Bank Regulatory Structure: France (Chapter Report, 08/31/95,
GAO/GGD-95-152).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-152
     TITLE:  Bank Regulatory Structure: France
      DATE:  08/31/95
   SUBJECT:  Financial institutions
             Banking regulation
             Banking law
             Bank management
             Foreign governments
             Bank examination
             Deposit funds
             Reporting requirements
             International economic relations
IDENTIFIER:  European Union
             France
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Honorable
Charles E.  Schumer
House of Representatives

August 1995

BANK REGULATORY STRUCTURE - FRANCE

GAO/GGD-95-152

French Bank Regulatory Structure

(233434)


Abbreviations
=============================================================== ABBREV

  AFB - Association Franï¿½aise des Banques (French Bank Association)
  AFEC - Association Franï¿½aise des ï¿½tablissements de Crï¿½dit
     (Association of French Credit Institutions)
  BAFI - Base de Donnï¿½es des Agents Financiers
  BIS - Bank for International Settlements
  CB - Commission Bancaire (Banking Commission)
  CCA - Commission de Contrï¿½le des Assurances (Insurance Control
     Commission)
  CEC - Comitï¿½ des ï¿½tablissements de Crï¿½dit (Credit Institutions
     Committee)
  CLAMEF - Comitï¿½ de Liaison des Autoritï¿½s Monï¿½taires et Financiï¿½res
  CNC - Conseil National de Crï¿½dit (National Credit Council)
  CNCC - Compagnie Nationale des Commissaires aux Comptes
  COB - Commission des Opï¿½rations de Bourse
  CRB - Comitï¿½ de la Rï¿½glementation Bancaire (Bank Regulatory
     Committee)
  EDP - Electronic Data Processing
  EU - European Union
  MATIF - Marchï¿½ ï¿½ Terme International de France
  SBF - Sociï¿½tï¿½ des Bourses Franï¿½aises

Letter
=============================================================== LETTER


B-259977

August 31, 1995

The Honorable Charles E.  Schumer
House of Representatives

Dear Mr.  Schumer: 

Proposals to consolidate United States bank regulatory agencies have
raised questions about how other countries structure and carry out
their various bank regulation and central bank activities.  You asked
us to provide you with information about the structure and operations
of regulatory activities in several countries.  This report presents
the information you requested for France.  It describes the French
bank regulatory structure and its key participants, how that
structure functions, and how banks are examined in France. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies of
this report to Members of the House Committee on Banking and
Financial Services, other congressional committees, and other
interested parties.  We will also make copies available to others on
request. 

The report was prepared under the direction of Mark J.  Gillen,
Assistant Director, Financial Institutions and Markets Issues.  If
you have any questions, please call me on (202) 512-8678.  Other
major contributors are listed in appendix I. 

Sincerely yours,

James L.  Bothwell, Director
Financial Institutions
 and Markets Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Proposals to consolidate U.S.  bank regulatory agencies have raised
questions about how other countries structure and carry out their
various bank regulation and supervision and central bank activities. 
Representative Charles E.  Schumer asked GAO to provide information
about the structure and operations of such activities in several
countries.\1 This report presents the information requested for
France, where jurisdiction over the authorization, regulation, and
supervision of banks is divided among three different but
interrelated regulatory bodies called committees.  GAO's objectives
were to describe (1) the French bank regulatory and supervisory
structure and its key participants; (2) how that structure functions,
particularly with respect to bank authorization, regulation, and
supervision; (3) how banks are examined in France; and (4) how the
central bank handles other bank-related responsibilities. 


--------------------
\1 For information on GAO's reports on the German and British
regulatory systems, see Bank Regulatory Structure:  The Federal
Republic of Germany (GAO/GGD-94-134BR, May 9, 1994) and Bank
Regulatory Structure:  The United Kingdom (GAO/GGD-95-38, Dec.  29,
1994).  GAO is also preparing reports on the regulatory systems of
Canada and Japan. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

France has a universal banking system in which banks may conduct a
variety of activities, including insurance and securities business. 
In 1994, French banks were the leading participants in the French
securities industry and had gained about 50 percent of the French
life insurance market. 

As of December 31, 1993, there were 425 banks with 9.6 trillion
French francs (Fr.fr.) or $1.6 trillion in assets.\2 These banks
represent the largest component of the credit institution sector in
France, which also comprises more specialized credit institutions and
finance companies.\3 Altogether there were 1,674 credit institutions
conducting banking operations in France and Monaco on December 31,
1993, with approximately Fr.fr.  16 trillion, or $2.7 trillion, in
assets. 

From 1941 to 1984, the regulation of credit institutions in France
was quite fragmented, with banks being regulated separately from
other types of credit institutions.  By 1984 a consensus emerged
among policy makers that the regulatory system placed banks at a
competitive disadvantage compared to other types of credit
institutions in France.  Some of these institutions were becoming
strong and direct competitors of banks but were not thought to be
regulated as strictly or as comprehensively. 

Partly as a result of these perceived inequities and partly to
resolve jurisdictional questions among regulatory bodies, the French
Banking Act of 1984 (1984 Act) was passed to bring all financial
institutions deemed to conduct banking activities under the same
legal framework.  In addition to changing the structure of bank
supervision and regulation, the 1984 Act gave the bank supervisor
broader powers and a wider scope of authority than its predecessor. 

The banking industry in France also experienced some major changes in
the post-war era, including two waves of nationalizations and
privatizations in which the ownership of most banks was transferred
to the French government and later sold back to the private sector. 
In recent years, most nationalized banks--with the major exception of
France's largest bank, Crï¿½dit Lyonnais--have once more been
privatized.  The 1980s also brought an extensive liberalization of
restrictions on some banking and securities activities including the
lifting of credit restrictions and foreign exchange controls.  In
part, this liberalization resulted from financial services directives
passed by the European Union (EU), of which France is a member. 

The Bank of France, France's central bank, was established in 1800 as
a private bank and was nationalized in 1946.  In August 1993, it was
given legal independence in determining and implementing monetary
policy. 


--------------------
\2 GAO used the December 31, 1993, exchange rate of Fr.fr.  5.9 per
dollar. 

\3 French regulators have divided credit institutions into six
categories:  banks, mutual or cooperative banks, savings banks,
municipal credit banks, finance companies (including security
houses), and specialized financial institutions.  Throughout this
report, GAO is focusing its discussion on the banks, which are
comparable to commercial banks in the United States. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Since 1984, bank authorization, regulation, and supervision have been
divided among three legally independent but interrelated committees. 
The Comitï¿½ des ï¿½tablissements de Crï¿½dit, or the Credit Institutions
Committee (CEC), is responsible for authorizing and licensing credit
institutions, must approve any significant changes to a credit
institution's structure or ownership, and may disapprove of
management changes.  The Comitï¿½ de la Rï¿½glementation Bancaire, or the
Bank Regulatory Committee (CRB), is responsible for developing the
regulations applicable to credit institutions, which are then signed
into force by the Minister of Economic Affairs.  Finally, the
Commission Bancaire, or Banking Commission (CB), is responsible for
supervising all credit institutions authorized under the 1984 Act. 
It is to monitor the financial soundness of credit institutions and
enforce legal and regulatory requirements through a wide range of
enforcement actions.  In addition, given its jurisdiction over bank
supervision, CB is expected to provide technical assistance to the
other committees--particularly CRB.  Under this three-committee
structure, no single individual or agency controls decisionmaking in
the bank regulatory and supervisory process. 

Although there are three regulatory bodies with distinct
jurisdictions, the French regulatory and supervisory system is more
cohesive than it might first appear from the separation of
responsibilities.  According to Bank of France and CB officials,
responsibilities are often shared on a day-to-day basis among the
committees, and decisionmaking, particularly on issues of
significance, is generally collegial and involves coordination among
committee members and staffs.  The catalyst for the frequent
collaboration among the committees is the Bank of France.  By law,
the Governor of the Bank of France is the Chairman of both CEC and CB
and a member of CRB, and the staff for all three committees are drawn
from the Bank of France. 

The Minister of Economic Affairs also has an influential position in
bank regulation and supervision because he is the Chairman of CRB and
a member of CB and CEC; he appoints the independent members of all
three committees, and he must sign credit institution regulations for
them to become final.  However, the Governor of the Bank of France,
according to many French officials and bankers, appears to have a
somewhat greater position of power given (1) his authority as the
head of the central bank, (2) that his staff develops and proposes
actions to be taken by the three committees and implements committee
decisions, and (3) his statutory authority to request that the
banking industry contribute to resolving a crisis in the credit
institutions sector. 

Through "permanent" oversight and on-site inspection--or
examination--CB obtains information necessary to enforce compliance
with regulations and assess the financial condition of credit
institutions.  Permanent oversight is to be carried out by CB and
includes gathering and analyzing institutions' performance from
reports filed by the institutions, discussions with the managers, and
information provided by external auditors and other market sources. 
This permanent oversight is supplemented with full-scope, as well as
more limited, on-site inspections that are done for CB by Bank of
France inspectors. 

In addition to its role in bank regulation and supervision, the Bank
of France has responsibilities in other bank-related activities, such
as liquidity provision, crisis management, payments settlement,
international negotiations, and lender of last resort. 

The deposit protection system, which protects French franc deposits
up to Fr.fr.  400,000, is administered by the Association Franï¿½aise
des Banques (AFB), the French Bank Association, for its member banks. 
The deposit protection system is not an insurance fund, but is a
loss-sharing agreement among member banks that comes into effect once
a member institution has failed. 

   Figure 1:  Responsibility for
   Bank Regulatory and Related
   Functions in France

   (See figure in printed
   edition.)

\a CB and CEC staff often assist CRB in developing regulations. 

\b CRB proposes regulations that the Minister of Economic Affairs
signs into force. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      SUPERVISORY AND REGULATORY
      RESPONSIBILITIES ARE DIVIDED
      AMONG THREE INTERRELATED
      COMMITTEES STAFFED BY THE
      BANK OF FRANCE
-------------------------------------------------------- Chapter 0:4.1

The decisionmaking responsibilities for supervision and regulation of
credit institutions are divided among three different but
interrelated regulatory committees:  CEC for authorization, CRB for
regulation, and CB for supervision.  The rationale for this structure
was twofold.  First, the adoption of a committee structure was
intended to ensure that no single individual or agency controlled
decisions with respect to bank regulation and supervision, while at
the same time securing the participation of the major parties who had
an interest in bank regulation and supervision:  the Bank of France,
the Ministry of Economic Affairs, and the credit institutions
industry.  Second, the division of responsibilities among these
committees was to separate enforcement from regulation and licensing
in order to reduce potential for conflicts of interest. 

CEC, which is chaired by the Governor of the Bank of France and has
four independent members and a representative of the Ministry of
Economic Affairs, authorizes and licenses credit institutions.  In
authorizing an institution, CEC procedures require that it (1) assess
the proposed business program, (2) ensure that the institution's
capital meets or exceeds minimum requirements, (3) check that at
least two individuals are responsible for the institution's
management and that they have adequate integrity and experience, and
(4) assess the institution's technical and financial resources and
the suitability of its investors.  After authorization, CEC remains
responsible for approving any significant changes to a credit
institution's structure, ownership, scope of activities, and branch
structure within the EU; and it may disapprove of management changes. 

CRB is chaired by the Minister of Economic Affairs or his
representative and has four independent members and a representative
from the Bank of France.  It is to propose regulations for credit
institutions that, to become final, must be signed into force by the
Minister of Economic Affairs in his capacity as Minister, not as
Chairman of CRB.  The areas for which CRB may propose regulations
include (1) minimum capital levels, (2) prudential standards, (3)
ownership conditions, (4) branch openings, (5) bank equity
participations in other companies, (6) transaction requirements, (7)
accounting information, and (8) management standards.  According to
cognizant French regulatory officials, regulations are drafted in a
consultative process involving staff from CB, the Bank of France, the
Ministry of Economic Affairs and other interested government
agencies; representatives of the banking and accounting industries;
and other interested parties. 

CB is chaired by the Governor of the Bank of France and has four
independent members and a representative of the Ministry of Economic
Affairs.  CB is responsible for supervising credit institutions,
ensuring that credit institutions observe legal and regulatory
requirements, and monitoring the financial soundness of the
institutions.  If CB observes regulatory breaches or financial
irregularities, it is responsible for taking enforcement
actions--ranging from informal warnings to withdrawals of
authorization--to resolve any problems. 

The committees meet only to make decisions.  The preparation for
these decisions and their implementation are to be undertaken by Bank
of France personnel, who staff all three committees. 


      DAY-TO-DAY DIVISION OF
      RESPONSIBILITIES AMONG
      COMMITTEES IS NOT CLEAR-CUT: 
      BANK OF FRANCE STAFF PROVIDE
      LINK
-------------------------------------------------------- Chapter 0:4.2

While the division of responsibilities among CEC, CRB, and CB is
defined under law, the execution of these responsibilities by the
three committees and their staffs on a day-to-day basis is more
flexible.  Tasks within the jurisdiction of one committee may be
performed by Bank of France staff from one of the other committees. 
Decisionmaking was described to GAO by French officials as being
collegial in most cases, sometimes involving discussions among staff
of the Ministry of Economic Affairs, the Bank of France, and all
three committees.  There are a number of factors that the officials
said contribute to this sharing of day-to-day responsibilities:  (1)
CEC and CRB sometimes rely on CB for technical and other assistance;
(2) the Bank of France provides the staff for all three committees,
which creates a sense of cohesion, collaboration, and common goals;
(3) the Bank of France and the Ministry of Economic Affairs are
represented on all three committees; and (4) the individuals involved
in bank regulation tend to have similar educational and professional
backgrounds and are accustomed to working with each other. 


      THE BANK OF FRANCE AND THE
      MINISTRY OF ECONOMIC AFFAIRS
      HAVE INFLUENTIAL ROLES IN
      SUPERVISION AND REGULATION
-------------------------------------------------------- Chapter 0:4.3

The Bank of France and the Ministry of Economic Affairs clearly have
the most influential roles in the supervision and regulation of
credit institutions.  The Ministry's influence is derived primarily
from its chairmanship of CRB and its membership in CEC and CB as well
as from its position of power in the French Cabinet and its power to
approve regulations.  However, the Bank of France appears to have
greater day-to-day influence on bank supervision and regulation than
does the Ministry, stemming from (1) its chairmanship of CEC and CB;
(2) the fact that it staffs CEC, CRB, and CB; (3) its authority to
request assistance from financial institutions in a crisis; and (4)
its importance in and influence over French financial markets. 


      CB RELIES ON MANY SOURCES OF
      INFORMATION TO CARRY OUT ITS
      SUPERVISORY RESPONSIBILITIES
-------------------------------------------------------- Chapter 0:4.4

CB has available several sources of information to fulfill its
supervisory obligations, including detailed monthly reports by the
main credit institutions and quarterly reports by all others,
meetings with credit institutions, market information, and on-site
inspections--or examinations--conducted by Bank of France staff. 
Three kinds of bank inspections may be conducted:  (1) routine
inspections, (2) inspections that focus on perceived problems, and
(3) thematic inspections, for example, of real estate lending
activities.  The frequency of inspections depends on the cumulative
information available to CB about the bank and its risk profile and
control systems.  To date, CB's use of external auditors for
information on credit institutions has been limited, but senior CB
officials said that CB plans to increase its reliance on the
auditors' work to reduce the duplication of effort between the
auditors and CB. 


