Credit institution law: definition, authorisation, prudential rules and liability

Last updated: 25 March 2026

A credit institute is an authorised legal entity whose business consists essentially of receiving repayable funds from the public and granting credit for its own account. Article L. 511-1 of the French Monetary and Financial Code refers to the European CRR Regulation (no. 575/2013, art. 4, § 1, point 1) for this definition. This definition has far-reaching consequences: a banking monopoly, compulsory authorisation, permanent supervision and strict prudential ratios. This guide sets out the full legal framework.

Credit institutions: a European definition transposed into French law

For a long time, the concept of a credit institution was governed solely by national law. The Banking Act of 24 January 1984 laid the foundations. European law has gradually absorbed it: since the CRR regulation of 26 June 2013, the definition is directly applicable in all Member States, without the need for transposition.

Two cumulative elements characterise a credit institution:

• the receipt of repayable funds from the public (sight deposits, term deposits, current accounts) ;
• l'granting of credit for own account.

This definition draws a clear line with finance companies, created by Order no. 2013-544 of 27 June 2013, which can distribute credit but do not collect deposits from the public. It also distinguishes credit institutions from payment institutions and electronic money institutions, which are subject to separate approval regimes.

Banking transactions and the banking monopoly

Three categories of reserved operations

The Monetary and Financial Code reserves three banking operations for credit institutions:

1. La receipt of repayable funds from the public ;
2. The credit operations : provision or promise to provide funds, commitment by signature (surety, endorsement, guarantee) ;
3. The payment services transfers, direct debits and card payments.

In addition related activities Foreign exchange transactions, asset management advice, investment services, equity investments, insurance intermediation.

The principle of the monopoly and its exceptions

Article L. 511-5 of the CMF prohibits anyone other than a credit institution or finance company from carrying out credit transactions on a regular basis. Violation is punishable by a three-year prison sentence and a fine of €375,000 (art. L. 571-3 CMF).

But the monopoly is not absolute. Articles L. 511-6 and L. 511-7 of the CMF provide for exemptions for non-profit organisations granting social loans, companies granting advances on salaries, participative financing platforms and inter-company loans (Macron Act of 6 August 2015).

A noteworthy point in practice is that failure to obtain approval constitutes a criminal offence, but does not automatically render contracts null and void. The Court of Cassation has confirmed this on several occasions (Cass. ass. plén., 4 March 2005, no. 03-11.725; Cass. com., 15 June 2022, no. 20-22.160).

Classification of credit institutions under French law

Universal banks

Incorporated as limited companies, universal banks can carry out all banking and related activities. BNP Paribas, Société Générale and Crédit Lyonnais represent the dominant model in the French banking landscape.

Mutual and cooperative banks

Governed by Articles L. 512-1 et seq. of the CMF, cooperative banks combine credit institution status with cooperative status. Crédit Agricole, Crédit Mutuel, BPCE group: these three networks account for around 60 % of bank deposits in France. What sets them apart is their governance: members, not shareholders, hold all the power.

Municipal credit unions

As municipal public institutions, the municipal credit banks have a monopoly on pawnbroking. They are authorised as credit institutions but have public law status.

Finance companies: the essential distinction

Since the Order of 27 June 2013, the former finance companies have been reclassified as finance companies. They are not credit institutions: the fact that they cannot receive funds from the public distinguishes them from credit institutions. They are authorised by the ACPR (not the ECB) and do not benefit from the European passport.

Authorisation: a prerequisite for any banking activity

The principle: no activity without prior authorisation

Article L. 511-10 of the CMF lays down an unambiguous rule: before carrying on business, credit institutions must obtain authorisation. Since the entry into force of Single Oversight Mechanism (EU regulation no. 1024/2013), this approval is issued by the ECB, on the proposal of the’ACPR.

The procedure works in two stages. The company submits its application to the ACPR, which has a deadline of six months, which may be extended for a further six months (art. L. 511-14 CMF). If the ACPR considers the request to be compliant, it submits a draft decision to the ECB, together with its assessment and recommendations. If it does not consider the application to be compliant, it rejects it outright.

Basic conditions

The ACPR checks that the applicant meets a number of cumulative requirements:

• Minimum capital between €1 and €5 million depending on the type of authorisation (art. L. 511-11 CMF); ;
• Effective management The «four eyes» rule requires at least two effective managers, whose registered office and head office are located in France (art. L. 511-13 CMF); ;
• Integrity and competence of managers The assessment covers experience, skills and probity. The ACPR does not limit itself to checking criminal records; ;
• Shareholder quality Examination of the identity and good repute of capital providers holding a qualifying holding (art. L. 511-12-1 CMF); ;
• Activity programme description of planned operations, technical and financial resources, internal control systems ;
• Suitability of legal form the activity of a credit institution (art. 93 of the CRR).

