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The reform addresses the separation of financing activities and customer services from proprietary trading activities; introduces a strengthened supervisory framework, including, critically, bail-in and other resolution powers; and provides for other consumer protection measures, such as caps on retail bank fees for certain customer transactions and increased protection of over-indebted consumers.
Since France is one of the few European countries to have put in place bail-in measures in advance of the implementation of the European Recovery and Resolution Directive (“RRD”), this memorandum focuses on the recovery and resolution aspects of the reform.
Bail-in and Other Resolution Powers
The French banking regulator ACP is being renamed ACPR, standing for Autorité de Contrôle Prudentiel “et de Résolution”. The ACPR is charged with supervising and implementing measures for the prevention and resolution of banking crises. It is given very broad powers with respect to “failing banks”, as discussed below. The ACPR is entitled to use any of its powers “in a proportionate manner” to achieve the following objectives: (i) to preserve financial stability, (ii) to ensure the continuity of banking activities, services and transactions of financial institutions, the failure of which would have systemic implications for the French economy, (iii) to protect deposits and (iv) to avoid, or limit to the fullest extent possible, any public bail-out.
The new law provides for the following resolution powers:
Failing Banks
Failing banks are defined in the law as those that, currently or in the near future (i) no longer comply with regulatory capital requirements, (ii) are not able to make payments that are, or will be imminently, due, or (iii) require extraordinary public financial support. Resolution measures can be applied by the ACPR if the bank's failure cannot otherwise be avoided within a reasonable timeframe.
QFCs
In addition to the temporary suspension of the exercise of any acceleration, termination or close-out of QFCs, as explained above, the French banking reform provides that a QFC entered into with a failing institution may only be transferred in its entirety (that is, no cherry-picking) and that no acceleration, termination or close-out netting of a QFC is permitted as a result of a resolution measure, except where such measure orders the transfer of assets which do not include the QFC in question.
Living Wills and Resolution Plans
Recovery and resolution plans are required of credit institutions (and financial investment firms), or groups of credit institutions (and financial investment firms), whose balance sheet exceeds a certain threshold that will be fixed by a decree of the French Government. Each such bank or banking group must prepare a recovery plan that will be reviewed by the ACPR. The ACPR is in turn required to prepare a resolution plan for such bank or banking group.
Deposit Guarantee and Resolution Fund (“FGDR”)
The existing deposit guarantee fund is being renamed FGDR, standing for the Fonds de Garantie des Dépôts “et de Résolution”. It is expected to be funded by contributions of up to €10 billion by 2020 which, according to the French Government, will be financed by the financial and banking sector. The FGDR is granted powers to, upon instructions from the ACPR, acquire all or part of the shares of a failing bank, to subscribe to shares in a bridge bank and to support the financing of a failing or bridge bank (including by granting guarantees). Payments made by the FGDR in this context are entitled to “new money priority” (the French equivalent of DIP financing).