The 2008 financial crisis revealed the dangers of an insufficiently compartmentalised banking system. Banks' speculative activities put depositors' savings at risk. To avoid a repeat of this scenario, France has adopted a binding legal framework.
The 2013 law on the separation and regulation of banking activities
The Act of 26 July 2013 imposed a far-reaching reorganisation of the French banking sector. Its aim: to isolate speculative activities in separate subsidiaries in order to protect public deposits.
The text specifically targets so-called "proprietary" activities, i.e. speculative transactions that banks carry out using their own funds. Article L. 511-47 of the Monetary and Financial Code now stipulates that these activities must be confined to separate subsidiaries, subject to stricter prudential requirements.
Subsidialisation applies to credit institutions, finance companies and mixed financial holding companies whose trading activities in financial instruments exceed certain thresholds defined by decree of the Conseil d'État.
This concerns :
- Proprietary trading in financial instruments
- Transactions with leveraged collective investment schemes
However, some activities are exempt from the requirement to be spun off into a subsidiary:
- The provision of investment services to customers
- Clearing financial instruments
- Covering the company's risks
- Market making
- Group cash management
- The Group's investment operations
This system is designed to guarantee financial stability and the solvency of depositors, and to avoid conflicts of interest with customers.
Banking resolution: anticipating crises
The 2013 Act also introduced a bank resolution mechanism to better manage bank failures.
Each bank must now draw up a preventive recovery plan describing the measures it would take in the event of difficulty. This confidential document is subject to supervision by the Autorité de contrôle prudentiel et de résolution (ACPR).
At the same time, the ACPR draws up a preventive resolution plan for each institution. This plan sets out the measures to be taken if the bank's internal systems fail.
In the event of a proven failure, the ACPR can intervene with considerable powers:
- Unilaterally changing the capital structure
- Prohibiting or limiting certain activities
- Calling on the deposit guarantee and resolution fund
It is only when all these measures have failed that ordinary collective proceedings can be initiated.
The Act of 26 July 2013 also renamed the deposit guarantee fund the "deposit guarantee and resolution fund". Its scope of intervention was extended to financial companies, mixed financial holding companies and investment firms.
The ACPR may seize this fund if it considers that an entity is failing without any prospect of recovery in the short term.
The European Resolution Mechanism
The French system is part of a harmonised European framework, established by Directive 2014/59/EU of 15 May 2014. This directive sets out a framework for the recovery and resolution of credit institutions and investment firms.
Law 2014-1662 of 30 December 2014 authorised the French government to transpose this directive by ordinance and to extend the resolution procedure to finance companies.
A single supervisory mechanism for credit institutions has also been introduced by Regulation (EU) 1024/2013. This regulation entrusts the European Central Bank with prudential supervision tasks.
Order 2014-1332 of 6 November 2014 adapted French legislation to enable the implementation of this regulation, in particular by organising cooperation between the ACPR and the ECB.
The collective proceedings applied to credit institutions have some special features. Article 86 of Directive 2014/59/EU provides that a decision subjecting a credit institution to collective proceedings may only be taken with the agreement of the ACPR. Decree 2020-4 of 3 January 2020 amended Article R. 613-14 of the Monetary and Financial Code to strengthen this control.
For bank customers, these measures have a direct impact on the security of their deposits. The Deposit Guarantee and Resolution Fund will compensate depositors up to €70,000 in the event of a bank failure.
Companies need to pay close attention to the financial health of the banking institutions they work with. Early diagnosis can help avoid losses in the event of default.
Sources
- Law no. 2013-672 of 26 July 2013 on the separation and regulation of banking activities (OJ 27 July 2013)
- Monetary and Financial Code, articles L. 511-47 to L. 511-50, L. 613-31-11 to L. 613-31-18, L. 613-34
- Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014
- Regulation (EU) No 1024/2013 of 15 October 2013
- Order no. 2014-1332 of 6 November 2014
- Decree no. 2020-4 of 3 January 2020
- Law no. 2014-1662 of 30 December 2014
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