France: Regulatory Ratios Applicable To The French Banking Sector

Last Updated: 31 May 1995

REGULATORY RATIOS APPLICABLE TO THE FRENCH BANKING SECTOR

According to the provisions of the French Banking Act (dated 24th January 1984), "credit institutions shall be required, subject to conditions laid down by the "Comite de la Reglementation Bancaire", to observe management standards designed to safeguard their liquidity and solvency in relation to depositors and, more generally, third parties, and the balance of their financial structure. They must in particular observe risk-asset and risk-diversification ratios" (art.51).

Enforced by the Banking Act or by specific regulations, the main ratios applicable to French banks are the following : the French solvency ratio; the risk ratios including the risk-division, the monitoring of interbank counterparty risks and the monitoring of foreign exchange positions ratios; the liquidity ratio; and the equity and long term resources ratio.

These ratios will be described here, after defining the equity that is used in their calculation.


THE REGULATORY DEFINITION OF EQUITY

A definition of equity is set out in regulation CRB nr. 90-02. This definition is applicable to the calculation of all prudential ratios, except the equity and long term resources ratio.

The total equity shall comprise the sum of what is called "basic" equity, as defined in the aforementioned regulation, and "supplementary" equity, within certain limits, after deduction of equity holdings in financial institutions and subordinated claims.

The basic equity:-

The basic equity includes the following items (added or deducted, depending on whether they are credits or debits): the capital (after deduction of unpaid capital); the legal reserve, statutory reserves, and reserves other than re-evaluation reserves; the paid-in capital; the unappropriated retained earnings; the net income for the period, verified by the auditors; the general reserve for banking risks.

Moreover, when calculated on a consolidated basis, the equity shall include : the goodwill; the difference on securities consolidated by the equity method; the foreign exchange translation differences; the minority interests.

Lastly, the treasury stocks held by the bank as well as the intangible assets (including the start-up costs) shall necessarily be deducted from the net "basic" equity.

The supplementary equity:-

Included in this category are :

- the re-evaluation reserves and differences, resulting from legal or regulatory re-evaluations.

- certain items that can be freely used by the bank to cover losses, not yet identified, related to normal banking activity, provided that they are booked in the bank's accounts and that their amount is set by the bank's management and checked by auditors. Falling into this category : fully mutualised guarantee funds; other guarantee funds and public funds allocated to cover credit risks (limited to 8% of the risk-weighted assets they cover); non-repayable public or private subsidies; reserves related to leasing operations.

- "hybrid instruments", i.e. funds deriving from the issue of securities of indeterminate duration or from loans meeting certain conditions (including the fact that they can only be repaid on the initiative of the borrower, the latter has an option to defer the interest payment, and that the lender's claim is subordinated).

- subordinated term debts.

The supplementary equity can be taken into account within a limit of 100% of basic equity. Moreover, an additional limit is set on the subordinated term debts, that should not exceed 50% of basic equity.

Deduction of equity holdings and subordinated claims:-

The subordinated claims and the equity holdings in financial institutions shall be deducted from the equity.

For the equity holdings exceeding 10% of the owned financial institution's capital or giving a significant influence over the institution, the total amount should be deducted. For the other shareholdings, only the amount exceeding 10% of the parent company's equity (before the said deduction) shall be deducted.


THE FRENCH SOLVENCY RATIO

Regulation CRB 91-05 stipulates that "credit institutions and securities houses ... shall observe at all times a solvency ratio (amount of their equity expressed as a proportion of their aggregate credit risk exposure as a result of their operations) of not less than 8%".

This ratio shall be reported to the Commission Bancaire twice a year. It shall necessarily be computed on a consolidated basis, whenever the institution controls or has a significant influence over one or more financial institutions.

The denominator of the ratio includes all on-balance-sheet assets and off-balance-sheet commitments given. These items must be risk-weighted according to three series of criteria :

1) their nature :

A simple weighting shall be directly applied to the on-balance-sheet items.

For the interest rate and foreign exchange off-balance-sheet commitments, the instruments should be :

- first revalued, either by calculating their market value plus a fixed percentage of their notional amount, or by taking into account their initial risk in applying a fixed percentage to their notional amount (from 0.5% to 1% for the interest rate instruments, and from 2% to 5% for the FX instruments);

- then weighted according to the counterparty.
For the other off-balance-sheet-commitments, the amounts are :
- first weighted according to the risk related to the type of commitment (for instance 0% for unutilised overdraft facilities, 20% for documentary credits),
- then weighted according to the counterparty.