      THE BANK OF FRANCE HAS
      SEVERAL OTHER BANK-RELATED
      RESPONSIBILITIES
-------------------------------------------------------- Chapter 0:4.5

Bank of France officials said the Bank has several other bank-related
responsibilities. 

  The Bank of France is to determine and implement monetary policy
     with the goal of ensuring price stability, and also either is to
     act as lender of last resort or is to request other banks to do
     so. 

  The Governor of the Bank of France has a leading role in crisis
     management involving credit institutions.  The Governor has
     broad discretionary authority under the 1984 Act to request
     assistance from an institution's stockholders and the banking
     industry when an institution or the reputation of French
     financial markets is in danger. 

  The Bank of France has a major role in payments and settlements
     clearance systems through its legal responsibility to ensure
     "the smooth operation and security of payments systems."

  The Bank of France participates in developing French positions with
     respect to financial issues in several international
     organizations even though it takes the lead only on the Basle
     Committee on Bank Supervision.\4


--------------------
\4 The Basle Committee on Bank Supervision was created in 1974, under
the auspices of the Bank for International Settlements and is the
main forum for central bankers and supervisors to reach agreement on
how best to supervise international banks.  Its members meet several
times a year and consist of senior representatives of bank
supervisory authorities and central banks from 12 countries. 


      AFB ADMINISTERS THE DEPOSIT
      PROTECTION MECHANISM
-------------------------------------------------------- Chapter 0:4.6

AFB, to which all 425 French banks belong, administers the Solidarity
Mechanism (the Mechanism) that protects French franc deposits up to
Fr.fr.  400,000.  AFB members are required to belong to the Mechanism
and are required to contribute to the Mechanism after a member
institution's failure.  The amount assessed is based on a percentage
of the assessed bank's deposits, with a per-bank distribution that is
the same for banks of all sizes.  The Mechanism was intended to
protect deposits in smaller banks and, therefore, is subject to an
annual payout limit.  The handling of a larger bank failure would
have to be determined by the French government but has not yet been
necessary. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

Senior officials from the Bank of France, the Ministry of Economic
Affairs, CB, two French banking associations, and the French
auditors' association provided comments informally on a draft of this
report.  These comments were generally technical in nature and were
incorporated in the report where appropriate. 


INTRODUCTION
============================================================ Chapter 1

Changes in the structure of the financial regulatory and supervisory
system in France reflect the evolution of the post-war French
financial system.  As distinctions among different classes of
financial institutions began to fade, the regulatory structure was
altered to provide more even-handed treatment for all institutions
involved in banking activities.  Other post-war developments in the
French financial system included two rounds of nationalizations and
privatizations of French banks and a liberalization of credit and
exchange controls. 


   OVERVIEW OF FRENCH CREDIT
   INSTITUTIONS
---------------------------------------------------------- Chapter 1:1

France has a universal banking system in which banks may conduct
deposit, lending, discount, securities, safe custody, insurance and
real estate activities\1 either directly or through subsidiaries. 
Indeed, French banks are the leading players in the French securities
industry.  While banks may not underwrite insurance directly, they
may do so in subsidiaries and may sell insurance products in the
bank.  All of the major universal banks own insurance subsidiaries
that together constituted approximately 50 percent of the life
insurance market in 1994.  Banks may also invest in nonbanking,
commercial companies, but no single equity participation may exceed
15 percent of the bank's net capital, and total equity participations
in commercial enterprises may not exceed 60 percent of the bank's net
capital. 

As of December 31, 1993, there were 1,674 credit institutions
conducting banking operations in France and Monaco\2 holding
approximately Fr.fr.  16 trillion ($2.7 trillion)\3 in assets.  The
number of credit institutions is high relative to many other
developed countries, partly because the definition of banking and
credit institutions in French banking law is quite broad.\4 Credit
institutions in France are divided into six categories:  banks,
mutual or cooperative banks, savings banks, municipal credit banks,
finance companies (including security houses), and specialized
financial institutions (see table 1.1). 



                               Table 1.1
                
                French Credit Institutions, December 31,
                                  1993

                                       Percentag  Percentag  Percentag
                            Number of       e of       e of       e of
Type of credit             institutio   industry   industry   industry
institution                        ns   deposits      loans     assets
-------------------------  ----------  ---------  ---------  ---------
Banks                             425      46.6%      50.3%      59.6%
Mutual and cooperative            146       33.6       22.4       16.2
 banks
Savings banks                      35       18.7        4.8        5.8
Municipal credit banks             21        0.1        0.2        0.1
Finance companies\a             1,015        0.8        7.2       10.1
Specialized institutions           32        0.2       15.1        8.2
======================================================================
Total                         1,674\b     100.0%     100.0%     100.0%
----------------------------------------------------------------------
\a Includes 158 securities houses. 

\b Includes 25 institutions that had head offices in Monaco. 

Source:  French Banking Commission. 


--------------------
\1 Real estate and some other nonbank activities are limited to 10
percent of a bank's overall activity. 

\2 Since 1945, financial institutions in Monaco have been subject to
French banking law.  Twenty-five of the 1,675 credit institutions had
their home offices in Monaco. 

\3 We use the December 31, 1993, exchange rate of Fr.fr.  5.9 per
dollar. 

\4 Under French law, "banking operations comprise the receipt of
funds from the public, credit operations, and making available to
customers or managing means of payment." Institutions have only to
conduct one of these operations to qualify as credit institutions. 


      BANKS
-------------------------------------------------------- Chapter 1:1.1

Banks are the largest category of credit institutions in France and
may conduct any of the universal banking and financial transactions
permitted under banking law.  On December 31, 1993, as shown in table
1.1, the banking sector held almost 47 percent of the total deposits
of French credit institutions, slightly over 50 percent of total
loans, and almost 60 percent of credit institution assets--Fr.fr. 
9.6 trillion.  The number of banks in France has remained relatively
stable in the last half century--around 400 since 1950--with a few
large banks accounting for the majority of loans and deposits.  As of
December 31, 1993, there were 409 authorized banks in France and 16
banks with their head offices in Monaco.  The five largest banks\5
held over 63 percent of total bank-only deposits and close to 60
percent of total bank-only loans.  Ninety-nine of the 425 banks were
foreign-owned subsidiaries--of which 3 were in Monaco--and 90 were
foreign-owned branches--of which 6 were in Monaco.  Eighty-three of
the foreign banks in France--45 subsidiaries and 38 branches--were
headquartered in other European Union (EU) member countries.\6


--------------------
\5 Banque Nationale de Paris, Crï¿½dit Lyonnais, Sociï¿½tï¿½ Gï¿½nï¿½rale,
Paribas, and Indosuez.  These banks hold close to 30 percent of total
financial institution deposits and loans in France.  The three
largest banks are in a class of their own by reason of the size of
their French networks (each has 1,600 to 2,000 branches), the number
of staff they employ (33,000 to 43,000 in France alone), the
universal nature of their operations, and their international
presence. 

\6 On December 31, 1994, members of the EU were Belgium, Denmark,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, and the United Kingdom.  As of January 1, 1995,
three additional countries, Austria, Finland, and Sweden, joined the
EU. 


      MUTUAL AND COOPERATIVE BANKS
-------------------------------------------------------- Chapter 1:1.2

Mutual and cooperative banks are distinguished from banks primarily
by their ownership; they are owned by their members (depositors). 
They were established to provide credit to their members who belonged
to certain categories of businesses or individuals--farmers, for
example.  Mutual and cooperative banks may now conduct all the
operations and transactions that banks may, and the largest among
them--Crï¿½dit Agricole, which is the largest credit institution in
France--are difficult to distinguish from banks.  As of December 31,
1993, there were 146 mutual or cooperative banks with approximately
Fr.fr.  2.6 trillion in assets. 


      SAVINGS AND MUNICIPAL CREDIT
      BANKS
-------------------------------------------------------- Chapter 1:1.3

Savings banks and municipal credit banks, with few exceptions, are
locally owned, nonprofit institutions.  Until various reforms were
implemented in 1983 and 1984, the powers of savings banks were
restricted to offering passbook savings accounts to depositors and
investing their funds in the central savings bank--the Centre
National des Caisses d'Epargne et de Prï¿½voyance.  Today they are able
to offer more products and services, including mutual funds and
checking accounts; may invest in a wider variety of activities,
including cable television, tourism, education, health, and regional
planning; and may lend to corporations.  The savings banks--which
held about Fr.fr.  930 million in assets in 1993--purposefully
consolidated their numbers from 468 in 1984 to 35, as of December 31,
1993, in order to allow savings banks to benefit from certain
economies of scale. 

The bulk of the business of municipal credit banks, of which there
were 21 with Fr.fr.  15 million in assets as of year-end 1993,
consists of loans granted to the general public. 


      FINANCE COMPANIES
-------------------------------------------------------- Chapter 1:1.4

Finance companies are restricted to certain types of operations, such
as leasing, or specialize in the financing of a specific industry or
specific customers and may not receive deposits of less than 2 years
in maturity.  On December 31, 1993, there were 857 finance companies
providing 7.5 percent of the total credit provided by the French
banking system and holding Fr.fr.  1.6 trillion in assets. 

Securities houses, which specialize in the investment and management
of transferable securities and negotiable instruments, are included
in the finance company category.  On December 31, 1993, one-third of
the 156 securities houses in France were subsidiaries of foreign
finance institutions such as U.S.  investment banks. 


      SPECIALIZED FINANCIAL
      INSTITUTIONS
-------------------------------------------------------- Chapter 1:1.5

The 32 specialized financial institutions in France were set up by
the government to perform certain public interest tasks, such as
financing low- and moderate-income housing, providing long-term
credit for acquiring industrial equipment, or making financing
available to local authorities.  These institutions hold over Fr.fr. 
1.3 trillion in assets and provide over 15 percent of total credit
but collect less than 1 percent of total deposits. 


   HISTORY OF BANK REGULATION AND
   SUPERVISION IN FRANCE
---------------------------------------------------------- Chapter 1:2

The current French bank regulatory and supervisory structure was
created through legislation in July 1984 and consists of three
regulatory committees on which the Ministry of Economic Affairs\7 and
the Bank of France (France's central bank) are the most prominent
members.  Under this structure, all financial institutions that
conduct banking activities are subject to common prudential
requirements, regulation, and supervision.  In addition to
experiencing changes in the bank regulatory structure, French banks
also were subject to other major changes including two waves of
nationalizations in 1945 and 1982. 


--------------------
\7 Until 1992, the Ministry of Economic Affairs was known as the
Ministry of Economics, Finance and Budget.  Its name was changed to
Ministry of Economics and Finance in 1992.  In 1993, the name of the
Ministry was changed to its current title and its budget
responsibilities were transferred to a new ministry that deals with
budget, fiscal, and tax issues--the Ministry of the Budget. 


      PRE-1984 REGULATION AND
      SUPERVISION
-------------------------------------------------------- Chapter 1:2.1

Before 1984 the regulation of financial institutions was quite
fragmented.  From 1941 to 1945, banks were regulated and supervised
by two committees:  the Standing Committee of Banks, consisting of
six bankers and a government representative charged with enacting
regulation and taking supervisory measures concerning individual
institutions, and the Bank Control Commission, which was responsible
for enforcing bank regulations.  A banking act passed in 1945
replaced the Standing Committee with the Conseil National de
Crï¿½dit--National Credit Council (CNC)--with the regulatory
responsibilities remaining the same.  The Minister of Economics,
Finance and Budget chaired CNC, but CNC was staffed by the Bank of
France. 

Other categories of financial institutions, such as finance
companies, savings banks, or mutual and cooperative banks, were
regulated and supervised separately according to special law--in most
cases either directly or indirectly by the Treasury Department
(Treasury).  According to French officials, Treasury is the most
influential Department of the Ministry of Economic Affairs, then
known as the Ministry of Economics, Finance and Budget. 

According to Commission Bancaire (CB), the Banking Commission,
officials, by 1984 banks were widely considered to be at a
competitive disadvantage compared to other financial institutions as
a result of the split in regulatory responsibilities.  While
prudential regulations for banks had evolved with changes in
financial markets, laws and regulations governing institutions such
as mutual banks or savings banks remained less stringent.  At the
same time, these other institutions were expanding their activities,
thereby becoming direct and strong competitors of the banks. 


      THE FRENCH BANKING ACT OF
      1984
-------------------------------------------------------- Chapter 1:2.2

The French Banking Act of 1984 (1984 Act) was intended to settle
these regulatory inequities by placing all financial institutions
deemed to conduct broadly defined banking activities under the same
legal framework.  In addition, it aimed to resolve the sometimes
overlapping responsibilities of CNC and the Bank Control Commission
by separating bank regulation and supervision into three distinct
areas--authorization, regulation, and supervision--and giving
jurisdiction over each of these areas to three separate committees. 
Thus three new committees were created:  (1) the Comitï¿½ des
ï¿½tablissements de Crï¿½dit, the Credit Institutions Committee (CEC),
was given authority over authorization; (2) the Comitï¿½ de la
Rï¿½glementation Bancaire, the Bank Regulatory Committee (CRB),
received jurisdiction over most regulatory issues; and (3) CB was
made responsible for bank supervision, replacing the Bank Control
Commission.  The CNC was not eliminated but its authority was reduced
to a purely advisory one. 

The act also strengthened some supervisory weaknesses of the old Bank
Control Commission by giving CB broader powers and a wider scope of
authority.  First, CB was given authority for supervision of all
credit institutions.  Second, its powers were broadened by mandating
that it scrutinize credit institutions' operations and monitor their
financial standing as well as supervise their compliance with
regulations.  Finally, it was given the authority to inspect (1) bank
subsidiaries, (2) the legal bodies directly owning or controlling the
bank and their subsidiaries, and (3) overseas branches and
subsidiaries of French banks.  This increased authority allowed CB to
find and address perceived problems in credit institutions as a
whole. 

French credit institutions are regulated and supervised almost
exclusively to ensure the safety and soundness of individual banks
and of the system as a whole.  For example, French banking law does
not directly address such issues as fair lending practices or
community reinvestment requirements.\8


--------------------
\8 The French banking industry is expected to follow French banking
industry rules of conduct with respect to issues such as fair
lending.  Incentives to provide certain types of loans, such as
low-income housing loans, are provided more directly through
government subsidies, not through government regulation of private
institutions. 


      BANKS EXPERIENCED TWO WAVES
      OF NATIONALIZATIONS AS WELL
      AS FINANCIAL MARKET
      LIBERALIZATION
-------------------------------------------------------- Chapter 1:2.3

The French banking industry experienced some major changes in the
post-war era including two waves of nationalizations in which the
ownership of most banks was transferred to the French government. 
The first period of nationalization occurred shortly after the end of
the Second World War in 1945.  It was intended to prop up the ailing
banking industry and to give the French government the power to
direct credit to the industries that needed it in order to revive the
post-war economy. 

At the same time, the Bank of France, which had been established in
1800 as a private bank at the instigation of Napoleon Bonaparte and,
beginning in 1803, was granted the right to issue banknotes, was also
nationalized.  The Nationalization Act of 1945 transferred the Bank
of France's capital to the State effective on January 1, 1946, and
reimbursed the Bank's previous shareholders with 20-year bonds. 

With the exception of the Bank of France, the banks nationalized in
1945 were gradually privatized by the end of the 1970s under
conservative French governments.  The second wave of nationalizations
occurred in 1982 through 1983 after the election of a Socialist
president and a Socialist Assemblï¿½e Nationale, National Assembly, in
1981.  This return of bank ownership to the government was justified
by the ruling party as a part of its political program to promote the
financing of small- and medium-sized businesses and a stronger
industrial policy.  These nationalizations were followed by a
privatization program implemented by a Conservative government in
1986, which stalled for several years after the election of another
Socialist government in 1988.  In recent years, however, the election
of a Conservative National Assembly has once more prompted a series
of privatizations, and the vast majority of French banks are now in
private hands.  To date, Crï¿½dit Lyonnais, the country's largest bank,
remains the only large nationalized bank, although there are also a
handful of smaller nationalized banks.  There are plans that these
remaining nationalized banks be privatized within the next five years
since both the Socialist and Conservative parties now agree that
having nationalized banks conflicts with the premise of a free market
that is one of the cornerstones of the EU.  For example, Crï¿½dit
Lyonnais--which lost
Fr.fr.  6.9 billion in 1993, principally as a result of poor
commercial and real estate investments--benefited from a Fr.fr.  4.9
billion bailout in July 1994, raising questions about the role the
government plays as the owner of the largest French bank and the
effect that has on competition in the French banking industry.\9

The 1980s also brought an extensive liberalization of restrictions on
some banking and securities activities.  Credit restrictions--credit
ceilings and interest rate controls--were completely removed by 1987. 
Foreign exchange controls were eliminated in 1989.  Deposit interest
rates have been decontrolled, although paying interest on demand
deposits held by residents is prohibited by French law to allow banks
to maintain free checking services.  Securities commissions and fees
were also deregulated and new markets, such as the Marchï¿½ ï¿½ Terme
International de France (MATIF)--the French financial futures
market--and the short- and medium-term notes markets, have been
organized. 

Overlaying these events has been the development of a unified
financial services market in the EU, which has also affected French
bank regulation and supervision.  Central to the liberalization of
financial services under the EU's Single Market Program\10 is the
concept of a "single passport," a concept which the French have been
influential in helping to develop.  Once a financial firm is
established and licensed in one EU member country--its home
country--that firm can use a single passport to offer financial
services in any other EU member state--its host country.  Underlying
the single market program is an understanding that a minimum level of
harmonization in regulation is necessary among the member countries
to ensure the safety and soundness of the financial system.  For
instance, the EU Second Banking Directive requires all EU banks to
have a minimum capital base and a minimum level of shareholder
disclosure and limits equity participation in nonfinancial firms. 
Consequently, EU member countries have had to change their banking
laws and regulations as necessary to meet the minimum requirements
imposed by EU financial services directives.  To date, EU directives
have not resulted in major changes to the structure of bank
regulation and supervision in France. 

The recent independence of the Bank of France is, however, a result
of an EU mandate in the Treaty on European Union that all EU member
countries have independent central banks.  As a result of this
mandate, the purpose and structure of the Bank of France were
redefined in the 1993 Act on the Status of the Banque de France and
the Activities and Supervision of Credit Institutions (the 1993 Act). 
This act made the Bank of France independent of the Ministry of
Economic Affairs in formulating and implementing monetary policy.  As
a result, the Bank of France "shall neither seek nor accept
instructions from the Government or any other person in the
performance of its duties" with respect to monetary policy.  Before
the passage of the 1993 Act, the government determined monetary
policy, which the Bank of France was in charge of implementing. 


--------------------
\9 Further losses of Fr.fr.  12 billion in 1994 and a second
government rescue plan in 1995 involving a multi-billion franc
government guarantee of some of Crï¿½dit Lyonnais' debts, raised
additional complaints by two large French banks that the proposed aid
package strengthened the position of Crï¿½dit Lyonnais compared with
other banks in a way capable of distorting competition. 

\10 For additional information about the Single Market Program, see
European Community:  U.S.  Financial Services' Competitiveness Under
the Single Market Program (GAO/NSIAD-90-99, May 21, 1990). 


   SUPERVISION OF BANKS'
   SECURITIES AND INSURANCE
   ACTIVITIES
---------------------------------------------------------- Chapter 1:3

Securities activities may be conducted within the banks or other
credit institutions or in separate subsidiaries.  CB is responsible
for the supervision of these activities when securities activities
are conducted within the bank or in separate maison de titres
subsidiaries, of which there were 26 on December 31, 1994.  When
securities activities are conducted in sociï¿½tï¿½ de bourses
subsidiaries, of which there were 54 at year-end 1994, these are
supervised by the Conseil des Bourses de Valeurs, the regulator of
the French stock exchange, and the Sociï¿½tï¿½ des Bourses Franï¿½aises
(SBF), which runs the day-to-day operation of the stock market.\11 In
either case, CB is responsible for the supervision of the parent bank
and the consolidated entity.  Under banking law, it may also inspect
all of the subsidiaries of a bank, even when these are supervised by
another supervisory authority.  In practice, however, it relies on
information provided by the supervising authority rather than on the
imposition of its jurisdiction. 

All insurance activities are supervised by the Commission de Contrï¿½le
des Assurances, the Insurance Control Commission (CCA), which is
headed by the Ministry of Economic Affairs.  If an insurance company
is a subsidiary of a bank, then CB is responsible for the
consolidated entity, but CCA supervises the insurance subsidiary.  If
an insurance company owns a bank, then CCA supervises the
consolidated entity, but CB supervises the bank subsidiary. 

According to CB officials, coordination and cooperation between
supervisory authorities have grown steadily stronger in recent years
in response to the development of financial conglomerates and the
increasingly global nature of financial activities.  In 1992, for
example, secrecy restrictions were lifted between CB and CCA.  As a
result, periodic meetings now take place between CB and CCA to (1)
discuss the situation of individual institutions or financial groups
of concern to both authorities, (2) exchange views on problems of
common general interest, such as the supervision of financial
conglomerates and the transposition\12 of EU directives, and (3)
promote mutual understanding of risk evaluation methods and
supervisory techniques. 

In addition, the regulators of all financial institutions and markets
meet as a group three or four times a year at the Treasury, according
to Treasury, CB, and Bank of France officials, to exchange
information on the institutions for which they are primarily
responsible and on financial markets in general.  This informal
group, called the Comitï¿½ de Liaison des Autoritï¿½s Monï¿½taires et
Financiï¿½res (CLAMEF), includes the heads of its member
organizations.\13 In addition, a group called mini-CLAMEF, consisting
of lower rank individuals from each of the member groups, meets every
month to discuss financial market issues of concern and interest. 


--------------------
\11 Maisons de titres and sociï¿½tï¿½s de bourses may both conduct
securities activities; the major difference between the two is that
maisons de titres are credit establishments and supervised by CB.  In
addition, sociï¿½tï¿½s de bourses may not underwrite securities.  Most
sociï¿½tï¿½s de bourses belong to banks as a result of consolidation in
the financial services industry. 

\12 The process of changing national laws and regulations to meet the
minimum requirements imposed by EU directives. 

\13 The members include the Treasury, Commission des Opï¿½rations de
Bourse (COB); MATIF; Conseil des Bourses de Valeurs, the
self-regulatory organization covering the seven French stock
exchanges; SBF; CCA; and the Bank of France. 


   OVERVIEW OF PARTICIPANTS IN
   FRENCH BANK AUTHORIZATION,
   REGULATION, AND SUPERVISION
---------------------------------------------------------- Chapter 1:4

Regulation, supervision, and examination of banks in France is shared
among several regulatory participants, some more influential than
others.  These include CNC; the three regulatory committees that have
responsibilities over authorizing, regulating, and supervising credit
institutions; the Bank of France; and the Ministry of Economic
Affairs. 


      CNC IS AN ADVISORY BODY
-------------------------------------------------------- Chapter 1:4.1

Although CNC was initially created in 1945, its structure and purpose
were changed in the 1984 Act, and its function is now purely
advisory.  It is primarily a forum for studies on issues relevant to
credit institutions and the economy.  The Minister of Economic
Affairs is CNC's Chairman, and the Governor of the Bank of France is
its Deputy Chairman.  In addition to these two individuals, CNC has
51 members appointed by the Minister of Economic Affairs.  These
members are to be drawn from the government, Parliament, credit
institutions, professional and consumers' organizations, and trade
unions, and include other professionals chosen for their competence
in banking and financial matters. 


      CEC IS RESPONSIBLE FOR
      AUTHORIZATION
-------------------------------------------------------- Chapter 1:4.2

CEC, an independent regulatory committee, authorizes individual
credit institutions to conduct banking activities as defined in the
1984 Act.  CEC's membership consists of the Governor of the Bank of
France, who acts as its Chairman; the Director of the Treasury; and
four other members chosen from CNC membership and appointed by the
Minister of Economic Affairs for 3-year terms.  These four members
include a representative of the Association Franï¿½aise des
ï¿½tablissements de Crï¿½dit (AFEC), the French Association of Credit
Institutions; a representative of the trade unions for credit
institution employees; and two prominent individuals chosen for their
knowledge of financial issues. 

Decisions of CEC are made by majority vote, with the Chairman having
the deciding vote in case of a tie.  In addition to CEC members, the
association representing the credit institution about which a
decision is being made is represented during the meeting and has a
vote in any decision affecting that institution.  The Director of the
Treasury may request a postponement of any decision of CEC. 

The Secretariat of CEC is staffed by approximately 60 staff who work
in the credit institutions directorate of the Bank of France. 


      CRB IS RESPONSIBLE FOR
      REGULATION
-------------------------------------------------------- Chapter 1:4.3

CRB, which is an independent committee, is responsible for developing
regulations applicable to all credit institutions.  CRB has six
members including the Minister of Economic Affairs, who is its
Chairman; the Governor of the Bank of France; and four other members
chosen from CNC membership, who are appointed by the Minister of
Economic Affairs for 3-year terms.  Similar to CEC, these members are
to include representatives of AFEC and the trade unions, and two
prominent individuals chosen for their knowledge of financial issues. 
Decisions of CRB are made by majority vote, with the Chairman having
the deciding vote in case of a tie. 

A two-person Secretariat of CRB is provided by the Bank of France. 
According to Bank of France and CB officials, the Secretariat works
closely with the Banking Division of the Treasury, whose Director is
president of the committee.  The Bank of France also provides staff
from its Credit Institutions Directorate and from the General
Secretariat of CB to assist CRB when necessary. 


      CB IS RESPONSIBLE FOR
      SUPERVISION
-------------------------------------------------------- Chapter 1:4.4

CB is a six-member independent committee, which has the
responsibility for supervising credit institutions in France.  It is
chaired by the Governor of the Bank of France and its membership
includes the Director of the Treasury, who acts as its chairman, and
four other members appointed by the Minister of Economic Affairs for
6-year terms.  These four members are two senior judges and two
members chosen for their expertise in banking and financial matters. 
In case of a tie vote, the Chairman has the deciding vote. 

The Bank of France currently provides the staff and resources for the
General Secretariat of CB.  An amendment to the 1984 Act also gives
the General Secretariat the authority to hire staff outside the Bank
of France, although this provision has not yet been used. 

The General Secretariat of CB is divided into two divisions (1) micro
supervision, responsible for permanent oversight of individual
banks--but not including examination--and (2) macro supervision,
responsible for legal affairs, international affairs, European
affairs, banking analysis, accounting and reporting, and information
technology.  These divisions share approximately 230 staff who are
located in Paris.  In addition, CB is assisted by 95 Bank of France
inspection staff who conduct credit institution inspections for CB. 


      THE BANK OF FRANCE
-------------------------------------------------------- Chapter 1:4.5

The Bank of France is managed by a Governor, who is assisted by two
Deputy Governors.  All three are appointed by a decree of the French
Cabinet for irrevocable 6-year terms, which may be renewed once.  The
Bank's responsibilities include (1) issuing legal tender, (2)
determining and implementing monetary policy, (3) regulating the
relationship between the French franc and foreign currencies, (4)
ensuring the proper functioning of the banking and payments systems,
(5) keeping treasury accounts and managing treasury bills and similar
obligations, and (6) monitoring the state of the economy and the
health of business enterprises. 

In August 1993, in the Bank of France Act of 1993, the Bank of France
was given complete independence in determining and implementing
monetary policy; and the terms of the Governor, Deputy Governors, and
the members of the Monetary Policy Council were made irrevocable. 
The Bank of France is required, though, to carry out its duties
"within the framework of the government's overall economic policy"
without this requirement affecting its independence.  In practice,
the government can communicate its point of view to the Monetary
Policy Council through the Prime Minister or the Minister of Economic
Affairs, as both are entitled to attend the Monetary Policy Council
meetings but do not have voting privileges.  This facilitates direct
dialogue between the government and the monetary authority. 

The Bank of France has two governing bodies--the Monetary Policy
Council and the General Council.  The Monetary Policy Council was
created by the 1993 Bank of France Act to formulate monetary policy,
which is then implemented by the Governor.  The Council has nine
members:  the Governor, who chairs the Council and who has the
deciding vote in case of ties; the two Deputy Governors; and six
other members.  These members are appointed by a decree of the
Cabinet from a list drawn up by mutual consent or, failing that, in
equal parts by the President of the Senate, the President of the
National Assembly, and the President of the Economic and Social
Council.  The six appointed members have 9-year, nonrenewable,
irrevocable terms. 

The General Council is responsible for administering the Bank of
France and meets approximately every 2 weeks.  It is headed by the
Governor and comprises the members of the Monetary Policy Council and
a representative of the Bank of France staff.  The General Council
prepares the Bank's estimated expenditures, draws up its annual
accounts, and proposes the distribution of profits and the amount of
the Bank's dividend to be paid to the government.  A Censor,
appointed by the Minister of Economic Affairs, is to attend the
meetings of the General Council and may submit proposals for the
consideration of the Council and may also oppose decisions of the
Council.  Among other things, the presence of the Censor allows the
government to follow the Bank's budgetary process.  In practice, the
General Council exercises little independent authority vis-a-vis the
Governor, according to Bank of France officials with whom we spoke. 

As noted above, the Bank of France was nationalized in 1946, and its
stock is held by the Treasury.  It is required to pay annual
dividends to the Treasury, but these dividends vary from year to
year, depending on the Bank's profits, and are not based on any
specific formula. 

The Bank of France performs its tasks through 9 directorates general
and its network of 211 branches.  It had 15,065 "banking" staff as of
December 31, 1993, plus 1,997 staff employed in its bank note
printing department.  Fifty-seven percent of its banking staff were
employed in the Bank's branches.  These branches are used for various
activities including note and coin circulation, studying and
reporting on the local economy, and meetings to solve
over-indebtedness problems of individuals. 


      THE MINISTRY OF ECONOMIC
      AFFAIRS
-------------------------------------------------------- Chapter 1:4.6

The Ministry of Economic Affairs is considered to be the most
powerful government ministry, according to French officials with whom
we spoke.  It is headed by the Minister of Economic Affairs, a
political appointee, who is part of the government's cabinet.  The
Ministry has three main functions:  to (1) promote economic growth in
France and formulate market regulations; (2) observe the state of the
French economy and forecast its evolution; and (3) manage public
finances. 

Within the Ministry, the Trï¿½sor, the Treasury, is the most important
department.  It is headed by the Director of the Treasury, who is a
civil servant, not a political appointee.  Within the Treasury, the
Division of Banking Regulation and National Banks is responsible for
fulfilling the Ministry's responsibilities with respect to bank
regulation and supervision.  Because the Banking Division has a
relatively small staff of 12, it relies on other agencies to gather
the data that it needs to conduct its work. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

At the request of Congressman Charles E.  Schumer, we examined
various aspects of the French bank regulatory and supervisory system. 
Specifically, our objectives were to describe (1) the French bank
regulatory and supervisory structure and its key participants; (2)
how that structure functions, particularly with respect to bank
authorization, regulation, and supervision; (3) how banks are
examined in France; and (4) how the Central Bank handles other
bank-related activities.  We completed similar studies on the bank
regulatory and supervisory structures in the Federal Republic of
Germany\14 and the United Kingdom\15 and are currently performing
studies of the systems in Canada and Japan. 

In preparing this report, we carried out interviews with senior
officials from CB, CRB, CEC, the Treasury, and the Bank of France. 
They also provided us with various documents and statistics including
three volumes of statistics that banks submit to CB; annual reports
of the Bank of France, CB, CEC and CRB; and selected banking
regulations. 

In addition to our interviews with those responsible for bank
regulation and supervision, we met with senior representatives of the
Association Franï¿½aise des Banques, the French Bank Association (AFB),
and AFEC; several senior executives at French banks; senior
executives from external auditing firms and from the Compagnie
Nationale des Commissaires aux Comptes (CNCC), the association
representing accountants in France, which is responsible for setting
standards for annual audits of French corporations, including banks;
as well as several other individuals expert on French bank regulation
and supervision and the auditing of banks in France. 

Finally, we reviewed translations of the 1984 Act, the law that
relates most directly to bank regulation and supervision in France,
and the Bank of France Act of 1993.  This review does not constitute
a formal legal opinion on the requirements of either law, however. 

We conducted our review, which included three visits to France, from
September 1994 through March 1995 in accordance with generally
accepted government auditing standards. 

We gave senior officials of the Bank of France, the Ministry of
Economic Affairs, CB, AFB, AFEC, and CNCC a draft of this report for
their informal comments.  They provided primarily technical comments
that were incorporated where appropriate. 


--------------------
\14 Bank Regulatory Structure:  The Federal Republic of Germany
(GAO/GGD-94-134BR, May 9, 1994). 

\15 Bank Regulatory Structure:  The United Kingdom (GAO/GGD-95-38,
Dec.  29, 1994). 


BANKING LAW DIVIDES
RESPONSIBILITIES FOR
AUTHORIZATION, REGULATION, AND
SUPERVISION AMONG THREE COMMITTEES
============================================================ Chapter 2

Under the 1984 Act, the responsibility for bank authorization,
regulation, and supervision is divided among three committees-- the
Credit Institutions Committee (CEC) has responsibility for
authorization, the Bank Regulatory Committee (CRB) for regulation,
and the Banking Commission (CB) for supervision.  A fourth committee,
the National Credit Council (CNC), is purely advisory.  While the
overall division of responsibilities is clearly defined under law, it
is not as evident in the day-to-day operations of the three
committees.  For instance, the Bank of France provides the staff for
all three committees to ensure both a common background and the basis
for cooperation among the staff and at least some Bank of France
influence over the committees' work.  Furthermore, CB may contribute
to the work of the other two committees, if needed.  Finally, the
chairmanships of the three committees and CNC are divided between the
Bank of France and the Ministry of Economic Affairs--the two most
influential participants in bank regulation and
supervision--providing both an incentive and an opportunity for
cooperation and collaboration among the chairmen and the committees. 


   MEMBERSHIP IN SUPERVISORY AND
   REGULATORY STRUCTURE DESIGNED
   TO BE INCLUSIVE; ENFORCEMENT
   POWERS ARE SEPARATED FROM OTHER
   RESPONSIBILITIES
---------------------------------------------------------- Chapter 2:1

Bank regulation and supervision were structured under the 1984 Act
specifically to accomplish several goals.  These goals related both
to the composition of the separate committees and the division of
responsibilities among the committees. 


      COMPOSITION OF COMMITTEES
      PROVIDES FOR SHARED
      RESPONSIBILITY AMONG
      INTERESTED PARTIES
-------------------------------------------------------- Chapter 2:1.1

According to a senior Bank of France official, the decision to assign
bank regulation and supervision to separate committees was designed
to ensure that (1) all major parties who had an interest or stake in
bank regulation and supervision also had a part in it and (2) no
individual or agency was solely responsible for making decisions that
could affect individual institutions or the industry as a whole. 
Thus membership in the three regulatory and supervisory committees
includes the Bank of France, the Ministry of Economic Affairs,
representatives of the credit institution industry, and various
outside experts.  This structure allows for decisions to be based on
a broad range of knowledge and experience and acknowledges different
points of view.  It also takes into consideration the perceived
imperative that both the central bank and the government be involved
in bank regulation and supervision.  The central bank is involved
because of its role in financial markets and in developing monetary
policy, and the government because of the nationalized sector of the
banking industry and the government's role as a potential financial
resource if a large bank were to fail. 

Since the committees have distinct legal powers, they are able to
behave independently of the institutions their members represent and
thus allow the Ministry and the Bank of France to distance themselves
from committee decisions, to a certain degree, if they so desire. 
However, the preparation for committee decisionmaking and the
implementation of these decisions is done by Bank of France personnel
who staff all three regulatory and supervisory committees.  According
to Bank of France officials, this helps ensure that the Bank of
France has all the information it needs for the monetary policy and
other work it does while also lending a consistency to the
decisionmaking process. 


      FUNCTIONAL DIVISION OF
      RESPONSIBILITIES INTENDED TO
      REDUCE CONCENTRATION OF
      POWER AND ENSURE INDEPENDENT
      DECISIONMAKING
-------------------------------------------------------- Chapter 2:1.2

When the structure of regulation and supervision was being developed,
it was felt advisable to separate enforcement and supervisory
responsibilities from regulatory and licensing responsibilities.  A
senior Bank of France official likened this separation to that of
separating the judicial from the legislative authority.  Such a split
was intended to (1) avoid giving too much authority to one entity,
particularly since the supervisor has very strong enforcement
authority, and (2) ensure independent decisionmaking so that
conflicts between initial regulatory decisions and future enforcement
actions were less likely to arise.  For example, if omissions in the
licensing process allowed an institution to get into trouble, the
supervisor might be less willing to take enforcement actions against
the institution for fear of having to acknowledge its own regulatory
mistakes. 

While the separation of enforcement and other regulatory actions only
necessitated two committees, the regulatory functions were split into
two committees, for a total of three, to allow the Bank of France and
the Ministry of Economic Affairs to each chair one of the two
committees. 


   CEC AUTHORIZES BANKS
---------------------------------------------------------- Chapter 2:2

CEC is responsible for authorizing and licensing credit institutions
to undertake banking operations.  Thus, any bank or credit
institution must receive permission from CEC to operate.  It also may
withdraw authorizations and must approve any significant changes to a
credit institution's structure or ownership.  For example, it must
approve any changes in controlling ownership interest and the
crossing of ownership thresholds--purchases of shares that increase
ownership to 10, 20, or 33.3 percent.  It must also be kept informed
of any management changes and may disapprove such changes.  In
addition, it must approve modifications to the institution's legal
form, business name, location of head office, scope of activities,
and branch networks within the European Union (EU).  Finally, CEC may
grant exemptions provided for in law and regulations to individual
institutions. 

In authorizing a bank, CEC is to assess several criteria.  First, it
must judge whether an institution qualifies for a banking license or
whether its license should be limited to that of another type of
credit institution.  This is a very important part of CEC's work,
since a banking license carries more prestige than a license for a
more specialized institution and, consequently, many institutions
that do not intend to take deposits and grant loans--one of the
principal requisites of a banking license--apply for a banking
license.  In addition, CEC must ensure that the applying institution
meets the minimum required capital standard.  Particularly in the
case of banks, CEC usually requires start-up capital higher than the
minimum requirement because new credit institutions generally lose
money in their first year of operation, according to Bank of France
officials, and CEC is responsible for ensuring that minimum capital
standards are still being met at the end of the first year of
business.  According to Bank of France officials with whom we spoke,
CEC also checks that at least two individuals are responsible for
"the effective direction" of the institution, and that they have "the
necessary integrity and adequate experience for their duties."

CEC must also assess the institution's business program, its
technical and financial resources, and the suitability of the
individuals investing capital in the institutions and their
guarantors, where applicable.  If CEC decides that the main
shareholder of a proposed bank is not satisfactory, either in terms
of experience or financial resources, its policy is to ask that the
bank obtain a shareholder who is among the world's 500 largest
banking institutions and operates in France.  The bank shareholder
must have a seat on the applicant bank's board and must participate
actively in the management of the bank.  This is intended to ensure
that the applicant bank benefits from the shareholder bank's
experience in the French market as well as from its financial
resources, if necessary.  CEC requests to banks that they obtain
French bank shareholders are made quite frequently, according to Bank
of France officials, particularly when the applicant bank is not
among the world's largest 500 banks.  When a bank does not have a
controlling shareholder, the larger shareholders must sign a written
agreement that guarantees their cohesion and their actions should
additional financial resources be necessary for the bank.  In 1993,
CEC authorized 53 new credit institutions. 

In 1993, CEC reviewed approximately 600 total applications, about
one-quarter of which concerned credit institutions surrendering their
authorizations.  A growing proportion of the other applications was
made under the provisions of the Second European Banking Coordination
Directive dealing with the freedom of EU member banks to provide
services anywhere in the EU.  In 1993 and 1994, CEC received a total
of 22 applications from French credit institutions to open branches
in EU countries.  Such applications must be approved by CEC before
the French institution may open the branch.  By EU agreement, once
the home country authority--CEC in this case--gives its approval, the
host country in which the French bank is expanding has no authority
to disapprove the establishment of the branch.  In the same time
period, CEC also received 149 declarations from French credit
institutions that intended to provide cross-border services in other
EU countries.  The provision of cross-border services does not
require CEC approval, although CEC sometimes deems that the services
being proposed require a branch, in which case it will request that
the bank proposing those services apply to establish a branch. 
Finally in 1993 and 1994, CEC received 64 notifications from
non-French EU banks that they wanted to provide cross-border services
in France, and 17 notifications from EU banks that they had received
permission from their home country authorities to establish branches
in France.\1

CEC meets approximately once a month but can be called into session
more often when necessary.  Meetings of CEC are generally divided
into sessions, each of which is devoted to a specific category of
credit institution as represented by the professional
associations--of which there are four--or their central
organizations--of which there are six\2 --plus a session for
interbank brokers, which are also licensed and authorized by CEC and
supervised by CB.\3 With the exception of interbank brokers, each
session includes a voting representative of the category of
institution being discussed, either a member of the institution's
association or its central organization.  As a result, CEC decisions
are generally voted on by seven individuals. 

CEC meetings are chaired by the Governor of the Bank of France or his
representative--usually the Vice-Governor.  We were told that the
meetings usually begin with the committee staff presenting the cases
to be discussed.  After the case presentations, the committee members
discuss the issues and vote.  The Chairman of the committee does not
significantly influence the outcome of the discussions, and unless
there is a tie vote, in which case his vote counts double, his vote
is no more significant than those of the other five members. 
However, because CEC staff are all from the Bank of France, and
because they present the issues for discussion, prepare the files
upon which committee members rely for information and propose
specific actions, the Bank of France position on the cases presented
does carry significant weight.  Nevertheless, the committee sometimes
votes contrary to the course of action proposed by the staff, albeit
infrequently, according to Bank of France officials with whom we
spoke. 

The Minister of Economic Affairs--or his representative--enjoys a
unique right not given to the other committee members, namely to ask
for adjournment of the committee.  He generally uses this privilege
to obtain more information on a case before voting on the issue.  For
example, since the Minister has a specific responsibility toward the
provision of social housing, which is partially financed by the
state, he may require additional information if a case involves a
credit institution that provides credit for public housing. 


--------------------
\1 Although CEC has no authority to disapprove such entry, it has, in
one or two cases, written to the home supervisor and the notifying
bank to request that the bank open a branch instead of merely
providing cross-border services, to which the institutions have
agreed. 

\2 Central organizations are credit institutions in their own right,
but are also responsible, under law, for "ensuring the cohesion
within their network and the smooth functioning of their member
institutions.  To this end, they shall take all necessary measures,
in particular to safeguard the liquidity and solvency of each of
these institutions and of the network as a whole." These measures
include taking disciplinary actions and inspecting the institutions
that are their members.  All files that are sent to CEC by the
central organizations' members are first sent through the central
organization, which can decide whether to forward these files on to
CEC. 

\3 Interbank brokers are responsible for bringing individual banks
together for financial deals, such as interbank lending, that involve
just banks. 


   CRB PROPOSES BANK REGULATIONS
---------------------------------------------------------- Chapter 2:3

In France, the National Assembly has the authority over all laws and
legal provisions.  It may, however, delegate the authority over some
types of legal provisions, such as regulations, to other official
bodies.  Consequently, the Banking Act of 1984 gave CRB the
responsibility to develop the regulations applicable to credit
institutions.  This delegation of authority is quite significant
since in France most legal actions concerning credit institutions are
taken through regulations, not through law, as is the case in some
countries such as Germany. 

The areas in which CRB may propose regulations include (1) minimum
capital levels; (2) prudential standards, such as minimum solvency
and liquidity requirements; (3) the conditions under which
individuals may own voting powers in a credit institution; (4) the
opening of branches; (5) bank equity participations in other
companies; (6) transaction requirements, such as interest rates on
deposits and rules on information provided to borrowers; (7) the
disclosure of accounting documents and information; and (8)
management standards, particularly with respect to safeguarding
institutional liquidity, solvency, and stability.\4

All major prudential rules--such as regulations with respect to
solvency, liquidity, and financial structure requirements--must be
observed by all categories of credit institutions.  However, CRB may
differentiate among types of credit institutions. 

Although CRB has a broad scope, more and more regulations are being
determined at the international level through the EU.  In such cases,
the responsibilities of CRB are reduced to transposing international
decisions into French law.  Rules that are still determined primarily
at the national level include those established to protect consumers
as well as prudential norms that have not yet been harmonized within
the framework of the EU. 

Regulations are usually proposed and initially developed by the
Credit Institutions Directorate of the Bank of France, acting in its
capacity as CRB Secretariat, or in prudential supervision matters by
the CB Secretariat, according to Bank of France and CB officials. 
Regardless of who initially drafts and is responsible for the
technical work on a regulation, the Ministry of Economic Affairs and
the Bank of France are in close contact before a regulation is
proposed and are almost always in agreement on a text before it is
sent forward to CRB, according to Bank of France staff.  The process
for obtaining agreement between the Treasury and the Bank of France
is not always an easy one, however, according to CRB and CB staff,
primarily because of differences in points of view. 

The other committee members are also consulted before any measure is
brought to CRB for its approval because, according to Treasury staff,
it is not sufficient to have Ministry and Bank of France approval to
get a regulation through CRB.  The other committee members must agree
with any proposal since they have four of six votes.  Finally, CRB
and other agency staff involved in the drafting process have created
working groups as well as an informal consultative process involving
the banking community, the associations that represent banks, and
other interested parties such as accounting and law firms.  This
consultative process between the bank regulators and the industry is
viewed by the Association of French Credit Institutions (AFEC) and
AFB as one of their primary responsibilities and helps promote
cooperation between the regulators and the regulated.  However,
extensive consultations do not always mean that there is full
agreement on proposed regulations by the regulated or other
interested parties. 

As a result of the external and internal consultative process,
agreement on proposed regulations is usually unanimous among the six
CRB members, according to CRB and Treasury staff.  Nevertheless,
there are occasions when there are serious discussions among the
members of CRB, particularly between the Treasury and the Bank of
France.  Amendments are sometimes made to a proposed regulation as it
is being considered by CRB--word changes to address legal
uncertainties, for example--but if a regulation is formally proposed
to the committee, it generally is passed. 

All regulations proposed by CRB must be stamped and signed into force
by the Minister of Economic Affairs, not as Chairman of the CRB, but
by virtue of his position as Minister of Economic Affairs.  Thus, the
Minister has veto power over any regulations proposed through CRB. 
As of March 1, 1995, no regulation had ever been vetoed, in part
because discussion and consultation involved in preparing a
regulation includes the Ministry, and also because the Minister, as
Chairman of the CRB, would not present a regulation for CRB approval
if he did not agree with it, according to Treasury officials. 

While CB has no formal role in approving regulations, it does have
the responsibility of making sure that they are implemented.  As part
of this duty, it will issue clarifications and further details on
specific regulations that, according to CB officials, credit
institutions would regard as seriously as a regulation--even though
these clarifications do not have the force of law.  Such
clarifications are generally of a relatively minor nature, however,
since the responsibility for the interpretation of law lies with CRB
and the Minister, according to Bank of France officials with whom we
spoke. 

There is another agency in France that contributes to the drafting
and clarification of banking regulations that specifically address
accounting issues.  This agency, the Conseil National de la
Comptabilitï¿½, is an advisory committee attached and reporting to the
Ministry of Economic Affairs.  Its membership of approximately 100 is
made up of representatives of the accounting profession, private
industry, and government agencies.  Its purpose with respect to bank
accounting regulations is twofold.  First, it is to comment on
proposed regulations when asked for its opinion by CRB.  Second, and
perhaps more significantly, it is to publish its opinion on how
accounting standards should be implemented.  These opinions are
generally used as precedents by courts of law and CNCC, the
accounting profession's association, recommends that its members
apply CNC opinions when auditing banks as well as other
organizations.  CNC has no authority, however, over the way in which
auditors conduct their financial audits.  This authority rests with
CNCC (see ch.  3). 


--------------------
\4 While CRB used to have responsibility over determining compulsory
bank reserves, that responsibility has been transferred to the
Monetary Policy Council of the Bank of France. 


   SUPERVISION IS THE
   RESPONSIBILITY OF CB
---------------------------------------------------------- Chapter 2:4

The primary responsibility for ensuring that deposits in credit
institutions are safeguarded--one of the goals of the 1984 Act--lies
with CB.  CB thus has responsibility over the supervision of all
credit institutions authorized under the 1984 Act.  It is the duty of
CB to ensure that credit institutions observe legal and regulatory
requirements, as well as the industry's rules of good conduct;\5 to
ensure that the rules of sound banking practice are observed; and to
monitor the financial soundness of credit institutions.  If CB
observes regulatory breaches or financial irregularities in a credit
institution, it is responsible for taking enforcement actions to
resolve any problems. 


--------------------
\5 CB has not specifically delineated the industry's rules of good
conduct, but they are often based on case-law determinations of best
practices. 


      CB'S SUPERVISORY PHILOSOPHY
      FOCUSES ON CONCENTRATION
      RISK AND MAINTAINING
      ADEQUATE INTERNAL CONTROLS
-------------------------------------------------------- Chapter 2:4.1

According to CB, its experience has proven that "failures of credit
institutions are always attributable to overconcentration of risks,
notably credit or liquidity risks." Historically, French banks have
often become specialized in specific industries--leading to
concentration problems.  In addition, French companies tend to rely
on only one major bank for all banking services, again leading to
concentrations.  Many of CB's efforts are therefore focused on
examining the concentration of a bank's loan portfolio and other
businesses. 

In turn, according to CB, concentration risks "can only arise as a
result of shortcomings in the system of internal controls." CB,
therefore, places a significant amount of emphasis on a bank's
internal control systems, which establish a set of procedures
designed to guarantee the quality of the information provided to bank
management, shareholders, supervisors and other interested parties. 
It also attaches importance to a bank's internal control department,
which is responsible for verifying the effectiveness and coherence of
these internal control systems.  All banks are required to have both. 

To help ensure that banks are implementing internal controls
properly, CB proposed a regulation approved by CRB and the Minister
of Economic Affairs in 1990 that specifies certain requirements for
internal audit systems.  CB officials have described this regulation
as one of the most important that it enforces.  The regulation
requires that bank internal audit systems must be able to ensure an
adequate audit trail with respect to information that is contained in
published accounts.  This audit trail must make it possible to (1)
reconstruct operations in a chronological order, (2) support all
information with original documents, and (3) account for the movement
in balances from one statement to the next.  Institutions are also
required, at least once a year, to provide CB with a report on how
internal auditing is carried out.  Furthermore, the decisionmaking
body of the institution is required to review the activities and
results of the internal audit at least once a year.  According to CB,
it is "determined to take a strict line with regard to internal
controls" and will assess the competence, independence, and results
of the internal control departments. 

In doing its work, CB maintains that it "must refrain from
interfering in the management of credit institutions." It emphasizes
that it is not its role to substitute for credit institution
managers, and that CB's task "in no way detracts from the obligations
and responsibilities incumbent upon" those managers.  For example, CB
does not set derivatives limits for banks; instead, banks are
required to set individual derivative risk limits about which they
must report to CB. 


      ALL ENFORCEMENT ACTIONS ARE
      TAKEN BY CB
-------------------------------------------------------- Chapter 2:4.2

CB is solely responsible for taking enforcement actions against
credit institutions when they are "in breach of the rules of sound
banking practice" or when they have "contravened a law or regulation"
relating to their business.  The 1984 Act gives CB a wide range of
enforcement powers, ranging from warnings to disciplinary actions
culminating in the withdrawal of an institution's authorization. 
Because CB has the ability to take very strong enforcement
actions--including replacing bank management or withdrawing a bank's
authorization--credit institutions fully understand that if they do
not comply with less forceful actions, such as warnings, they will be
subject to stronger actions that will follow.  As a result, CB does
not have to resort to forceful actions frequently since
warnings--both official and unofficial--and injunctions are generally
respected by banks. 

Official warnings have been issued at the rate of about 50 a year and
are meant to formally bring a CB concern to an institution's
attention without penalizing the institution, and they usually follow
at least one, often more, unofficial warnings, according to CB staff. 
If, for example, an institution is contravening sound banking
practices, CB may, after giving management an opportunity to explain
the situation, issue an official warning.  It can request an
institution to increase its provisioning against doubtful loans or to
match its funds more closely to lending.  CB may also issue a warning
if it finds a breach of the industry's rules of good conduct,
something which it has done only once in the last 3 years,\6 although
it has issued more unofficial warnings.  If an unofficial or official
warning is heeded, no further action is taken or sanction imposed by
CB. 

If a warning is not heeded, CB can enjoin an institution to take all
necessary measures to resolve financial or management problems by a
specific deadline.  According to CB, this type of injunction is used
quite frequently.  In the last 3 years, CB has issued 63 injunctions
that ordered institutions to (1) transmit periodic documents to CB on
time, provide more information on share ownership, strengthen their
financial structure, and appoint a second responsible manager, as
required under law; (2) institute efficient internal control systems;
(3) comply with the rules on risk distribution; (4) provision
adequately for losses; (5) amend management methods; and (6)
strengthen liquidity ratios. 

Finally, CB may sanction an institution when it has disregarded an
injunction or warning, or has contravened a law or regulation. 
Sanctions, which are categorized as disciplinary procedures, range in
severity and include (1) cautions, (2) reprimands, (3) prohibitions
or limits on the conduct of certain operations, (4) temporary
suspensions or permanent dismissal of senior bank management, and (5)
the withdrawal of an institution's authorization.  In addition, CB
has the power to impose fines.  In the past 3 years, CB has appointed
acting managers 23 times and has initiated disciplinary proceedings
36 times.  Reasons for taking such actions have included, among
others, breaches of capital, solvency, and liquidity requirements;
supplying misleading information to CB; breaches of risk distribution
and exchange rate rules; and inadequate internal controls.  Eight of
the 26 disciplinary proceedings initiated in 1992 and 1993 have
ultimately resulted in the revocation of an institution's
authorization. 

Recommendations to take enforcement actions against individual
institutions are made by the staff of CB but must be approved by the
six-member Commission.  In 1993, CB met 9 times and issued 19
injunctions, appointed an acting manager 7 times, instituted 17
disciplinary proceedings, and withdrew authorizations 7 times.  While
CB would normally issue warnings to a bank before it takes more
formal enforcement action, in an emergency it can act very quickly
and require a bank to close operations immediately, according to CB
staff.  When taking an enforcement action, CB acts as an
administrative court, and all enforcement actions must be agreed to
unanimously by CB's members.  This may delay action to some extent
until all CB's members are present to vote. 

Enforcement actions are generally not made public at the time they
are taken.  Nevertheless, once a situation is resolved, CB's policy
is to publish the major actions taken and their outcomes in its
annual report. 

The Chairman of CB--the Governor of the Bank of France--plays an
important role in the decisionmaking of CB, even though the committee
is deemed collegial by Bank of France and CB staff.  Nevertheless, if
the Treasury strongly supports or opposes a particular action, then
it is difficult to contradict the Treasury, particularly because such
situations happen very infrequently, according to CB staff. 

The Bank of France is also afforded another significant opportunity
to influence the decisions of CB members through its staff who
present the cases and proposed solutions to CB.  Although CB
generally follows the recommendations of the staff, we were told that
concerns about perceived legal problems with staff proposals are not
infrequent. 

According to CB staff, they always discuss every important decision
with the Governor before any meeting so that the Governor is prepared
to argue the proposed solutions.  On very important decisions, the
staff also discusses the case with the Treasury before CB meetings. 


--------------------
\6 In this case, CB issued a warning to a mutual bank that was
offering credit to customers at inflated prices because of its
influential position with these customers. 


      CEC AND CB SHARE AUTHORITY
      TO REVOKE AUTHORIZATION
-------------------------------------------------------- Chapter 2:4.3

An institution's authorization may be withdrawn either by CEC or CB. 
If an institution ceases operation voluntarily it can petition CEC to
withdraw its authorization.  In the 5-year period from 1988 through
1993, CEC withdrew 207 authorizations for institutions that ceased to
operate.  If, however, an institution's authorization is withdrawn
due to financial difficulties or other supervisory problems, CB is
responsible for taking such action. 

When it becomes clear to CB that an institution can no longer be
rescued, it must initiate disciplinary proceedings against the
institution and appoint an acting manager.  According to CB staff,
this is a difficult decision to make because it must not be taken too
early, if there is still a chance for the institution's survival, or
too late because of the increasing cost over time of resolving an
eventual failure.  Usually when a problem situation develops, CB and
the involved institution develop a solution to the problem in which
the bank will slowly self-liquidate.  This obviates the need for a
liquidator and generally ensures that depositors' funds are not
endangered and that the deposit protection mechanism need not be
activated. 

Since AFB--the French bank association--member banks are responsible
for protecting depositors when a bank fails, as described further in
chapter 4, AFB has an interest in how failing banks are resolved. 
Nevertheless, there is no legal requirement for CB to involve AFB in
the failure resolution process, and CB staff stated that AFB's role
in failure resolution is very limited.  Sometimes, however, AFB has
been informally involved in determining potential solutions as was
the case in 1992 when a small bank suddenly got into trouble and was
eventually acquired by another bank, which had acted as the failing
bank's administrator.  In this case, AFB worked with the acquiring
bank and used the deposit protection structure to finance part of the
acquisition. 

CB may appoint a liquidator when a bank's authorization has been
withdrawn and has done so 11 times in the last 2 years in cases when
it has not been able to reach an agreement to allow the bank to
self-liquidate. 


   CEC, CRB, AND CB ARE
   POLITICALLY INDEPENDENT
---------------------------------------------------------- Chapter 2:5

CEC, CRB, and CB are all established as politically independent
committees.  They do not report to Parliament or to the President of
France.  Their independence notwithstanding, we were told by Bank of
France staff who work with the committees that there has not been a
case when the government has disagreed with actions taken by them. 

Decisions taken by CEC and CB may be appealed before the highest
administrative court in France, the Conseil d'Etat.  We were told
that such appeals have been infrequent, occurring approximately once
or twice a year.  While CEC had always won any appeals, as of May 1,
1995, CB has lost a few cases.  However, its staff do not believe
that these legal setbacks or the possibility of an appeal have
affected their ability to get credit institutions to take corrective
actions. 


   CNC IS AN ADVISORY COMMITTEE
---------------------------------------------------------- Chapter 2:6

CNC is described by the 1984 Act as an advisory committee to be
consulted on monetary policy and credit policy.  Its mandate includes
studying the banking and financial system, particularly with respect
to customer relations.  It may issue opinions in these areas and set
up working groups to conduct research.  It may also be asked to give
its opinion on bills and draft decrees within its area of
responsibility. 

The 1984 Act also established a new committee that reports to CNC
called the Comitï¿½ Consultatif (Advisory Committee).  The Advisory
Committee is mandated to study the relations of credit institutions
with their customers and to suggest recommendations in this area. 
The committee is composed predominantly of representatives of credit
institutions and representatives of their customers. 


   THE DAY-TO-DAY DIVISION OF
   SUPERVISORY AND REGULATORY
   RESPONSIBILITIES IS NOT
   CLEAR-CUT
---------------------------------------------------------- Chapter 2:7

While the division of responsibilities among CEC, CRB, and CB is
clearly defined under law, the execution of these responsibilities by
the three committees and their staffs on a day-to-day basis is more
flexible.  There are a number of factors that contribute to this
flexibility.  First, by law, the Bank of France provides the staff of
CEC, CRB, and CB.  Being Bank of France employees, the staff may
rotate back to the Bank of France or among the regulatory and
supervisory committees.  Consequently, the staffs of the committees
are more likely to work together when necessary since they are all
part of the same organization. 

Second, CB staff are often called upon to assist the other two
committees in preparing some of their work in prudential supervision
matters.  Thus, for example, CB does the technical work on many of
the bank regulations considered by CRB. 

Finally, the individuals involved in bank regulation and supervision
often have similar backgrounds and have studied together, according
to Bank of France staff.  They tend to replace each other as they
move from one job to another within the group.  Furthermore, they are
often in work groups and committees together.  Both formally and
informally there is a continual interchange of ideas among the
committees and their staffs, and decisions are made on the basis of
continuous discussions and give-and-take among the players.  As a
result, both in terms of staffing and decisionmaking, the system is
not as disaggregated as it may look on paper. 


   THE BANK OF FRANCE AND THE
   MINISTRY OF ECONOMIC AFFAIRS
   HAVE THE MOST INSTITUTIONAL
   INFLUENCE OVER SUPERVISION AND
   REGULATION
---------------------------------------------------------- Chapter 2:8

Institutionally, the Bank of France and the Ministry of Economic
Affairs clearly have the most influence in the supervision and
regulation of credit institutions.  They split the chairmanships of
the three regulatory and supervisory committees and CNC and are
members of the committees they do not chair.  The Governor of the
Bank of France chairs CEC and CB, and the Minister of Economic
Affairs chairs CRB and CNC. 

The decisionmaking on the committees has been described as collegial
by Bank of France and CB staff.  However, they also suggested that
there is some rivalry between the Bank of France and the Ministry,
and disagreements between the two do occur--both between their staffs
and within the committees.  If either the Governor or Minister, as
chairman of a committee, strongly disagrees with the direction in
which a meeting is moving, he may adjourn the meeting.  A chairman
may also deflect opposition by other committee members through his
power over the committee's agenda. 

In their roles as chairmen, they are sometimes identified with the
work that is being done by their committees.  For example, in several
of our discussions with banks or their associations, the Bank of
France was often mentioned as the authorizing agency, not CEC.  In
other cases, banks identified their supervisor as the Bank of France,
not CB.  The frequency of these portrayals may reflect the fact that
the committees are chaired by the Governor of the Bank of France as
well as the fact that the staff of the committees are Bank of France
employees. 

The Ministry of Economic Affairs has significant influence (1)
through its powerful position in the government's cabinet; (2)
because it appoints the other members of CEC, CRB, and CB, and is a
member of all committees it does not chair; (3) because the Minister
must sign any credit institution regulation before it may take
effect; and (4) because it is the major stockholder in nationalized
banks, which include the largest bank in France, Crï¿½dit Lyonnais. 
The extent of financial support the government is in the process of
providing Crï¿½dit Lyonnais accentuates the role of the government in
the banking industry and the effect its ownership could have on
competition in the banking industry.  To date, Crï¿½dit Lyonnais, the
country's largest bank, remains the only large nationalized bank,
although there is a handful of smaller nationalized banks.  There are
plans that these remaining nationalized banks be privatized within
the next five years since both the Socialist and Conservative parties
now agree that having nationalized banks conflicts with the premise
of a free market that is one of the cornerstones of the EU.  For
example, Crï¿½dit Lyonnais, which lost Fr.fr.  6.9 billion in 1993,
principally as a result of poor commercial and real estate
investments, benefited from a Fr.fr.  4.9 billion bailout in July
1994, raising questions about the role the government plays as the
owner of the largest French bank and the effect that has on
competition in the French banking industry.\7

In addition to the influence the Bank of France obtains through its
chairmanship of CEC and, in particular, of CB, which is the largest
and arguably the most important of the three regulatory and
supervisory committees, the influence of the Bank of France stems
most directly from (1) the fact that it staffs all three committees,
(2) its power to require credit institutions to contribute funds in a
crisis to "ensure the smooth functioning of the banking system and
safeguard the reputation of the financial center" whenever it deems
such assistance is necessary, and (3) its importance in and influence
over French financial markets.  (See ch.  4 for a discussion of the
crisis resolution powers of the Bank of France.)

While both the Minister of Economic Affairs and the Governor of the
Bank of France have a significant influence on the regulation and
supervision of credit institutions, it is the Governor--both as
Governor and as Chairman of CB--who is considered by banks to be the
more influential player on a day-to-day basis and is considered to
have a greater knowledge of the banking industry, according to
banking and Bank of France officials with whom we spoke.  For
example, whenever a serious problem or question arises, we were told
that a bank chairman would be likely to call the Governor of the Bank
of France--not necessarily because of his position as the Chairman of
CB, but because of his position as Governor.  Furthermore, we were
also told that the participants in France's banking system know that
the Bank of France staffs the regulatory and supervisory committees
and understand the influence that conveys.  Finally, we were told
that in the eyes of the public, the Bank of France and CB, not the
Minister of Economic Affairs, are held responsible if there are bank
problems, unless the bank in question is nationalized, in which case
the Treasury, as the representative of the state, would be held
equally responsible. 


--------------------
\7 Further losses of Fr.fr.  12 billion in 1994, and a second
government rescue plan involving a government guarantee of some of
Crï¿½dit Lyonnais' debts, raised additional complaints by two large
French banks that the proposed aid package strengthened the position
of Crï¿½dit Lyonnais compared with other banks in a way capable of
distorting competition. 


CB OBTAINS INFORMATION THROUGH
PERMANENT OVERSIGHT AND BANK
INSPECTIONS
============================================================ Chapter 3

The Banking Commission (CB) obtains information necessary to enforce
compliance with regulations and assess the financial condition of
credit institutions through a combination of permanent oversight and
inspection visits conducted by separate sections within CB and the
Bank of France.  These two sections--microsupervision within CB and
inspection within the Bank of France--must coordinate closely to
ensure the exchange of information relevant to the performance of CB
duties. 


   PERMANENT OVERSIGHT PROVIDES
   BASIS FOR BANK SUPERVISION
---------------------------------------------------------- Chapter 3:1

Information gathered and analyzed by the microsupervision section of
CB in the performance of permanent oversight includes periodic
reports filed by the institutions, discussions with their managers,
and information provided by external auditors and other market
sources. 


      CB RELIES PRIMARILY ON
      INFORMATION FILED BY BANKS
-------------------------------------------------------- Chapter 3:1.1

In order to fulfill its supervisory responsibilities, CB receives
regular information filed electronically with CB by all credit
institutions, according to CB officials with whom we spoke.  Banks
must file most of these reports quarterly, with the exception of
larger banks who are required to file monthly, but some reports are
filed semiannually or annually. 

CB is responsible for determining the content and frequency of any
reports that must be filed by banks.  In 1993, CB implemented a new
reporting system for credit institutions called Base de Donnï¿½es des
Agents Financiers (BAFI), the data base of financial agents.  The new
data base serves the purpose of collecting and analyzing information
for prudential, monetary, and balance of payments purposes and is
intended to provide an early warning of potential problems in
individual banks or in the banking industry as a whole.  BAFI
includes several hundred pages of information on institutions'
balance sheets, profit and loss statements, solvency, liquidity,
concentration risk, large exposures, exchange rate positions, and
other areas.  Appendixes to BAFI include information on risks
associated with activities such as market making, trading, and
derivatives. 

CB spent several years developing and implementing BAFI and intends
to place a significant amount of emphasis on the information obtained
through it.  It relies on this information not just to assess a
bank's current financial status but also to monitor bank risk-taking,
to determine whether a bank is entering new business areas, to follow
up on banks' actions in response to CB warnings or enforcement
actions, and to assess whether a bank should have an inspection
scheduled.  Through BAFI, CB can check banks' controls on
concentration and exposure and assess the likelihood of future risks. 
It can conduct peer group comparisons, analyze individual banks'
break-even points, and forecast trends in the industry.  If a bank is
in good financial condition and has not expanded its risk-taking or
entered into new activities, BAFI will be the primary source of
information for CB.  Approximately half of its staff--about 100
individuals--are devoted to the permanent microsupervision of credit
institutions, which focuses on analyzing BAFI data.\1 About 10 to 12
individuals in this group are involved in the microsupervision of the
10 largest banks in France. 

All BAFI data are filed with CB, and any statistics useful to develop
monetary policy, as well as aggregate data on the banking industry,
are forwarded to the Bank of France after they have been processed by
CB staff, according to CB officials with whom we spoke.  Banks are
also required to separately report some information directly to the
Bank of France, which CB may access.  Information is to be submitted
to the Bank of France on (1) material credits outstanding to
companies, (2) current balance sheets of companies, (3) dishonored
checks, and (4) repayment problems on loans to private individuals. 
Banks may access this data base for a fee and obtain information, for
example, on their percentage of the total material loans outstanding
to specific companies. 

In addition to BAFI information, banks are required to file with CB
quarterly reports on loans to any one company or group of companies
that exceed 15 percent of capital, quarterly reports on bank policies
with respect to derivatives limits and how their derivatives
activities compare to those limits, monthly foreign exchange position
reports, monthly liquidity reports, monthly balance sheet reports,
and annual reports on nonperforming loans.\2

CB is moving toward a system--planned for completion by
mid-1996--that should be able to analyze all of the quantitative and
qualitative information on credit institutions available to
CB--including information collected through on-site inspections--to
conduct analyses of bank client activities, market activities,
service operations, compliance with prudential regulations, and
statistical analyses.  The system is intended to allow for an
analysis of a bank's activities, risks, and profitability in greater
detail than is now possible as well as for comparisons with a bank's
peer group. 

Institution specific information collected by CB through BAFI and
other reports is not automatically shared with the Bank of France,
even though CB staff are Bank of France employees.  As part of the
agreement to give the Bank of France independence in 1993, CB was
officially separated from the Bank of France--it is now
independent--and information does not automatically flow between
them.  Nevertheless, information on individual banks may be requested
by the Bank of France, or any other member of CB, if there is a
specific need--in the event of a financial crisis, for example. 
Furthermore, since the Bank of France chairs CB, it is regularly
informed of any problems in the banking industry and, therefore, is
aware of situations that it might be asked to resolve. 


--------------------
\1 The microsupervision staff are usually not involved in bank
inspections, which are normally carried out by the Bank of France for
CB, as discussed later in this chapter. 

\2 Larger institutions submit reports on a monthly basis; medium and
small institutions submit them quarterly. 


      MEETINGS WITH BANKS ALSO
      PROVIDE CB WITH INFORMATION
-------------------------------------------------------- Chapter 3:1.2

If CB has any concerns or questions about a bank's operations based
on periodic filings by banks or other information it has received, CB
has the authority to request and receive from banks any "information,
clarification or proof necessary to the exercise of its functions."
CB officials told us that CB often obtains such information or
clarification through discussions with bank management.  For example,
the bank's accounts may be sent to CB and discussed with CB staff
before they are released in June and December, if CB requests that
information.  If there appear to be any problems, the discussions are
moved up to higher levels of CB staff.  In April, CB is to receive a
list of all the nonperforming loans at all the banks and information
detailing how the banks have provisioned against these loans.  This
information is intended to allow CB to compare levels of provisioning
at banks and then to recommend increases when banks fall below the
normal level.  The same is true for country risk provisioning.  If a
bank disagrees with CB's assessment, then discussions are held
between the bank and CB to clarify the bank's position. 

According to CB staff, CB has numerous meetings with banks.  There is
no formal schedule for such meetings; instead, they are set up
whenever there is a need.  CB staff at different levels meet with
banks every day and have numerous contacts by telephone and by fax. 
The level of the individual involved in the discussions depends on
the issue being discussed.  If a concern about a bank is being
discussed, they said it will involve higher-level individuals--the
General Manager or President of the bank--than if there is a question
on appropriate accounting methods.  In addition to bank specific
questions, there are also many contacts between banks and CB on more
general industry-related topics such as real estate problems. 

Finally, CB addresses numerous issues in correspondence.  It sends
and receives about 40,000 pieces of correspondence a year. 
BAFI-related questions are frequently asked and responded to in this
fashion, for example.  Technical questions about asset weighting for
capital adequacy purposes or loan provisioning, for instance, are
also generally the subject of correspondence between a credit
institution and CB. 


      MARKET INFORMATION DEEMED OF
      HIGH IMPORTANCE BY CB STAFF
-------------------------------------------------------- Chapter 3:1.3

Informal discussions with banks and other market sources sometimes
provide CB with its first warning of potential problems in an
institution and are consequently considered extremely important by CB
staff.  Such information may come through an informal notification
that a market participant has stopped dealing with a particular bank
because of perceived problems, for example, or that an institution's
method of operating in a specific business area differs significantly
from that of its peers. 


   ON-SITE INSPECTIONS ALSO
   PROVIDE INFORMATION
---------------------------------------------------------- Chapter 3:2

Permanent oversight of credit institutions is supplemented with
full-scope,\3 as well as more limited, on-site inspections--or
examinations.  These inspections, which are to cover all elements of
an institution's activities, are done for CB by Bank of France
inspectors.  Inspection follow-up, on the other hand, is the
responsibility of CB, and CB may differ with bank inspectors on the
supervisory conclusions to be drawn from an inspection. 


--------------------
\3 Full-scope examinations include examining bank asset quality,
assessing banks' systems and internal controls, judging capital
adequacy and reserves, and assessing compliance with laws and
regulations. 


      BANK OF FRANCE INSPECTORS
      EXAMINE BANKS FOR CB
-------------------------------------------------------- Chapter 3:2.1

According to Bank of France and CB officials, all credit institution
inspections are led by high-level staff (inspectors), with at least
10 years of on-site inspection experience, of the inspection division
of the Bank of France.  They are assisted by a team of lower-level
staff.  Although the inspectors conduct inspections on behalf of CB,
the inspection division reports directly to the Governor of the Bank
of France. 

After the inspection is conducted, we were told that the inspectors
write an inspection report, which is provided to the bank and CB, and
brief CB on their findings and conclusions.  CB then writes a
follow-up letter to the bank notifying the bank of the actions it
must take to resolve any problems found during the inspection.  It is
this CB letter, not the inspection report, that is binding on the
bank.  If the bank does not follow CB recommendations, it would be
subject to enforcement actions; however, no action would be taken if
the bank disregarded a problem addressed in an inspection report that
was not addressed in CB's letter. 

When opinions differ on the content of the CB follow-up letter to the
bank, Bank of France and CB officials said that CB and the inspectors
generally try to harmonize their views, primarily because they do not
want to send the credit institution mixed signals.  However, if they
are not able to agree, CB sends the bank a follow-up letter that, on
certain points, may not coincide with the inspection report, and both
the inspector and CB will take responsibility for not coming to
agreement. 

Although the inspection division is separate from CB, officials told
us there is a significant exchange of information between the two. 
There are monthly meetings between the inspectors and the General
Secretariat of CB assisted, as necessary, by CB experts; and the
inspectors are to receive all of the BAFI reports.  Furthermore,
inspectors are to meet with CB staff before inspections and, after
their inspection, when on an as-needed basis, they explain their
major findings or especially complex points to CB experts.  Finally,
if the inspectors find any serious problems during their inspections,
they are to report to the top management of CB immediately. 

Nonbank credit institutions that belong to central organizations are
to be inspected by those organizations.  For example, a savings bank
would be inspected by the central savings bank--the Centre National
des Caisses d'Epargne et de Prï¿½voyance.  The inspections are to be
conducted by the central organization's staff and their inspection
reports are sent to CB.  If CB believes that a further inspection is
necessary--based on the inspection reports from the central
organizations or for any other reason--then a Bank of France
inspection team is to conduct a further inspection. 

In 1994, the Bank of France conducted 173 inspections for CB,
including 117 full-scope reviews of credit institutions and 55
examinations of specific problems or thematic subjects.  This
frequency is considered to be insufficient by the Bank of France and
CB, and the Bank of France is currently planning to increase its
inspectorate staff by 30, from 95 inspection staff in December 1994,
to 125 in 1995.  This increase in staff is intended to reduce the
average inspection rate to every 4 years, with problem banks being
inspected much more frequently. 

When necessary, the Bank of France may call on other members of the
Inspection Division, who normally work on internal audits of the Bank
of France and its branches, to assist in bank inspections.  In
addition, the Bank of France could call on any Bank of France
employee who has ever worked for CB or in the Inspection Division to
assist on an inspection. 


      BANK INSPECTIONS ASSESS
      SOUNDNESS OF AN INSTITUTION
-------------------------------------------------------- Chapter 3:2.2

According to CB, inspections "provide an opportunity for a more
detailed review of the institution's decisionmaking procedures and
its financial situation." They also serve to verify information
collected through the reporting process, particularly with respect to
judging the adequacy of an institution's prudential ratios. 

Bank of France inspectors conduct three kinds of bank inspections for
CB:  (1) routine inspections, (2) inspections that focus on perceived
problems, and (3) thematic inspections.  All credit institutions are
to receive a routine inspection at some time, according to Bank of
France and CB staff.  The timing of such an inspection depends on a
number of factors.  On average, Bank of France officials said banks
will be inspected more frequently than other credit institutions,
partially because they are involved in riskier and more extensive
activities and partially because many other credit institutions are
inspected by their central organizations, as discussed above. 
Finally, inspection rates depend on the individual institution. 
Based on information gathered through BAFI or market sources,
institutions may be inspected more frequently--up to twice a year--if
they are perceived to have financial difficulties; to be expanding
into unfamiliar or more risky activities; or to be heavily involved
in activities that may be experiencing a market downturn, such as
real estate in the past several years. 

According to Bank of France policy, the primary purpose of on-site
inspections is to assess the soundness of a bank--to judge its
ability to conduct its business without a deterioration in its
liquidity, solvency, and profitability.  A routine inspection,
therefore, is to cover all elements of an institution's activities
including organization, management, internal controls, capital,
assets, earnings, and liquidity.  Specific areas of a bank's
activities that are to be inspected include the bank's market
activities, electronic data processing (EDP), technology, derivatives
activities, mergers and acquisitions, mutual funds, and leasing,
among others.  In the course of their mission, inspectors also are to
check the accuracy of banks' reported loan loss reserves and the
bank's prudential ratios:  risk diversification, foreign exchange,
maturity mismatch, capital, and liquidity. 

According to CB staff, CB is focusing more attention on management
quality, internal controls, and corporate governance.  With respect
to management quality, inspectors are to assess the results of
management strategies and the extent to which management is informed
about the bank's activities.  The inspection is to include an
assessment of the kind of information management receives--whether it
is accurate and concise--and whether management reacts quickly to the
information it has.  Because the quality of information managers are
provided with depends, to a large extent, on the efficiency of the
institution's internal controls, inspectors also are to test internal
control procedures.  According to CB, inspectors verify "the
effectiveness and coherence of internal control systems" by
determining whether "the procedures [for internal controls] are
appropriate to the needs of the institution." Since the
mid-seventies, the inspection process has placed particular emphasis
on an institution's EDP, both to assess its reliability and to
conduct inspection controls.  CB is currently in the process of
developing a new methodology for testing EDP for use by Bank of
France inspectors. 

An important by-product of an inspection is the checking of the
accuracy of the institution's BAFI reports.  Both CB and the Bank of
France stressed the significance of these checks since CB relies very
heavily on BAFI information in its permanent oversight.  Generally,
the testing finds that banks submit accurate information, but if a
bank is found to be submitting inaccurate information, there is no
question that it will be disciplined, according to CB staff. 

During an inspection, inspectors may examine bank
subsidiaries--including subsidiaries located in other European Union
(EU) countries.  How often such subsidiaries are inspected depends on
their significance to the institution as a whole--whether they
significantly contribute to profits, asset size, or risks.  If they
do, then they are generally inspected with the parent company,
according to Bank of France and CB officials with whom we spoke. 

During an inspection, the facts relevant to the inspection are to be
discussed with the institution's department heads in order to get
their agreement on those facts, and the inspection team then writes a
draft report.  Although it is not compulsory, it is an established
tradition for the inspectors to provide bank management with an
opportunity to review the draft report or parts thereof, according to
Bank of France officials with whom we spoke.  After a short time--2
to 7 days--the inspector is to return to discuss the report with
management but is only to change the report if the facts upon which
he based his judgments were wrong, or if the bank's situation has
changed since the draft was written--for example, if a unit that was
in trouble was sold.  The president of the institution gets the final
inspection report, which is confidential.  CB is to use this report
and any other information it has--including information on the
general economy or the situation of the banking industry--to send a
follow-up letter to the institution telling it what CB expects it to
do in response to issues raised in the inspection.  This letter is
then to be followed up with meetings, additional correspondence, and
monitoring of BAFI information to ensure that the institution is
taking the recommended actions, according to CB staff. 

Depending on the size of the institution, an inspection could be from
2 months in length with an inspection staff of 2 to 4 for a
medium-sized bank, to 4 to 6 months with an inspection staff of 4 to
8 for a larger bank.\4 If a bank has significant credit activities,
it requires a larger inspection staff to examine credit files than if
it has extensive market operations.  No inspectors are located
full-time in any bank or other credit institution. 

If a bank is believed to have a problem based on the examination of
reports available to CB, a specific inspection is to be conducted by
the Bank of France that focuses on the area of the bank believed to
have problems.  If, for example, a bank's loan portfolio is thought
to be weak, inspectors are to examine the bank's procedures for
granting the loans and its loan administration.  They are to also
inspect the measures that were taken after a loan was determined to
be in trouble, the provisioning taken against the loan, and the
operations of the problem loan unit.  In addition, they are to review
the bank's management and its internal controls in order to assess
the criteria for decisionmaking.  Finally, they are to inspect the
bank's loan portfolio, particularly its larger loans, to assess the
amount of residual risk.  Examinations of banks with problems may
occur as often as twice a year. 

The inspectors of the Bank of France may also conduct thematic
inspections.  In these inspections, the inspectors are to examine a
specific area of business or operation--such as derivatives
activities, property risks, or the organization of internal auditing. 
Such inspections would be done across a sample of all institutions if
the issue, such as internal controls, were relevant to them all; or
across a sample of larger banks in areas such as derivatives
activities.  In this way, the inspectors can do a peer comparison of
the banks as well as judge the impact a specific line of business is
having on the industry as a whole. 


--------------------
\4 If needed, the size of inspection teams may go as high as 30
staff. 


   INFORMATION FROM EXTERNAL
   AUDITS IS GROWING IN IMPORTANCE
---------------------------------------------------------- Chapter 3:3

Historically, external audits of credit institutions have not played
a major role in bank supervision in France.  However, CB is beginning
to place more reliance on information from external auditors and sees
their role developing further. 


      BANKS ARE AUDITED UNDER
      CORPORATE LAW
-------------------------------------------------------- Chapter 3:3.1

French credit institutions are required to receive annual audits,
according to French corporate law.  Such audits of banks are
automatically sent to CB.  The main duty of the statutory auditor is
to certify to the shareholders as to the fairness of presentation of
the financial statements.  In addition, as of 1935, all audit firms
have been required to report to the public prosecutor any criminal
offense by their clients related to the auditor's account that the
auditors discover during their audit.  They are not specifically
required to look for such offenses, however. 

Under the 1984 Act, French banks, with the exception of those below a
certain balance sheet size threshold, are required to be audited by
at least two auditors, who split the annual audit responsibilities
between them.  According to CB officials, at least one of the
auditors of most large banks is likely to be a "big six"
international accounting firm,\5 although the second firm is often to
be a large French firm.  Smaller banks are more likely to be audited
by a small French accounting firm. 

CB has no minimum audit requirements for bank audits, but may take
action against an external auditor, described below, if a bank audit
is deemed unsatisfactory.  In carrying out their audit work and in
preparing their report on the financial statements, auditors are to
comply with auditing standards developed by the national association
of auditors (CNCC).  CB is a member of the banking committee of the
CNCC, which develops these standards and, consequently, has some
input.  Accounting rules, on the other hand, are proposed by the
CRB--the regulatory committee. 

In conducting their annual audits, the external auditors typically
are to check that banks are complying with capital requirements; to
assess asset quality, loan loss reserves, earnings, and management
capability; and to review internal controls.  This work includes
checking a bank's balance sheet, its profit and loss statement, and
related footnotes; and testing the bank's internal controls.  The
auditors are to take samples of the bank's loan portfolio but
generally are to focus on the bank's largest credits.  They are then
to determine whether the bank's provisioning has been set adequately
and may recommend increases.  They also are to review the market risk
calculations that all banks are required to include in their annual
reports.\6

Until the relatively recent development of financial
problems--primarily due to real estate difficulties--banks,
particularly larger ones, did not place much importance on the
results of their audits, according to external auditors with whom we
spoke.  They said that they did not feel their reports were valued by
the banks, and because French banks are not required to establish
audit committees, auditors with whom we spoke felt that communication
with the banks' presidents or boards of directors was difficult. 
More recently, however, auditors have had more access to bank boards
and their chairmen because of the financial difficulties many banks
are facing, and said that they feel that their role has been
enhanced.  Nevertheless, the external auditors with whom we spoke
felt that their work would be more valued if banks had an audit
committee requirement.  Such a requirement is strongly supported by
CB, but is opposed by some of the larger banks, according to CB and
AFB--the French Bank Association--officials. 

According to a manager of one of the large banks with whom we spoke,
obtaining an audit opinion without qualification is extremely
important to the bank.  Consequently, he said, bank management will
discuss and try to resolve any problems in audit reports with the
bank's auditor before the reports are finalized.  While there is
nothing unusual about such a process of consultation in his view, it
could raise some questions about the usefulness of bank auditors'
opinions to CB or Bank of France in discharging their bank
supervision responsibilities. 


--------------------
\5 In the United States, these firms are known as Ernst & Young,
Arthur Andersen LLP, Deloitte & Touche, KPMG Peat Marwick, Coopers &
Lybrand, and Price Waterhouse. 

\6 CB has no specific requirements for calculating market risk, and
every bank may judge its risk according to its own models. 


      RECENT DEVELOPMENTS HAVE
      INCREASED CB RELIANCE ON
      EXTERNAL AUDITS
-------------------------------------------------------- Chapter 3:3.2

While, to date, external auditors have not been relied upon by CB for
any significant informational contribution to bank supervision, the
relationship between the auditors and CB is evolving, according to CB
staff.  Until 1992, audit firms were prohibited by their client
confidentiality responsibilities from providing CB with information. 
Legislation implemented in 1992 removed that barrier to reporting and
now allows the auditor to provide CB with information.  While there
is no requirement that the auditor report any problems it uncovers
unless CB specifically asks the auditor about the issue,\7 auditors
may report problems in banks to CB of their own volition.  In
addition, auditors sometimes approach CB with specific questions that
make clear to CB that they have some concerns, according to CB staff. 
As a result, CB may then follow up with questions of its own. 

While CB staff assert that they may receive auditor reports on
specific problems as frequently as once a month, CNCC, the
association representing accountants in France, asserts that such
reports are quite rare because of the client confidentiality
protection under French criminal law.  CNCC representatives said
that, in any case, if an auditor were to report a specific problem to
CB, separate from the annual audit report, he or she would usually
notify the bank first before reporting to CB. 

On CB's part, we were told that since 1992, when CB was first allowed
access to auditors' workpapers, it has been moving toward a greater
reliance on them and would like to develop the relationship with
auditors further.  Part of the reason for this development is that CB
is focusing more attention on internal controls and corporate
governance issues, topics typically covered in an auditor's report. 
A greater reliance on the auditors could, therefore, help reduce some
duplicative efforts.  The use of auditors for supervisory information
is still in its nascency, however.  CB officials told us that CB does
not generally ask auditors for a meeting unless CB already suspects a
problem in a bank.  Audit workpapers also have not been used to any
great extent.  CB has, however, designated one of its staff to work
specifically on auditor relations. 

Auditors with whom we spoke, on the other hand, were generally
cautious about embracing a broader supervisory role, questioning the
added cost of such efforts to banks and the willingness of their
clients to pay for them. 


--------------------
\7 An EU directive to come into effect on January 1, 1996, will
impose a duty on bank auditors to report to bank supervisors if they
uncover any fact that could lead to the qualification of their audit
and if they uncover any breaches of laws or regulations. 


      CB MAY DISAPPROVE OF AN
      EXTERNAL AUDITOR'S
      APPOINTMENT
-------------------------------------------------------- Chapter 3:3.3

External auditors in France are to be appointed every 6 years by bank
shareholders.  Under the 1984 Act, credit institutions must notify CB
of the appointment of their auditors, and CB has the authority to
disapprove the appointment of an auditor by a bank within 2 months of
the appointment.  CB may disapprove of entire firms or it may
disapprove of specific branches or individual partners of a firm.  It
may also disapprove an audit firm working for one bank but approve
its working for another one. 

While CB action against external audit firms is not frequent--one to
five times a year--it has been using the threat of disapproval more
frequently in order to ensure that auditors have adequate training,
knowledge, and experience.  In 1991, for example, CB notified two
audit firms that "it could give no assurance as to the position it
would adopt" if credit institutions were to notify CB of the
appointment of these two firms.  Such a notice is tantamount to
disapproving the appointment of the firms, even though it comes
before the actual appointment is made.  CB took this action because
the firms had failed to qualify the accounts of two financial
companies despite knowledge of factors that should have led to such a
qualification.\8 That same year, CB drew attention to another
external auditor whose lack of vigilance had been cited by the
regulator of the French stock exchange.  In 1992, CB reviewed the
audits conducted by seven firms and contested the appointment of two
auditors.  No actions were taken by CB against audit firms in 1993. 


--------------------
\8 In one case, the external auditor knew that contracts in progress
contained a potential liability arising in connection with a lawsuit
that was not reflected in the books and records.  In the other case,
the CB annual report said the external auditor "failed to draw
attention to the practice of undue netting of assets and liabilities
and the insufficient provisions set aside by the institution."


      EXTERNAL AUDITORS GENERALLY
      ARE NOT SUBJECT TO JOINT AND
      SEVERAL LIABILITY
-------------------------------------------------------- Chapter 3:3.4

According to French external auditors with whom we spoke, liability
is not yet a big issue for external auditors in France--the level of
claims and premiums for insurance are considered to be quite low. 
Furthermore, external auditors in France are not subject to joint and
several liability, unless it can be proven that the auditor was an
accomplice in any attempted deception.  In case law, an auditor is
only responsible for a proper and reasonable audit and is not
required to be 100-percent accurate.  Consequently, we were told by
external auditors with whom we spoke that civil suits have not been a
big problem for audit firms since the courts have simply apportioned
part of the total judgment to each of the parties in the case.  Thus,
for example, they said that an institution's own accountant is likely
to be apportioned more blame than its external auditor since the
accountant was responsible for the development of the financial
statements, according to auditors with whom we spoke. 

The external auditors said that criminal cases against external
auditors are more of a problem, since French prosecutors are leaning
toward suits against all parties when some criminal activity is
uncovered in an institution. 


THE BANK OF FRANCE HAS OTHER
BANK-RELATED RESPONSIBILITIES; AFB
ADMINISTERS DEPOSIT PROTECTION
============================================================ Chapter 4

In addition to its role in bank regulation and supervision, the Bank
of France has responsibilities for other bank-related activities such
as liquidity\1 provision, crisis management, payments clearance,
international negotiations, and lender of last resort.  The French
Bank Association (AFB) administers the system that protects deposits
in French banks. 


--------------------
\1 Liquidity is the ability of an organization to meet its current
financial obligations; for instance, depositors' demands for funds. 


   THE BANK OF FRANCE HAS OTHER
   BANK-RELATED RESPONSIBILITIES
---------------------------------------------------------- Chapter 4:1

The Bank of France's bank-related responsibilities are not limited to
supervision and regulation.  It also plays a role in liquidity
provision, crisis management, payments clearance, international
organizations, and serves as lender of last resort. 


      LIQUIDITY PROVIDER
-------------------------------------------------------- Chapter 4:1.1

The Bank of France intervenes in the money market to implement its
monetary policy with the goal of ensuring price stability.  The
Monetary Policy Council of the Bank of France was made responsible
for defining the terms and conditions of such operations by the 1993
Bank of France Act, which gave the Bank of France independence over
defining and implementing monetary policy. 

According to Bank of France officials, the Bank of France undertakes
daily operations in the French money markets to supply or withdraw
liquidity to the banking system, primarily in the form of repurchase
agreements.  Credit institutions obtain money from the Bank of France
by selling securities under an agreement to repurchase them at a
later date at a price that includes the agreed upon interest rate. 
The Bank of France may also grant cash loans to credit institutions
but does this less frequently and only if the loans are
collateralized. 


      CRISIS MANAGEMENT
-------------------------------------------------------- Chapter 4:1.2

The Governor of the Bank of France plays a leading role in crisis
management involving credit institutions in France reflecting both
his authority as Governor, as well as his role as Chairman of the
Banking Commission (CB).  More specifically, though, the Governor is
given a broad discretionary authority under Section 52 of the 1984
Banking Act to request assistance when a credit institution is in
danger.  This assistance may be requested in the first instance from
the institution's stockholders who will be asked to contribute more
capital.  Such requests for assistance have been made more frequently
by the Governor, particularly in the past several years, as a result
of the credit industry's financial difficulties.  The Governor's
power to request assistance from stockholders stems from the general
belief that, since banking is considered a special industry and money
a public good, a bank's stockholders also have special
responsibilities.  It was also recognized by the drafters of the 1984
Act, though, that owning a bank should not be too onerous. 
Consequently, the Governor was given no enforcement authority with
respect to his requests for assistance, other than his moral
authority as Governor and Chairman of CB. 

If assistance from stockholders is not forthcoming--if the
shareholders do not have money to give, for example--Section 52 also
allows the Governor to request assistance from the banking industry
to take "the measures needed to protect the interests of depositors
and third parties, ensure the smooth functioning of the banking
system and safeguard the reputation of the financial centre." Again,
Section 52 does not provide the Governor with sanctions if banks do
not honor his requests for assistance.  Nevertheless, banks would
generally not refuse such a request because of the authority of the
Bank of France, according to Bank of France officials with whom we
spoke. 

According to Bank of France officials, the Governor has used his
Section 52 authority to request assistance from the banking industry
only once, in the case of the failure of Al Saudi Banque, S.A.  (Al
Saudi) in 1988.  Although Al Saudi was a small bank, Bank of France
officials said that the Governor felt that its depositors and
creditors--many of whom were foreign, including several foreign banks
who were lending short-term funds in the interbank market\2 --should
be protected in order to safeguard the reputation of French financial
markets.  The French deposit protection mechanism does not protect
deposits in foreign currencies or interbank deposits.  Consequently,
French banks were requested by the Bank of France to provide over
Fr.fr.  200 million in assistance to Al Saudi, and those who were
creditors of Al Saudi were asked to forgive that debt.\3 Because the
primary goal of the rescue was to protect the reputation of French
markets, foreign depositors and creditors of Al Saudi were completely
paid off, while French depositors and creditors were only partially
compensated under the terms of the rescue.\4

The Bank of France has no specific criteria for using Section 52,
preferring some uncertainty about whether a bank will be rescued and
how much creditors might lose if a bank fails as a means of
encouraging investors to use good judgment in investing their funds. 
According to Bank of France officials, the general wording of the
Section 52 mandate gives the Governor extensive leeway in determining
the extent of any action that should be taken with respect to a
credit institution problem.  The amount of the assistance that he
requests of stockholders or banks, for example, is completely up to
his discretion, as is the extent to which depositors and other
creditors are reimbursed under any rescue. 

The Bank of France is able to act in financial crises because it has
access to information about individual institutions through its role
in the bank regulatory and supervisory structure and in the financial
markets. 


--------------------
\2 Banks borrow from and lend to each other in the interbank market. 
In its last several years of operation, Al Saudi found it difficult
to borrow from banks in France, which were aware of its weak
financial situation. 

\3 Most of Al Saudi's shareholders refused to contribute funds to
rescue the bank. 

\4 Al Saudi's assets were transferred to new owners, including
France's Banque Indosuez, which supplied 35 percent of the new bank's
capital; Indosuez's Middle Eastern affiliate, the Hariri group of
Saudi Arabia; and Thomson, a state-owned electronics firm. 


      PAYMENTS CLEARANCE
-------------------------------------------------------- Chapter 4:1.3

The Bank of France plays a major role in payments clearance,
primarily because of its legal responsibility to ensure "the smooth
operation and security of payment systems."\5 It also has a
significant amount of influence over the players in payments
clearance since the 1984 Act restricts the right to issue and
administer payment media to credit institutions, which the Bank of
France helps regulate and supervise. 

The Bank of France is in charge of managing all 102 provincial
clearing houses, the computer clearing centers, the interbank
teleclearing system accounting system, the regional check record
exchange centers, and SAGITTAIRE (automated system for the integrated
handling and settlement of foreign transactions by means of
telecommunication).  It also acts as settlement agent for the members
of those systems.  In 1992, over 3.7 billion items were presented in
the clearing houses, representing a total value of Fr.fr.  55,192
billion.  In addition, about 3.3 billion messages representing Fr.fr. 
59,219 billion were processed by SAGITTAIRE. 

There is no statutory supervision or regulation of the payment
systems operating in France, over and above the supervision of credit
institutions undertaken by CB and the general task of oversight of
the payment system vested in the Bank of France by its statutes.  The
regulations on interbank payment and settlement systems have been
developed by interbank consultative and standardization groups in
which the Bank of France is represented and where its views are given
great weight due to its role as central bank and banker of the
Treasury.  According to a recent Bank for International Settlements
(BIS) report, the Bank of France does "regularly perform audit
procedures for the interbank exchange and settlement systems which it
administers.  It pays particularly close attention to maintaining
continuity of service."\6

According to BIS, the Bank of France also "has consistently promoted
measures to modernize the French payments system.  Consequently, it
has played an active role in reforms, carried out in consultation
with the banking industry, designed to lower the cost of bank
intermediation by automating payment media and rationalizing payment
circuits."\7


--------------------
\5 A payment system is a mechanism for transferring money between
suppliers and users of funds. 

\6 Payment Systems in the Group of Ten Countries, BIS (Dec.  1993). 
Prepared by the Committee on Payment and Settlement Systems of the
Central Banks of the Group of Ten Countries. 

\7 Payment Systems in the Group of Ten Countries (Dec.  1993). 


      PARTICIPATION IN
      INTERNATIONAL ORGANIZATIONS
-------------------------------------------------------- Chapter 4:1.4

The Bank of France participates in developing French positions with
respect to financial issues in several international organizations,
even though it takes the lead only on the Basle Committee on Bank
Supervision under BIS auspices, on which CB is also represented.\8 In
other groups, such as the EU and the Organization for Economic
Cooperation and Development, the Bank of France and the General
Secretariat of CB play active roles in negotiations and
consultations, even though the lead role is played by the Treasury. 
COB, as the overseer of the securities markets, is the representative
to the International Organization of Securities Commissions. 


--------------------
\8 The Basle Committee, whose primary purpose is addressing bank
supervision-related issues, is made up of the banking supervisors and
central banks of the Group of Ten countries:  Germany, Belgium,
Canada, the United States, France, the United Kingdom, Italy, Japan,
the Netherlands, Sweden, and Switzerland.  For further information on
the Basle Committee, see International Banking:  Strengthening the
Framework for Supervising International Banks (GAO/GGD-94-68, Mar. 
21, 1994). 


      LENDER OF LAST RESORT
-------------------------------------------------------- Chapter 4:1.5

While France historically has not had a problem with bank runs, it
has experienced numerous occasions when banks have cut other banks
off in the interbank market.  If the Bank of France determines that
the bank being cut off is simply experiencing liquidity problems, and
not solvency problems, it may step in and provide liquidity, although
it does so infrequently. 

In addition, separately from his authority under Section 52,
discussed above, the Governor of the Bank of France may "request"
banks to provide liquidity to other institutions who need it.  For
example, in 1993, the Bank of France asked some of the larger banks
in France to provide lower-rate overnight loans to another large bank
that had large liquidity needs but could not afford the high rates
that had resulted from government intervention in the currency
markets.\9 Such requests for assistance have been made infrequently;
however, and the Governor is only to ask banks for assistance if he
is confident that they will accede to the request, according to Bank
of France staff, since the Governor has no legal authority to enforce
his requests.  In very rare cases, the Bank of France may agree to
cover potential losses from such lending, according to Bank of France
officials with whom we spoke. 

The Bank of France has no strict policy regarding when it will
provide liquidity or "encourage" other banks to do so.  According to
Bank of France officials, the Bank of France prefers to maintain a
policy of "constructive ambiguity" in order to preserve market
discipline to the greatest extent possible. 


--------------------
\9 In this case, overnight interest rates had skyrocketed due to
central bank action to support the French franc and thus hampered
borrowing by banks needing liquidity. 


   AFB ADMINISTERS SYSTEM TO
   PROTECT DEPOSITS IN BANKS:  THE
   SOLIDARITY MECHANISM
---------------------------------------------------------- Chapter 4:2

AFB administers the system, called the Solidarity Mechanism (the
Mechanism), whose purpose is to protect deposits in its members--the
425 banks.\10 Although there is no legal requirement that banks join
the Mechanism, there is a provision in the 1984 Act that requires all
credit institutions to belong to an association or body that is
affiliated with AFEC, the umbrella organization for French credit
institutions.  The AFB is that association for banks, and membership
in the Mechanism is a requirement for AFB members.  As of July 1,
1995, when the EU deposit insurance directive took effect, all EU
banks were required to belong to the deposit protection schemes of
their home countries.  Consequently, branches of non-French EU member
banks are not required to belong to the Mechanism, but all French
banks and non-EU banks are legally required to belong, according to
AFB officials with whom we spoke. 

The Mechanism is not a deposit insurance system in which banks pay
premiums into a fund that is then used to cover insured deposits in
failed institutions.  Instead, after a member bank fails, the full
membership of the Mechanism provides the funds as needed to cover the
protected deposits in the failed bank.  A determination of the level
of funding needed and the burden sharing among the Mechanism's
members is determined by AFB staff.  Until recently, the amount each
bank was assessed to address a bank failure was based purely on the
bank's deposit size.  As a result of complaints by larger banks who
argued that they paid the most when a bank failed but were unlikely
to fail themselves, the assessment system was changed.  Now, only
half of the agreed upon payment is based on deposit size.  The other
half is a per bank distribution divided evenly among the Mechanism's
membership, affecting small banks--and foreign banks who often have
very low French franc deposits--in the same manner as large banks. 

French franc deposits, and since the beginning of 1994, EU currencies
and European currency unit deposits, in failed banks are protected up
to Fr.fr.  400,000 per capita.\11 Foreign currency deposits, deposits
in branches of French banks in other countries, and interbank
deposits are not protected by this system.\12

There is also a global limit of Fr.fr.  200 million on Mechanism
payouts in any 1 year.  However, since the unused funds of the
previous 2 years plus the funds of the following 2 years may be used
in any 1 year, the actual ceiling for bank failures in any 1 year is
Fr.fr.  1 billion.  Even this limit is fairly small compared to the
size of France's largest banks and indicates that the Mechanism was
meant to cover small banks.  If a large bank were to fail, the Bank
of France, using Section 52 of the 1984 Act, or the French government
would have to determine what action to take. 

Since the Mechanism was established on January 18, 1990, 10 banks
have failed, costing the Mechanism's membership a total of about
Fr.fr.  450 billion. 


--------------------
\10 Cooperative, savings, and mutual banks have a different system
for protecting depositors.  Cooperative banks or savings banks have
agreements with each other to resolve problems in any individual
institution either through financial assistance or through merger so
that no institution will fail and put depositors at risk.  Mutual
institutions are protected by their central organizations, which pay
in case of problems. 

\11 Using a December 31, 1993, exchange rate of Fr.fr.  5.9 per
dollar, the deposits are protected up to about $67,797 per capita. 

\12 As of July 1, 1995, when the EU deposit insurance directive
became effective, deposits in branches of French banks located in EU
member countries are also covered. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Tamara E.  Cross, Evaluator
Hazel J.  Bailey, Writer-Editor
Phoebe A.  Jones, Secretary


   EUROPEAN OFFICE
--------------------------------------------------------- Appendix I:2

Maja C.  Wessels, Evaluator-in-Charge


   OFFICE OF GENERAL COUNSEL,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:3

Paul G.  Thompson, Attorney