Presentation of the 2021 Annual Report
of the (ACPR)
Autorité de contrôle prudentiel et de résolution
Press conference, 31 May 2022
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Chairman of the ACPR
Press contact: Mark Deen (mark.deen@banque-france.fr).
Ladies and Gentlemen,
I am very pleased to welcome you to our presentation of the Annual Report of
-
the Autorité de contrôle prudentiel et de résolution (ACPR Prudential
Supervision and Resolution Authority), in the company of Jean-Paul Faugère,
Vice-Chairman of the ACPR, Dominique Laboureix, Secretary General of the
ACPR, and Alain Ménéménis, President of the Sanctions Committee. Last year
was marked by a vigorous recovery of our economy, during which our financial
sector proved particularly robust (I). 2022 should now see substantial advances
on the regulatory front (II). However, the war in Ukraine is posing new risks to
the financial sector, calling for heightened vigilance (III). In all these situations,
the women and men of the ACPR have worked tirelessly to ensure that the
French financial system remains resilient under all circumstances, providing
adequate financing to the economy. I would like to extend my warm thanks to
them.
**
I. The strength of the French financial sector is more than ever an asset
for our economy
I shall start with just a short word on the situation for insurers, which Jean-Paul
Faugère will go into in greater depth. In the context of the economic recovery in
2021, the insurance sector saw a return to growth in all its activities: net inflows
increased by 18% compared with the previous year. This allowed insurers to
consolidate their solvency, with the average Solvency Capital Requirement
(SCR) coverage ratio rising to 253% after the slight decline seen during the
Covid crisis.
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saw a "return to normal" in 2021 in terms of dividend
French banks in turn
payouts, which was completely justified. Their solvency ratio, which was already
solid, increased even further over the year, reaching 16% for the top six French
banking groups.
Their profitability also improved (their RoE stood at 7.1% at end-2021 compared
with 4.6% a year earlier and 6.4% in 2019): it is close to the European average
but still structurally too low.
Page 3 of 8
Banks continued to play their full role in financing the economy, providing a
robust supply of credit: 4% growth in loans to SMEs and even 6% growth in
residential housing loans, which is a particularly high rate. Credit in France is
-
continuing to grow faster than the economy, so private debt that of
-
corporations and households is still rising.
With regard to corporate loans, I said here last year that the gradual winding
down of the government aid measures posed a manageable risk to the financial
sector. Indeed, the wave of business failures feared by some has not in fact
materialised. At the end of April 2022, the total number of failures over the
previous 12 months was 43% lower than the figure for April 2019.i And even
more importantly, according to our estimates, more than 95% of state-
guaranteed loans (SGLs) should be repaid on time. Half the SGLs granted in
2020 started to be repaid in 2021; repayments on the other half began as of
April this year. True, the shock of the war in Ukraine is slowing our rate of growth,
and I shall come back to this. But the soundness of our banks and businesses
at the end of 2021, with the emergence from the Covid crisis, gives strong
grounds for confidence. There is nothing today that justifies, in the face of
certain warnings or excessive demands, a return to the exceptional measures
that we saw in 2020: either in bank prudential regulations or in terms of general,
untargeted support for businesses. The Credit Mediation service, which is
attached to the Banque de France has received very few requests for the
restructuring of SGLs (fewer than 200 cases out of a total of 700,000 SGLs
granted).
France has the strongest banking and insurance sector in the euro area: this is
a major asset for our economy, and one that our country is not always sufficiently
aware of or positive about. This justifies us paying close attention to a healthy
regulatory framework.
II. A regulatory framework that remains to be finalised
With regard to the Commission presented its proposal at
banking regulation,
the end of October 2021 for the transposition into EU law of the international
agreement of December 2017, which is a decisive step towards the finalisation
of Basel III. The ACPR supports this proposal which takes full account of
Europe's specificities and allows sufficient time - -
until 2032 to adapt to the
new features of supervision. But I want to be very clear on this: the exemptions
regarding housing loans or unrated businesses must absolutely remain
temporary. Any temptation to make them more permanent would call into
question our commitment, the international credibility of France and Europe. In
response to certain surprising but recurrent claims from the banking industry, let
me just re-state the obvious: in the past ten years, the regulatory framework has
done nothing to hinder the sound, and even very broad, financing of the French
economy; on the contrary, it has strengthened the resilience of the financial
system, as became abundantly clear during the Covid crisis. We must not
deviate or drag our feet: France and Europe have everything to gain from a
stable and balanced Basel III; we shall strive to maintain this level international
regulatory playing field, including in investment banking which is important for
European sovereignty.
Alongside Bercy this time, and French banks, I fully support the Commission
and ECB'sii
target of applying the output floor on a consolidated basis: we must
not create new obstacles to Banking Union, and the reluctance of "host"
countries has no other basis than a form of harmful protectionism.
Regarding insurance, the Commission also published in September its
proposed amendments to the rules, which look set to lead soon to
Solvency II
a final compromise text at Council level, under the French Presidency of the
European Union. They have our full support, to facilitate long-term, sustainable
investment (support for equity investment, integration of climate objectives),
without increasing overall capital requirements for insurers.