Limitations, conditions and undertakings

The ACPR may propose to the ECB that authorisation be limited to certain transactions, that it be subject to special conditions designed to preserve the financial equilibrium of the banking system, or that it be made conditional on compliance with commitments entered into by the institution. Failure to comply with these conditions may result in disciplinary proceedings before the Enforcement Committee (art. L. 612-39 CMF).

The European passport

An institution authorised in one Member State may carry on business throughout the European Union, either by setting up a branch or under the freedom to provide services. This mutual recognition mechanism, which stems from the CRD IV directive (2013/36/EU), is based on the principle of home country control (home country control).

Withdrawal of approval

Withdrawal may occur at the request of the institution or be ordered by the ECB in several cases (art. L. 511-15 CMF): false declarations at the time of application, failure to comply with prudential requirements, failure to use the authorisation for twelve months, inactivity for more than six months. Withdrawal entails a winding-up period during which the institution may only carry out transactions that are strictly necessary to rectify its situation.

Prudential supervision: who supervises the banks?

A three-tier architecture

Credit institutions are subject to supervision at several levels:

• La ECB, through the Single Supervisory Mechanism, directly supervises significant institutions (assets in excess of €30 billion, national economic importance, cross-border activities). Around 130 banking groups in the eurozone, representing more than 80 % of banking assets; ;
• L'ACPR supervises less significant institutions and retains exclusive responsibility for anti-money laundering, consumer protection and the supervision of payment institutions; ;
• Le High Council for Financial Stability (HCSF) is responsible for macro-prudential supervision and may set lending conditions (art. L. 631-2-1 CMF).

SREP: the annual review of each bank

Le Supervisory Review and Evaluation Process (SREP) is the central tool of supervision. Each year, the supervisor assesses the institution's business model, internal governance, capital risks and liquidity risks. Following this review, the supervisor may impose additional capital requirements (Pillar 2) over and above the regulatory minimums.

For a detailed analysis of the ESM and the role of the ECB, see our guide to the Single Oversight Mechanism.

Prudential rules: from Basel III to CRR/CRD

Article L. 511-41 of the CMF requires credit institutions to comply with management standards designed to guarantee their liquidity and solvency. The guiding principle is simple, as one author has put it: since it is impossible to prevent losses - risk-taking is the very nature of the banking business - own funds must be sufficient to absorb them.

Capital ratios

The prudential framework is based on the Basel III, These were transposed into European law by the CRR Regulation (No. 575/2013) and the CRD IV Directive (2013/36/EU), revised by CRR II and CRD V. Article 92 of the CRR sets out three minimum requirements:

• CET1 ratio (Tier 1 capital): 4.5 % of risk-weighted assets ;
• Tier 1 ratio (tier 1 capital): 6 % ;
• Total capital ratio : 8 %.

In addition to these minimums capital cushions (conservation buffer of 2.5 %, countercyclical buffer, buffer for systemically important institutions), as well as additional Pillar 2 requirements imposed on a case-by-case basis by the supervisor.

Liquidity ratios

Liquidity management is governed by two complementary ratios:

• Le CSF (Liquidity Coverage Ratio): the institution must hold sufficient high-quality liquid assets to cover its net cash outflows over 30 days in a stress scenario; ;
• Le NSFR (Net Stable Funding Ratio): ensures stable financing over a one-year horizon, by comparing the stable financing available with the stable financing required.

Leverage ratio

Independent of risk weighting, the leverage ratio (minimum 3 %) limits the institution's overall indebtedness. It acts as a safety net against the shortcomings of risk-weighting models, the limitations of which were revealed by the 2008 crisis.

The risk division

Article 395 of the CRR limits large exposures: exposure to a single client or group of related clients may not exceed 25 % shareholders' equity eligible. A risk is classified as «large risk» as soon as it reaches 10 % of equity capital.

Internal control

The Order of 3 November 2014 on the internal control of credit institutions organises a system structured around four pillars: permanent control, periodic control, compliance and risk management. Systemically important institutions must also have a separate risk committee and audit committee.