2) the nature of the counterparty : central governments and central banks; institutions of the European Community; regional or local governments; credit institutions; clients.

3) the geographical area : OECD and the rest of the world.

The risk-weightings for the various combinations of the above-mentioned criteria are 0%, 20%, 50% and 100%.

The Cooke ratio is applicable in France to the institutions having significant international operations. Although some discrepancies with the French solvency ratio exist, they tend to disappear progressively, so that their computation becomes more and more consistent.


THE RISK RATIOS

The risk-division ratio (CRB 84-08)

All credit institutions shall maintain at all times, and report quarterly to the Commission Bancaire :

- a maximum ratio of 40% between their overall exposure per beneficiary and their equity;
- a maximum ratio of 800% between the aggregate of their large exposures (i.e. where the exposure on a single client exceeds 15% of equity) and their equity.

These ratios shall be computed on a consolidated basis. The notion of "beneficiary" shall be construed as a counterparty or a group of counterparties, whenever there is a control over other entities. The exposure includes the risks over clients and foreign financial institutions, and covers credits, leasing, securities transactions, and off-balance-sheet commitments. It is a weighted exposure, where the weightings vary depending on the type of transactions and counterparties.

The monitoring of interbank counterparty risks (CRB 90-07)

All banks shall set up a monitoring system for interbank counterparty risks, including limits for each banking counterparty in relation to their equity.

No formal ratio or reporting requirement is set up by this regulation. However, the banks shall provide the Commission Bancaire, upon request, with their largest off-balance-sheet and on-balance-sheet exposures, and, if applicable, all excess over their internal limits.

The monitoring of foreign exchange position (CRB 89-02)

The financial institutions shall observe at all times, and report quarterly to the Commission Bancaire:

- a maximum ratio of 15% between the weighted amount of their long or short position in each foreign currency and the amount of their net equity;
- a maximum ratio of 40% between the largest total weighted long or short positions in all currencies and the amount of their equity.

A 30% weighting shall be applied to the positions denominated in ECU or in an EMS currency, and 100% for the other currencies.


THE LIQUIDITY RATIO

The financial institutions shall observe a liquidity ratio, and several "observation ratios" reflecting their forecasted liquidity position (CRB 88-01), and report them quarterly to the Commission Bancaire. They can be calculated on a consolidated basis.

The liquidity ratio is the ratio between their short term and liquid weighted assets and their short term and exigible weighted debts, and should not be less than 100%. The treasury balance, as defined below, shall be added to the numerator when it is a debit and to the denominator in the opposite case. The treasury balance is defined as the sum of 100% of equity plus debit balances minus credit balances of certain weighted items including : cash, trading securities, demand and time accounts of less than one month of maturity, etc.

The liquid assets include credits (except those with an undetermined maturity), leasing, securities transactions (except own shares and investment securities), collection accounts and standby credits. The short term debts include demand and time deposits, savings accounts, notes and certificates of deposit, collection accounts, bonds issued, and certain off-balance-sheet commitments.

The observation ratios are calculated like the liquidity ratio (although some weightings are different), but for the assets and liabilities with a maturity respectively between 1 and 3 months, between 3 and 6 months, and between 6 and 12 months.


THE EQUITY AND LONG TERM RESOURCES RATIO

The financial institutions shall observe a minimum ratio of 60% between their equity and long term resources (with a maturity exceeding 5 years) and their long term assets (CRB 86-17). It should be noted that the definition of equity used in this calculation is different from the above-mentioned. This ratio is reported annually to the Commission Bancaire.

In conclusion, it can be noted that the main current issue relating to prudential ratios in France concerns the EC directive on market risks (EC 93/6). This directive sets capital adequacy rules in respect of capital markets risks undertaken, including "position" risk (variation in prices), delivery risk and foreign exchange risk. This directive has not yet been enforced into French banking regulations, but it should be done by the end of this year.

For more information, please contact Olivier Durand or Olivier Drion on (33) (1) 42 91 08 16.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions