financial instruments, to establish closer cooperation
between European and American accounting standard-setters (the IASB 1 and
the FASB 2) and to make improvements in the accounting rules for credit risk
provisioning. The IASB published a number of consultative documents in
response to those demands. The General Secretariat of the Commission
Bancaire devoted major efforts throughout 2009 to monitoring and
analysing various proposals published by the IASB.

1 International  Accounting Standards Board.
2 Financial   Accounting Standards Board.

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                       2.2.1. Accelerated timetable for reforming IAS 39 - Classification of financial
                       At the request of political authorities, the IASB decided to accelerate the reform
                       of the accounting treatment of financial instruments, i.e. the recasting of IAS 39,
                       and to conduct the reform process in three phases:
                       u the first phase, which considered the classification and measurement of
                          financial instruments, was completed in November 2009 with the publication
                          of IFRS 9 1;
                       u the second phase, dealing with asset impairment, led to the publication of an
                          exposure draft in November 2009;
                       u The third phase is examining hedge accounting; its results will be published
                          in the first quarter of 2010.
                       In the first phase, the IASB decided to reduce the number of accounting
                       portfolios to two major categories – amortised cost and fair value through
                       profit and loss – in place of the four accounting portfolios in the current
                       standard (see Box 7 below). This phase was the subject of intense discussions
                       in which CEBS and the Basel Committee took an active part. The supervisors
                       sought to ensure that the IASB’s proposals would not lead to an expansion of
                       the class of financial assets booked at fair value through profit and loss, given
                       the disadvantages of this valuation method – particularly its effect on earnings
                       volatility – highlighted by the financial crisis.
                       In August 2009 the Basel Committee published Guiding Principles for the
                       Replacement of IAS 39. The General Secretariat of the Commission Bancaire
                       played a significant role in drawing up these principles, which were endorsed
                       by the G20 in its September 2009 statement. The principles stressed that
                       institutions’ financial statements should reflect their business model and that
                       the new standards should reflect accounting lessons from the financial crisis, in
                       particular the limitations of fair value when markets become dislocated or are
                       The General Secretariat of the Commission Bancaire, through its participation
                       both in working groups of domestic authorities (Autorite des Normes´
                       Comptables) and in international bodies (including the Basel Committee and
                       CEBS via the working group dealing with reporting), contributed actively to
                       consultation on the IASB proposals on classification and valuation, and also to
                       the analysis of the final version of IFRS 9 with a view to possibly accelerating its
                       adoption in Europe. This accelerated procedure ultimately was not approved
                       by the European Commission, in light of the criticisms that several participants
                       in the work – including CEBS – made of the IASB’s proposed text.
                       Consequently the standard published by the IASB is not applicable in
                       Europe. At the fundamental level the General Secretariat of the Commission
                       Bancaire had particularly strong reservations concerning provisions of IFRS 9
                       that would expand the scope of fair value through profit and loss. In making
                       fair value the default category for all instruments that do not satisfy the criteria

                       1 IFRS   9 – Financial Instruments.

       34                                                    Annual Report of the Commission Bancaire . 2009
for the amortised cost portfolio, IFRS 9 fails to define a specific mode of
management (trading activity) to designate the instruments covered by fair
value accounting. As a result, this category includes complex instruments with
little or no liquidity, whose fair value is calculated using internal models based
on parameters which cannot be observed in the market – a method that could
result in the recognition of unreliable results. The General Secretariat of the
Commission Bancaire considers that fair value through the profit and loss
statement should be defined positively, as in the current IAS 39, and not as a
default category.
Furthermore, IFRS 9 risks increasing the disconnect between the accounting
and prudential frameworks and thus requiring the use of additional
restatements, or ‘filters’, in determining regulatory capital.

 BOX 7
                  Principal provisions of IFRS 9 – Classification
                   and measurement of financial instruments

         BEFORE:                                         AFTER:
          IAS 39                                         IFRS 9

                              Measurement                                   Measurement

                           Fair value                                    Fair value through profit
      FAIR VALUE           through profit and                            and loss (including fair
    THROUGH PROFIT         loss (including                               value option) or fair
       AND LOSS            fair value option)           FAIR VALUE       value through equity for
                                                                         certain equity
                                                                         investments (irrevocable
            AFS            Fair value
                           through equity
    (Available For Sale)

           HTM             Amortised
     (Held to Maturity)    historical cost            AMORTISED COST
                                                                          historical cost

       LOANS AND           Amortised
      RECEIVABLES          historical cost

          4                                                   2
      Categories                                          Categories

