EN ECB -PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 12 December 2012  
on banking and financial stability  
(CON/20 12/106) 
 
Introduction and legal basis  
On 15 November 2012, the European Central Bank (ECB) received a request from the Minister for 
Economic A ffairs and Fina nce for an opinion on a draft law on banking and financial stability ( hereinafter 
the ‘draft law’).  
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the third  and s ixth indents of Article  2(1) of Council Decision 
98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities 
regarding draft legislative provisions1, as the draft law relates to the Banque de France and to rules 
appli cable to financial institutions insofar as they materially influence the stability of financial institutions 
and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the 
European Central Bank, the Governing Council ha s adopted this opinion.  
 
1.  Purpose of the draft law  
1.1 Structure of banking groups2  
The draft law separat es activities that financ e the economy from speculative operations. Above an 
exposure threshold defined by order of the Minister for Economic Affai rs, speculative operations 
will have to be ring -fenced in dedicated subsidiaries in the form of investment firms or 
exceptionally credit institutions. The banking groups will be authorised to keep all trading activities 
relating to the provision of investm ent services to clients , financial instruments  clearing , hedging 
investment risks of the credit institutions or group, market -making, the sound management of 
group treasury and financial operations between credit institutions and assimilated entities , as well 
as group investment operations. By contrast, proprietary trading  relating to financial instruments 
without these objectives will have to be conducted in dedicated subsidiaries, as well as any 
operation involving unguaranteed counterparty risks towards money market funds with a gearing 
effect or similar investment vehicles, under  criteria laid down by order of the Minister for 
Economic Affairs . The subsidiaries will not be able to accept  guaranteed deposits or provide 
payment services to clients whose de posit s qualify for the guarantee. The Prudential Control 
                                                 
1  OJ L 189, 3.7.1998, p. 42.   
2  See draft law, Title I.  
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2 Authority ( Autorité de contrôle prudentiel , ACP) and, if relevant, the Financial Markets Authority 
(Autorité des march és financiers, AMF) , should be provided with an organisational chart of the 
units  in charge of the operations relating to financial instruments, their objectives, the rules of good 
conduct and other applicable rules. The  ACP may refuse authorisation if the structure of the 
organisation or the internal control system is not satisfactory . The transfer of activities will take 
place ipso jure , without the need for any formality. The dead line for identif ying the activities to be 
transferred is 1 July 2014 and the deadli ne for transfer ring activities is 1 July 2015.  
1.2 Implementation of a bank resolution scheme3  
First, the ACP becomes the Prudential Control and Resolution Authority ( Autorité de contrôle 
prudentiel et de résolution ), with a new resolution college  and the Deposit G uarantee Fund (Fonds 
de garantie des dépôts ) becomes the Deposi t Guarantee and R esolution Fund (Fonds de garantie 
des dépôts et de résolution ) (hereinafter the ‘Fund’). The Prudential Control and Resolution 
Authority  may ask the Fund to intervene in a credit institution or an assimilated entity  which is 
failing and subject to resolution measures. The Fund would intervene  according to the procedure 
determined by the  Prudential Control and Resolution Authority  in accordance with  the draft law . In 
particular, the Fund may acquire some or a ll of the shares in the entity, subscribe  to an increase in  
capital of the entity or the bridge institution  set up by the Prudential Control and Resolution 
Authority , grant any form of funding to the entity or the bridge institution and assum e part of the 
costs required to guarantee the solvency of the entity. The sums paid by the Fund benefit from the 
more favourable status granted to any creditor providing new financing  to a bank or other 
undertaking subject to safeguard, receivership or winding- up proceedings. The Fund will only be 
liable in defined cases for losses resulting  from the assistance granted .  
Second, rules are laid down for the preventive recovery and resolution plans of banks and a  bank 
resolution scheme is introduced . In this framework, credit institutions and assimilated entities have 
to submit a preventive recovery plan to the Prudential Control and Resolution Authority  for 
possible modification and adoption. The preventive recovery plan may  not involve  the possibility 
to receive financial  support  from the State or t he Fu nd. The resolution college ’s powers includ e 
appointing a temporary administrator, removing any manager, deciding that some or all  activities 
should automatically be transferred or taken over, writing down or cancelling shares according to 
the entity’s loss es, and setting up a bridge institution . The resolution college ensures that the 
measures taken  guarantee financial stability and help to maintain the continuity of activities while 
limiting exception al public financial support to the strict minimum . At th e same time, the resolution 
college will ensure that  no shareholder, member or creditor is worse off than they would have been 
had the institution been liquidated.  
                                                 