Further advances have also been made in anti-money laundering and
combating the financing of terrorism (AML/CFT) with the creation of a
dedicated directorate within the ACPR, which will notably monitor the risks
France's
linked to crypto-assets. The ACPR is in part to thank for excellent
results in its evaluation by the Financial Action Task Force (FATF), with the
French AML/CFT system recently receiving the highest possible score for
quality.
In customer protection, the industry-wide agreement reached in February
2022 under the aegis of the Ministry of the Economy will ensure greater
transparency in management fees for life insurance and retirement savings
contracts, with insurers required to publish a fee schedule for each contract as
of 1 July 2022. But we need to ensure savers are even better informed. The
ACPR recently conducted a study to compare the features of the different
products available: fees, returns, type of underlying assets offered on unit-linked
contracts. The results, which show that the current offering needs to be
simplified and that we need to think of ways to better share the returns, will be
discussed this summer with insurers; we will publish the findings by next
autumn, along with the measures chosen in our talks with the industry. Insurers
deserve fair remuneration for the technical work that goes into marketing and
managing life insurance products: but fair also means open, and technical
should not also mean opaque.
Among the structural challenges facing the financial sector, there of course
remains the issue of climate change. After the pioneering pilot exercise
conducted by the ACPR in 2021, we now need to make these climate stress
-
tests compulsory as is already the case for banks supervised under the Single
-
Supervisory Mechanism and carry them out very regularly both for banks and
- -
insurers. Once the methodology has been refined and only then we will be
able to draw the appropriate conclusions in terms of capital requirements,
starting, as is logical, with Pillar 2.iii
III. The financial system and ACPR will need to be mobilised on several
fronts to tackle the consequences of the war in Ukraine
First, we are paying very close attention to the potential
fallout of the Russia-
Ukraine conflict for financial stability: for the time being it remains limited.
The direct exposure of the French financial sector to Russian assets is
contained: the liabilities of French banks vis-à-vis Russian banks account for
insurers'
less than 1% of their total international liabilities, and French
investments in Russian securities amount to just under EUR 500 million. The
withdrawal from investments in Russia was admittedly tricky, but orderly. The
conflict could have more of an impact via indirect channels, including the strong
tensions in global commodity markets. For the time being, the consequences of
these market movements on the French banking sector have been kept under
control. However, the ACPR remains fully mobilised in monitoring any potential
financial risks that might emerge.
More broadly, the macroeconomic and financial environment has evolved
significantly since last year, and the Ukraine conflict has exacerbated the
inflationary pressures that were already visible at the end of 2021: we are
naturally keeping a very close eye on this, like our fellow citizens. The latest
inflation figures for May, for France and the other countries, confirm a rise that
we were already
expecting, and the need for a gradual but resolute process of
normalisation. We shall take a decision at our Governing Council meeting next
week, which will be in line with recent comments by the President of the ECB.
After having for years listened to complaints about how low interest rates were
weighing on banks and insurers, we might have expected few to voice concerns
now about a rise in rates. Strangely, however, these worries appear to be
emerging. So we need to be clear: the rise in rates, if conducted in an orderly
and well-managed fashion, will be favourable for the financial sector. It should
banks' profitability by increasing their net interest margins. For
bolster French
insurers, it will allow them to change the composition of their portfolios with the
inclusion of higher-return assets; and this, combined with the distribution of
profit-sharing reserves, will allow them to continue offering close to market rates
of return on euro-denominated contracts, and limit redemptions. Financial
institutions will nonetheless have to guard against any potential adverse effects
in terms of unrealised financial losses, and on the solvency of certain borrowers
that are excessively "leveraged". But overall, interest rates -
which have been
-
exceptionally accommodative for borrowers since 2015 will remain favourable
and very bearable for the entire economy compared with historical standards.
Last, among the challenges facing the financial system, I need to mention the
rising threat of cyber risk. Exposure to this risk has increased considerably with
the digitalisation of our working methods, and in particular the growing use of
remote working; it is being further exacerbated by the possibility that Russian
authorities might resort to cyber attacks as part of the Russia-Ukraine conflict.
So far, we have not observed any rise in cyber incidents targeted at financial
institutions since February, but they need to remain vigilant. The proposed
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Digital Operational Resilience Act (DORA) on which a provisional agreement
was reached on 10 May under the French presidency before its formal adoption
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by co-legislators in the near future will increase the operational resilience of
the financial sector. In addition, specific assessments have been conducted in
conjunction with banks and the ECB to prepare actively for the eventuality that
cyber crisis management processes might need to be activated. At the national
level, the Paris Resilience Group, chaired by the Banque de France, has been
closely monitoring the situation of the main financial players and market
infrastructures since the start of the conflict.
**
Thank you for your attention, and I shall pass the floor now to Jean-Paul
Faugère, Vice-Chairman of the ACPR, who will go into more detail on the
insurance sector, and then Alain Ménéménis, who will present the activities of
the Sanctions Committee that he chairs.
References
i
Banque de France, Suivi mensuel des défaillances, April 2022.
ii
OPINION OF THE EUROPEAN CENTRAL BANK of 24 March 2022 on a proposal for amendments to Regulation
(EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk,
market risk and the output floor.
iii
F. Villeroy de Galhau, Europe in motion for climate transition: snapshot, video and scenario of risks, speech,
London, March 2022.