  The new provisions reduce the number of categories of financial assets from four in
  the current IAS 39 (fair value through profit and loss, available for sale, held to
  maturity, and loans and receivables) to two major categories: fair value and
  amortised cost.
  Only financial assets (debt instruments) (i) managed with the objective of collecting
  contractual cash flows (business model test) and (ii) for which the cash flows are
  basic, i.e. consisting solely of payments of principal and interest (contractual cash
  flow characteristics), may be measured at amortised cost. This would include bank
  loans and simple bonds (both listed and unlisted). The standard provides the option
  of measuring these instruments at fair value through profit and loss if this would
  reduce distortions in accounting treatment.
  All other financial assets (equity instruments, derivatives, complex debt instruments
  such as certain securitisation assets, certain perpetual securities, hybrid instruments

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                              such as convertible bonds, etc.) must be measured at fair value through profit and
                              loss. Fair value through profit and loss thus becomes a default category.
                              For equity instruments not held for trading purposes, the standard allows entities to
                              elect irrevocably to recognise fair value changes directly in equity rather than in profit
                              and loss. These instruments will not be depreciated and only their dividends will be
                              recognised in profit and loss; gains from sale remain in equity.
                              Reclassification of assets is required only in very restrictive circumstances, if the
                              business model objective for the instruments changes (e.g. as the result of acquiring
                              or abandoning a business).

                       Concerning provisioning for credit risk, the current standards require the
                       occurrence of a loss event (payment delinquency, financial difficulties
                       experienced by the borrower, etc.) before provisions can be constituted.
                       They therefore result in late recognition of deterioration in credit quality,
                       accentuating the impact of economic cycles on bank earnings. The IASB
                       proposes to move towards a model of depreciation based on expected
                       losses, which will permit gradual provisioning of future losses without
                       having to wait until the loss is incurred, as at present. The Basel Committee
                       and CEBS are closely involved in the discussions conducted by the IASB on this

                       The advantage of the IASB’s approach is that credit loss provisions are
                       anticipated and the income intended to cover future losses is no longer
                       recorded immediately in profit and loss (via the risk premium that is part of
                       the interest margin). But implementing the approach raises a number of
                       technical problems associated with the use of the effective interest rate.
                       Furthermore, the current methods laid down by the IASB for estimating
                       future losses (using point-in-time rather than through-the-cycle estimates)
                       tend to generate very frequent re-estimates, causing fluctuations in the
                       income statement.

                       The final form of the expected-loss model will therefore depend on what the
                       concrete solutions that are found to address these technical and conceptual
                       problems, notably by a consultative group set up by IASB. Composed of risk
                       management experts, the group includes the General Secretariat of the
                       Commission Bancaire, representing CEBS, and the Basel Committee.
                       Banking supervisors are working on proposals to simplify the provisioning
                       model used in accounting and to base it more firmly on the data used in the
                       Basel 2 framework.

                       In 2010 the General Secretariat of the Commission Bancaire will closely
                       monitor the IASB’s work on finalising the accounting standards pertaining to
                       financial instruments. It will pay particular attention to the proposals regarding
                       the treatment of financial liabilities, which for the moment are excluded from
                       the first phase of the reforms, and will seek to ensure that the concerns of bank
                       supervisors are taken into account, particularly concerning the treatment of

       36                                                            Annual Report of the Commission Bancaire . 2009
credit risk for financial liabilities measured at fair value, which ought to be

2.2.2. Convergence between IFRS and US GAAP
Pursuant to their commitment to develop common accounting standards, and
in response to the G20 recommendations, the IASB and the FASB indicated in a
statement on 5 November 2009 that they would continue to work on achieving
greater convergence between international and American accounting
standards (IFRS and US GAAP). However, on some major proposals, the
differences between the two sets of standards appears to be growing rather
than shrinking.
One of the joint projects involves financial statement presentation. CEBS and
the Basel Committee have expressed reservations concerning IASB proposals
that would radically alter the way that financial statements are presented,
particularly with regard to balance sheet and income statement data. These
proposals raise issues of comparability and relevance for financial institutions.
For its part, the IASB has published proposals to modify the rules for
consolidation and asset removal, seeking in principle to move closer to US
standards. In comment letters to which the General Secretariat of the
Commission Bancaire contributed, CEBS and the Basel Committee
expressed concern that these proposals could result in deconsolidating a
larger number of entities and removing more assets from balance sheets,
since exposure to risks and benefits would be recognised less. Conversely,
regarding the deconsolidation of balance sheet assets, the IASB has proposed
an accounting treatment that differs from the American treatment and could
significantly reduce securities lending and borrowing transactions, an
important funding source for credit institutions. The ECB has advised the
IASB that it shares the concerns of CEBS and the Basel Committee on this issue.
While some differences between international and American standards were
narrowed, the positions taken by the IASB and the FASB in other areas that are
important to credit institutions actually moved farther apart, increasing the
potential for competitive distortions. For example, in its approach to
overhauling the standard on classification and measurement of financial
instruments, the FASB seems to be moving away from the positions taken by
the IASB, particularly on the role of fair value and the principles governing
loan provisioning. The FASB seems to be favouring full fair value for recording
financial instruments, as well as a minor adjustment – instead of broader
reform – to the existing provisioning system, which would continue to link
provisioning to the existence of realised losses.
It is true that achieving greater convergence in accounting frameworks is
important in reducing competitive distortions caused by differences in
accounting rules, which can have a significant effect when calculating some
prudential ratios. That said, the goal of convergence should not overshadow
the principal objective of reforming European accounting standards, namely to
set optimal standards for European financial institutions. Faithful

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                       representation of the effect of transactions in the financial statements
                       published by credit institutions is one of the foundations of prudential
                       supervision and, more generally, of financial stability. The General
                       Secretariat of the Commission Bancaire will therefore monitor the
                       convergence process closely to ensure that the IASB does not adopt certain
                       FASB recommendations which, in the General Secretariat of the Commission
                       Bancaire’s view, are not entirely satisfactory.

                       2.2.3. Institutional reform of the governance of the IASB
                       The IASB continued its work on constitutional reforms, initiated in response to
                       numerous requests from interested parties, including bank supervisors, for
                       improvements in its system of governance. The international standard-setter
                       has been asked to give greater consideration to the ways in which accounting
                       standards impact on financial stability since, as the financial crisis has shown,
                       they can amplify certain phenomena.
                       The first part of the reform, completed at the beginning of 2009, resulted in the
                       creation of a Monitoring Group. This measure was an inadequate response to
                       the expectations expressed, insofar as the Group has no authority over the
                       direction of the IASB’s work or the appointment of its members. Consequently,
                       during the consultation on the second part of the constitutional review, CEBS
                       and the Basel Committee expressed reservations on these arrangements and
                       asked for bank supervisors to be more closely involved in the IASB’s work, and
                       in particular for them to have full membership on the Monitoring Group
                       instead of their current status as observers.

                       2.2.4 The importance of financial transparency
                       The transparency of financial information on credit institutions is one of the
                       prerequisites for restoring and preserving confidence in financial markets, a
                       concept referred to several times in the G20 recommendations.
                       During 2009 IFRS 7 (Financial instruments: disclosures) was amended to
                       enhance disclosures related to fair value, including those concerning the use
                       of internal valuation models.
                       A CEBS working group chaired by a representative of the General Secretariat of
                       the Commission Bancaire also conducted several studies aimed at measuring
                       and improving the quality and transparency of financial reporting by European
                       credit institutions. In June 2009 CEBS published a report on the quality of
                       financial disclosures published in banks’ 2008 annual reports 1, following up
                       on a similar analysis of 2007 annual reports. The report discussed the progress
                       made by financial institutions, while noting a certain number of shortcomings,
                       particularly concerning disclosures on fair value and impairment of financial
                       and non-financial assets and the marked lack of uniformity in disclosures. On

                       1 ‘‘Follow-up   review of banks’ transparency in their 2008 audited annual reports’’, June 2009.

       38                                                                Annual Report of the Commission Bancaire . 2009
the basis of these findings, CEBS published a consultation paper in October
2009 containing a set of recommendations intended to help institutions
improve their risk disclosures during crisis periods 1 . These
recommendations included general principles for proper communication
and a number of specific suggestions concerning the content and
presentation of financial disclosures.
In June 2009 CEBS published a report on compliance with the Pillar 3
disclosure requirements set forth in the Capital Requirements Directive 2. The
report found room for improvement in the information disclosed by European
financial institutions. While banks provided investors with substantial
information on risk management and capital adequacy from a regulatory
perspective, the lack of uniformity in the form and content of the disclosures
significantly reduced the usefulness of these data. Furthermore, certain
institutions failed to make some disclosures explicitly required under the
directive, such as information on the back-testing of internal credit risk
models. To promote European convergence in reporting under Pillar 3 while
respecting the logic of market discipline that underpins Pillar 3, CEBS
organised a debate in December 2009 between the preparers and the users
of financial statements in order to encourage dialogue among stakeholders.
In 2010 CEBS will continue monitoring disclosures and working to improve the
quality and consistency of financial reporting. To that end it will conduct new
analyses of annual reports and disclosures made under Pillar 3.