Banking resolution: anticipating default

The prudential framework is not limited to prevention. The BRRD Directive (2014/59/EU), transposed into French law, and the MRU Regulation (806/2014) organise the resolution of credit institutions in difficulty. The aim is to prevent the failure of one institution from destabilising the entire financial system, without resorting to public funds.

Resolution tools include divestment of activities, bridging institutions, asset segregation and internal refloating (bail-in), which requires shareholders and creditors to absorb losses before any public support is provided. The requirements of MREL (Minimum Requirement for own funds and Eligible Liabilities) ensure that each facility has a sufficiently absorbable «mattress».

Liability of credit institutions

Duty to inform, warn and advise

Banking liability is based on a gradation of obligations, the intensity of which varies according to the transaction and the customer's qualification:

• Le duty to inform General obligation to provide information on the characteristics of the product or service; ;
• Le duty to warn To alert uninformed borrowers to the risks of excessive debt. The founding decision dates back to the mixed chamber of the Court of Cassation (29 June 2007, no. 06-11.673); ;
• Le duty to advise Recommend a solution tailored to the customer's personal situation, particularly for complex products.

Whether or not the borrower is informed is a determining factor. For legal entities, it is assessed in the person of the company itself (Cass. com., 11 April 2018, no. 15-27.133).

The principle of non-interference

It is not the banker's job to check the validity of his customers' transactions. This principle of non-interference finds its limit in the duty of vigilance: faced with an apparent anomaly, the banker cannot look the other way.

Frequently asked questions

What is a credit institution?

A credit institution is a legal entity authorised by the ECB (on a proposal from the ACPR) whose business is to receive repayable funds from the public and to grant loans on its own behalf (art. L. 511-1 CMF). These include universal banks, cooperative banks and municipal credit banks.

What is the difference between a credit institution and a finance company?

A finance company may grant credit but may not receive deposits from the public. They are authorised by the ACPR (not the ECB) and do not benefit from the European passport. Credit institutions, on the other hand, combine the two activities and are subject to European supervision.

How do I obtain banking authorisation?

The application is submitted to the ACPR, which checks the capital requirements (1 to 5 million euros), the good repute of the directors, the programme of operations and the technical resources. If the application complies, the ACPR proposes authorisation to the ECB. The processing time is six months, extendable by six months.

What are the main prudential rules?

Credit institutions are subject to the Basel III requirements: solvency ratio (minimum 8 %, including 4.5 % in CET1), liquidity ratios (LCR and NSFR), leverage ratio (minimum 3 %), division of risks (maximum 25 % per counterparty) and governance and internal control obligations.

Who supervises credit institutions in France?

The ECB directly supervises large institutions via the Single Supervisory Mechanism. The ACPR supervises less significant institutions and retains responsibility for consumer protection and the fight against money laundering. The HCSF oversees global financial stability.

Does illegal practice of banking invalidate contracts?

No. The Court of Cassation has consistently ruled that failure to obtain authorisation, while constituting a criminal offence (art. L. 571-3 CMF), does not invalidate contracts entered into by the unauthorised institution (Cass. com., 15 June 2022, no. 20-22.160). Cancelling the contract would be tantamount to punishing the customer, whom the legislation is designed to protect.

The law governing credit institutions is at the crossroads of national law and European regulations. Approval, supervision, prudential ratios, resolution: each stage in the life of an institution is governed by rules whose increasing technicality requires appropriate legal support. If you are facing a dispute involving a credit institution - banking liability, challenges to commercial practices, prudential litigation - our firm can act before all the courts and tribunals. courts with jurisdiction in banking law.

Sources

• Monetary and Financial Code, articles L. 511-1 to L. 511-15 (definition, approval, withdrawal)
• Article L. 511-5 CMF (banking monopoly)
• Article L. 511-41 CMF (prudential rules)
• Regulation (EU) No 575/2013 (CRR) - prudential requirements
• Directive 2013/36/EU (CRD IV) - access to the activity
• Regulation (EU) no 1024/2013 - Single Oversight Mechanism
• Order no. 2013-544 of 27 June 2013 on credit institutions and finance companies
• Order of 3 November 2014 on internal control
• Cass. ass. pl., 4 March 2005, no. 03-11.725
• Cass. ch. mixte, 29 June 2007, no. 06-11.673 (duty to warn)
• Cass. com. 11 April 2018, no. 15-27.133 (informed borrower - legal entity)
• Cass. com. 15 June 2022, no. 20-22.160 (lack of approval and validity of contracts)