2.2.5. Ongoing work in France and CEBS on revising reporting
The General Secretariat of the Commission Bancaire continued its work on a
project, initiated in 2007, to overhaul the tools and processes for collecting
accounting and prudential information from the industry. Last year saw the
completion of key operational stages of this work, which concerns both purely
domestic reporting, i.e. migration from the current BAFI reporting system to
the unified system, SURFI, as well as reporting at the European level via the
FINREP 3 and COREP 4 reports administered by CEBS.
At the national level, on 20 June 2009 the Commission Bancaire adopted the
instructions establishing the new SURFI reporting framework, which will take
effect beginning 30 June 2010.
In addition to simplifying the report filing system, which will focus more
closely on institutions’ risk profiles and exposures, and rationalising data
collection, the SURFI reform also incorporates two other sets of
requirements: those arising from new rules implementing the standardised

1 ‘‘Disclosureguidelines: lessons learnt from the financial crisis’’, available at:
2 ‘‘Assessment of Banks’ Pillar 3 Disclosures’’.
3 FINREP: FINancial REPorting Framework – consolidated financial reporting based on the IFRS.
4 COREP: COmmon REPorting Framework – reporting related to the Basel capital ratio.

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                       approach for liquidity risk 1, and those associated with the ECB’s overhaul of its
                       framework for collecting policy data 2. The new reporting framework will use
                       the XML-XBRL data exchange format, designed to enhance the productivity
                       and flexibility of the process for transmitting FINREP and COREP data to the
                       General Secretariat of the Commission Bancaire.
                       At the European level, work on harmonising and rationalising FINREP
                       statements culminated in December 2009 with CEBS’s adoption of revised
                       guidelines for financial reporting. Based on the filings from 31 March 2012
                       onwards, the new guidelines will provide a more closely harmonised reporting
                       framework for cross-border institutions. It should be noted that changes in
                       accounting standards associated with the various phases of the overhaul of
                       IAS 39 (see above) may have an impact on FINREP reporting.
                       Work in 2010 will focus on completing the process of harmonising COREP
                       reports, in accordance with Article 74 of the CRD as amended by CRD 2. The
                       first submissions of the modified COREP statements are due on 31 December
                       2012. Until then, the changes necessitated by CRD 2 will be incorporated into
                       the current COREP reporting framework, with an effective date of
                       31 December 2010. CEBS will make additional changes in the framework in
                       line with future revisions of the CRD. The banking industry is involved in
                       overhauling the reporting systems through ad hoc meetings conducted at both
                       national and European levels.

                       2.3. Adapting the legislative and regulatory framework

                       2.3.1. EU legislation
                       Three major banking directives were adopted in 2009:
                       u Directive 2009/14/EC of the European Parliament and the Council of
                          11 March 2009 on deposit guarantee schemes amended Directive 94/
                          19/EC, changing the level of the guarantee and the maximum payout period.
                          The minimum coverage level for the aggregate deposits of each depositor
                          was increased initially from EUR 20,000 to EUR 50,000, and is due to rise to
                          EUR 100,000 on 31 December 2010. The maximum payout period – currently
                          three months, with the possibility of an extension to nine months – was
                          reduced to 20 working days. It may be extended in exceptional
                          circumstances with the approval of the competent authorities (in France,
                          the Commission Bancaire);
                       u Directive 2009/110/EC of the European Parliament and the Council
                          of 16 September 2009 on the taking up, pursuit and prudential

                       1 Order  of 5 May 2009 on the identification, measurement, management and control of liquidity risk, and
                         Commission Bancaire Instruction 2009-05 of 29 June 2009 on the standardised approach for liquidity risk.
                       2 Regulation ECB/2008/32 concerning the balance sheet of the monetary financial institutions sector

                         (recast), and Decision 2009-03 of the Governor of the Banque de France concerning the collection and
                         control of statistical data for the purpose of monetary policy.

       40                                                             Annual Report of the Commission Bancaire . 2009
  supervision of the business of electronic money specified and
  harmonised the legal framework for electronic money. Access to this
  market had previously been governed by Directive 2000/46/EC of
  18 September 2000, which Member States had transposed but with notable
  differences in certain cases. Directive 2009/110/EC, a maximum
  harmonisation directive, lowered the initial capital needed to create an
  electronic money institution (EMI) from EUR 1 million to EUR 350,000 in
  order to facilitate access to the business of issuing electronic money and to
  diversify the supply of services. The directive also brings the rules on EMIs
  into line with those for payment institutions under the Payment Services
  Directive. The new directive also establishes more precise rules for
  reimbursement in order to protect consumers, who may demand at any
  time that electronic money be refunded at its nominal value and who must
  be informed in advance of any conditions and fees on such refunds;
u Directive 2009/111/EC of the European Parliament and the Council
  of 16 September 2009 banks affiliated to central institutions, certain
  own funds items, large exposures, supervisory arrangements, and
  crisis management has strengthened the framework for cooperation
  between supervisors of cross-border banking groups. Specifically, it
  provides for supervisory colleges chaired by the supervisor of the parent
  company to be set up on a systematic basis. It strengthens the requirements
  applicable to originators of securitisations, which will be required to retain
  5% of the risks transferred to investors. And it strengthens the requirements
  for institutions investing in securitisations, which will be required to conduct
  a detailed analysis of the exposures underlying their securitisation positions.
  In the area of capital requirements, the directive sets eligibility criteria and
  ceilings for the inclusion of hybrid instruments in Tier 1 capital. New rules
  designed to limit liquidity risk were also introduced, requiring institutions to
  hold reserves of liquid assets, to stress-test liquidity crises and to prepare
  business continuity plans. Furthermore, the large exposures regime was
  strengthened by modifying the risk base used for calculating these

2.3.2. National law
France adopted several statutory and regulatory provisions:
u At the legislative level, Administrative Order 2009-866 of 15 July 2009
  on the conditions governing the provision of payment services and
  the creation of payment institutions transposed the European Payment
  Services Directive. The order introduced a new category of services –
  payment services – which are no longer reserved exclusively to credit
  institutions but may be provided by a new category of service providers
  known as payment institutions. These services consist mainly of funds
  transfers and direct debits, transmission of funds, services permitting the
  payment or withdrawal of currency and the management of a ‘‘payment
  account’’, and the execution of transactions for which the payor uses a

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                          telecommunications system such as a mobile phone. Under certain
                          conditions, payment institutions may also extend credit. They are subject
                          to streamlined requirements, notably on initial capital requirements. They
                          must obtain an authorisation from banking authorities and are subject to
                          their supervision;
                       u At the regulatory level, several Orders were adopted:

                          – The Order of 14 January 2009 amending Regulation 97-02 of
                            21 February 1997 on internal control of credit institutions and
                            investment firms specifically included the risk of fraud in operational
                            risk, regardless of whether it results in a loss or a gain. The order specified
                            the conditions in which the executive and decision-making bodies of an
                            institution must be notified of incidents detected by internal control and
                            risk management systems, as well as the mechanisms for informing the
                            Commission Bancaire of such incidents pursuant to the whistleblowing
                            requirement introduced as part of the new requirements. The decision-
                            making body must set materiality criteria and thresholds for prompt
                            reporting of incidents to the institution’s executive body and to the
                            Commission Bancaire. These criteria and thresholds must be
                            communicated to the Commission Bancaire, which will check whether
                            they are appropriate. Other requirements introduced by the order as part
                            of the system for controlling internal procedures and transactions include
                            the execution of corrective measures within a reasonable time period and
                            verifications to ensure that compensation policies are consistent with risk
                            management objectives.
                          – The Order of 5 May 2009 on the identification, measurement,
                            management and control of liquidity risk, which will be applicable
                            beginning on 30 June 2010, sets out of a standardised approach and an
                            advanced approach for liquidity risk. Reporting institutions will be
                            required to establish systems for identifying, measuring, analysing and
                            managing liquidity risk to ensure that they hold sufficient liquid assets at
                            all times to meet their commitments as they come due. The standardised
                            approach involves calculating a one-month regulatory liquidity ratio and
                            submitting a provisional cash flow table along with information on
                            supplementary funding sources and financing costs. The advanced
                            approach, which requires the approval of the Commission Bancaire, is
                            based on the use of internal methodologies that the institution will use to
                            generate indicators and limits for stocks of liquid assets and for stress tests
                            at different maturities;
                          – The order of 29 October 2009 on the regulation of electronic money
                            institutions amended Regulations 92-14 of 23 December 1992 and
                            Regulation 2002-13 of 21 November 2002. The order lowered the
                            minimum capital requirement for all electronic money institutions (EMI)
                            to EUR 1 million and provided that EMI with electronic money
                            commitments of less than EUR 6 millions may opt for a streamlined
                            prudential regime on condition that they do not receive mutual
                            recognition in Europe. If they opt for mutual recognition, they will
                            remain subject to the full prudential regime;

       42                                                    Annual Report of the Commission Bancaire . 2009
  – The Order of 29 October 2009 on prudential regulation of payment
    institutions, issued in application of Administrative Order 2009-866 of
    15 July 2009, sets the conditions for taking up the business of payment
    services (the information to be provided when applying for authorisation
    as a payment institution or providing notification of a change in situation,
    and the minimum capital requirements). It also specifies the rules for
    managing payment institutions, including rules for calculating capital
    requirements and the provisions for protecting customers’ funds, namely
    rules on segregation and investment, and coverage by a guarantee from a
    credit institution or insurance firm that is not part of the same group;
  – The Order of 3 November 2009 on compensation of staff whose
    activities are likely to have an effect on the risk exposure of credit
    institutions and investment firms transposed into French regulation
    the Financial Stability Board standards adopted by the G20 at the
    Pittsburgh Summit on 24 and 25 September 2009. It amended
    Regulation 97-02, introducing general principles relating to the
    determination of variable compensation, the methods for paying
    variable compensation (deferred payment, payment in shares,
    clawbacks), prohibition of guaranteed bonuses beyond one year, and
    the governance, control and transparency of compensation policies.

3. Decisions, sanctions and exercise of the Commission
   bancaire’s other legal powers

3.1. developments in case law

 BOX 8
                        Consequences of the judgment
                   of the European Court of Human Rights

  On 11 June 2009 the European Court of Human Rights (ECHR), responding to an
  application by Dubus SA, issued a ruling in the case of Dubus SA vs. France. The
  complaint followed the rejection by the Conseil d’Etat of the appeal against the
  Commission Bancaire’s 8 October 2001 decision reprimanding Dubus SA. The applicant
  company alleged before the ECHR that the disciplinary proceedings brought against it
  by the Commission Bancaire breached Article 6§1 of the European Convention for the
  Protection of Human Rights and Fundamental Freedoms (‘‘the Convention’’), which
  provides that, in the determination of any criminal charge against him, any person
  shall be entitled to a fair and public hearing by a competent, independent and
  impartial tribunal established by law.
  In its 11 June ruling, the ECHR concluded that Article 6§1 of the Convention had been
  breached on the ground that the applicant company might reasonably harbour doubts
  as to the independence and impartiality of the Commission Bancaire, given the
  absence of clear distinction between its functions of ‘‘prosecution, investigation and

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                              The ECHR based its ruling on the theory of ostensible authority. Given ‘‘the lack of
                              precision of the texts governing proceeding before the Commission Bancaire’’ as to the
                              composition and prerogatives of the bodies called to exercise the different functions
                              assigned to them, the Court noted in particular that neither the Monetary and
                              Financial Code nor any internal procedure made ‘‘a clear distinction between the
                              functions of prosecution, investigation and adjudication in the exercise of the judicial
                              power of the Commission Bancaire. While the combination of investigative and judicial
                              functions was not, in itself incompatible with (...) Article 6§1 of the Convention (...)
                              this was subject to their being no ’prejudgment’ on the part of the Commission’’.
                              In the opinion of the Court, ‘‘the applicant company might reasonably have had the
                              impression that it had been prosecuted and tried by the same people’’. The claimant
                              could harbour doubts regarding the decision of the Commission Bancaire, which ‘‘had
                              brought disciplinary proceedings against it, notified it of the offences and
                              pronounced the penalty’’. The Court agreed with the analysis of the Conseil d’Etat,´
                              which did not call into question the Commission Bancaire’s ability to open a case of its
                              own motion but which subjected it to the principle of impartiality; but the Court did
                              consider it necessary to limit more precisely the Commission’s right of initiative so as
                              to dispel the impression that the guilt of the claimant was established from the
                              moment the proceeding was opened.
                              The ECHR’s ruling means that compliance with the Convention does not necessarily
                              imply a complete separation of the functions of prosecution, investigation and
                              sanction in the exercise of judicial powers, provided that a clear distinction is made
                              between these functions and that they are governed by a precise procedure.
                              The Court expressly validated the principle of own-initiative referral and indicated
                              that combining investigative and adjudication functions was not in itself
                              incompatible with the principle of impartiality stated in Article 6§1 of the
                              Convention. This confirms the Conseil d’Etat decisions on the consistency of the
                              proceedings with that principle, provided that the texts support the principle of
                              Since the ECHR issued its ruling, none of the members of the body deliberating on
                              disciplinary sanctions has been party to the deliberations that upheld the complaints
                              against the institution. The role of the General Secretariat in the judicial proceeding
                              that begins when the institution receives the statement of complaints has been
                              confined to producing a memorandum, a process in which no member of the
                              sanctioning body is involved. The material tasks of the proceeding are performed
                              by the secretariat of the chairman of the sanctioning body.
                              The Commission Bancaire intends to follow the ECHR recommendations in order to
                              ensure that its judicial procedure is impartial.

                       3.2. Decisions issued by the Commission Bancaire

                       To enable the Commission Bancaire to exercise its powers, the Monetary and
                       Financial Code endows it with a number of legal powers that can be exercised
                       after documentary audits or on-site inspections.

       44                                                            Annual Report of the Commission Bancaire . 2009
3.2.1. Injunctions
Pursuant to paragraph 2 of Article L613-16 of the Monetary and Financial Code,
the Commission Bancaire can issue injunctions against firms under its
supervision instructing them to act within a given time-frame to restore or
strengthen their financial position, improve their management methods or
ensure that their organisation is properly geared to their activities or
development goals. It can also, under paragraph 5 of the same article, order
them a greater amount of capital than the minimum provided for in the
applicable regulation, and may also require them to apply a specific
provisioning policy or a specific treatment to their assets for capital
adequacy purposes.
In 2009 the Commission Bancaire issued three injunctions against institutions
based on paragraph 2 and 43 injunctions based on paragraph 5 (Pillar 2

3.2.2. Industry code of conduct
The Commission Bancaire monitors credit institutions’ compliance with
industry rules. When an institution infringes the code of conduct, the
Commission Bancaire may, after giving the managers an opportunity to
explain themselves, issue a warning.
In 2009 the Commission Bancaire issue a warning to one credit institution for
failing to apply certain practices in the area of mortgage lending.

3.2.3. Prosecution and disciplinary sanctions
The Commission Bancaire can initiate disciplinary proceedings if a company
subject to its supervision violates a legislative or regulatory provision related to
its business, ignores a recommendation, injunction or warning, or fails to meet
the conditions imposed or the commitments made to obtain accreditation,
authorisation, or exemption. These proceedings may lead to sanctions, the
most serious of which is exclusion. Instead of or in addition to these sanctions,
the Commission Bancaire may impose a fine, the amount of which has been
raised by the Economic Modernisation Act of 4 August 2008 to ten times the
minimum capital requirement applicable to the credit institution or investment
firm in question.
In 2009, four proceedings were brought against three credit institutions and
one financial company. The Commission Bancaire issued three reprimands
accompanied by fines of EUR 200,000, EUR 600,000 and EUR 20 million (the
largest fine being for shortcomings in the internal control of market
transactions) and one warning. The judicial decisions rendered by the
Commission Bancaire in 2009 were published in a special summary.

Annual Report of the Commission Bancaire . 2009                                        45
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       3.2.4. Appointment of provisional administrators
                       In 2009, pursuant to Article L613-18 of the Monetary and Financial Code, the
                       Commission Bancaire:
                       u reappointed provisional administrators in two French branches of foreign
                          banks, and
                       u made two successive reappointments and then ended the appointment of
                          the provisional administrator at a French subsidiary of a foreign bank.

                       3.2.5. Appointment of liquidators
                       The Commission Bancaire can appoint a liquidator when a credit institution or
                       an investment firm has been excluded. The Commission Bancaire did not
                       appoint any new liquidators under this article in 2009, but reappointed three
                       existing liquidators.
                       The Commission Bancaire may also appoint a liquidator if a court orders
                       winding-up procedures against a credit institution or an investment firm. The
                       Commission Bancaire appointed one liquidator under this article in 2009, at an
                       investment firm.

                       3.2.6. Collective proceedings
                       Articles L613-27 and 613-14 of the Monetary and Financial Code provide that
                       protection, reorganisation or winding-up proceedings ordered by a court
                       against credit institutions or investment firms under the Commercial Code
                       cannot begin until the Commission Bancaire has given its opinion.
                       In 2009 a judicial liquidation proceeding, opened under a mandatory referral to
                       the commercial court, was brought against an investment company whose
                       manager had previously made a request to open a receivership proceeding
                       (which was rejected). The Commission Bancaire rendered two opinions, first
                       on opening a receivership proceeding, and then on opening a judicial
                       liquidation proceeding for this company.

                       3.3. Exercise of other legal powers of the Commission Bancaire

                       3.3.1. Approval of instructions
                       Under Article L613-8 of the Monetary and Financial Code, the Commission
                       Bancaire determines the list, form, and submission deadlines of the documents
                       and information to be submitted to it.

       46                                                  Annual Report of the Commission Bancaire . 2009
In 2009 the Commission Bancaire issued eight Instructions containing such
u Instruction 2009-01 amended by Instruction 2009-07 on the establishment of
  a unified system of financial reporting;
u Instruction 2009-02 abrogating or amending several Commission Bancaire
u Instruction 2009-03 on the ratio of liabilities representing electronic money
  to capital, and on investment rules;
u Instruction 2009-04 on complementary submissions for calculating the
  contributions due from institutions subject to guarantee schemes for
  deposits, securities and bank guarantees;
u Instruction 2009-05 on the standardised approach to liquidity risk;

u Instruction 2009-06 amending Instruction 94-09 of 17 October 1994 on
  documents sent to the Commission Bancaire;
u Instruction 2009-07 amending Instruction 2000-09 on reporting on systems
  for preventing money laundering and terrorist financing;
u Instruction 2009-08 on filings for authorisation to apply the advanced
  approach for liquidity risk.

3.3.2. Appointment and reappointments of auditors and special
In 2009 the Commission Bancaire issued 729 favourable opinions on
proposals to appoint or reappoint statutory or alternate auditors at
369 institutions. It also issued two approvals in response to proposals to
appoint special examiners at a mortgage credit institutions. The Commission
issued a reservation on the reappointment of one statutory auditor, calling for
the audit agency concerned to correct failings in its internal organisation. It also
continued to work with the Haut Conseil du Commissariat aux Comptes
(H3C), the supervisory authority for the audit industry, on the sharing of
budgets among co-auditors.

3.3.3. Relations with judicial authorities
In addition to the referrals under Article L561-36 III (former Article L. 562-7) of
the Monetary and Financial Code (see above), the Commission Bancaire,
under Article 40 of the Criminal Code, in its capacity as an administrative
authority, informs the state prosecutor of any circumstances of which its
becomes aware in the course of its duties – including the conduct of on-site
inspections – that are likely to constitute a criminal offence. This could include
circumstances likely to constitute banking monopoly violations or other

Annual Report of the Commission Bancaire . 2009                                        47
Activities of the
Commission Bancaire
and its General Secretariat
in 2009
                       violations such as failure to comply with usury laws or misuse of company
                       Under Article L613-24 of the Monetary and Financial Code, the Commission
                       Bancaire can also institute civil action ancillary to criminal action at any stage
                       in certain criminal offences, including the illegal practice of banking. It did so
                       in one case in 2009. (See appendix table summarising the cases in which the
                       Commission Bancaire took civil action between 2003 and 2009).)
                       Several cases which had previously been referred to the prosecutor’s office by
                       the Commission Bancaire resulted in convictions in 2009:
                       1) In one case, the manager of a bureau de change was charged with having
                       provided various customers with cheques or bank drafts, i.e. transactions that
                       constitute banking services and that normally can be provided only by a credit
                       institution. The accused was convicted by the court of first instance and given a
                       twelve-month suspended sentence and a fine of EUR 50,000. The Commission
                       Bancaire’s civil suit was deemed to be admissible, and the accused was
                       ordered to pay the Commission one euro in damages and interest – the sum
                       it had requested – and fined EUR 3,000 under Article 475-1 of the Criminal
                       2) In December 2008, Commission Bancaire reported the actions of persons
                       who had deposited cash or cheques from third parties in a personal bank
                       account or the account of a company. In return, the third party received cash or
                       cheques with the payee line left blank in order to purchase automobiles for
                       export. The total amount of these transactions was estimated at EUR 84,700.
                       The two accused pleaded guilty and accepted penalties, respectively, of a nine-
                       month suspended sentence, a fine of EUR 10,000, and a fine of EUR 10,000 of
                       which EUR 8,000 was suspended;
                       3) One person, already convicted for similar acts, had been charged several
                       times with providing sureties through a company based in London that was not
                       authorised to conduct such activities in France, and had been convicted on
                       21 January 2008 of illegal practice of banking as a multiple offender and
                       sentenced to 18 months’ imprisonment, ordered to pay one euro in damages in
                       interest to the Commission Bancaire, and fined EUR 3,000 under Article 475-1
                       of the Criminal Code. The accused appealed the initial ruling, which the Paris
                       Court of Appeals upheld on all counts in a ruling issued on 2 March 2009.
                       The Commission Bancaire, in conjunction with other French financial
                       authorities, issued one public warning. The statement, which can be
                       downloaded from the Banque de France website (,
                       warned the public of an entity offering guarantees and sureties in France
                       without authorisation from the competent authorities (press release of 10 July
                       2009: ‘‘Garant non agree: SEGAP LLOYD’S RCP’’).

       48                                                   Annual Report of the Commission Bancaire . 2009

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