3  See draft law , Title II.  
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3 1.3 Macro -prudential  supervision4  
The Financial Regulation and Systemic Risk Council ( Cons eil de régulation financière et du risque 
systémique) becomes the Financial Stability Council (Conseil de stabilité financière ). It will  
supervis e the financial system as a whole and will define macro -prudential policy , with the aim of 
maintaining the stab ility of the financial system. It will evaluate systemic risks, taking into account 
the opinions and recommendations of the competent European institutions, a dopt opinion s or 
recommendations it deems necessary to prevent any systemic risk and any threat to  financial 
stability and decide to define a dditional  capital requirement s at the proposal of the Governor  of the 
Banque de France . The Banque de France , in cooperation with the Financial Stability Council , will 
help to maintain the stability of the financi al system, identify and monitor risks t o it and  contribute 
to the  implement ation of  the measures taken  by the Financial Stability Council.  
1.4 Enhanced powers of the AMF and of the ACP5 
In particular, t he powers of the ACP are strengthened  in relation  to, inter alia , the nomination of 
managers and other  persons on the Board of D irectors or S upervisory Board of inter alia  credit 
institutions. The ACP may  object to a nomination if the criteria of good repute, competence and 
experience required are not met . It may also suspend persons wh o no longer  fulfil the criteria .  
 
2.  Measures relating to the structure of banking groups 
This draft law arises in conjunction with the Report of the European Commission’s High- level Expert 
Group of 2 October 2012 on reformin g the structure of the EU banking sector  (hereinafter the ‘Liikanen 
report’)6. The European Commission will prepare a comprehensive impact assessment of i ts 
recommendations and will make corresponding legislative proposals as appropriate , to ensur e a consi stent 
Union framework . Given that these measures primarily address internationally active banks, the ECB 
considers coordination and consistency to be i mportant  at European and international levels to avoid 
regulatory arbitrage.  
More specifically, the draf t law provides for a mandatory separation of proprietary and other high- risk 
non-client related activities from the deposit- taking institution. Such a separation would further protect 
depositors from being exposed to losses f rom these high risk activities,  reduce complexity and enhance 
resolvability. The ECB also notes that, unlike  the Liikanen r eport , the draft law does not provide for ring -
fencing of market making activities.  
 
3.  Prohibition o n certain activities  
The draft law prohibit s the dedicated sub sidiaries, in the form of investment firms or, exceptionally, of 
credit institutions, from  carry ing out high frequency trading (HFT), dealing with financial instruments 
                                                 
4  See draft law, Title III.  
5  See draft law, Title IV.  
6  Available on the European Commission’s website at : http://ec.europa.eu/internal_market/bank/docs/high-
level_expert_group/report_en .pdf. 
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4 where the underlying asset is a raw food material, and the sale and purchase of derivat ive instruments for 
a credit event affecting a State without connection to the holding of securities issued by this State. In this 
respect, the ECB is of the view  that less intrusive approaches, in line with international 
recommendations7, might be  prefera ble. In addition, consistency should be ensured at U nion level.  
First, as regards HFT, as highlighted in O pinion CON/2012/218, the ECB supports the Commission’s 
proposal to introduce organi sational safeguards for trading venues, such as circuit breakers, m inimum tick 
sizes and maximum ratios of unexecuted orders, in line with international recommendations. Further, the ECB considered that all entities engaged in algorithmic trading on a professional basis should be 
considered as falling within the definitio n of investment firms and be subject to supervision and 
monitoring of their activities by competent authorities. Finally, th e ECB supports  the empowerment of 
competent authorities to temporarily prohibit or restrict certain types of financial activity or p ractices  with 
a view to addressing a threat to the orderly functioning of financial markets or the stability of whole or 
part of the financial s ystem.  
Second, as regards the proposed prohibition on operations relating to financial instruments where the 
underlying asset is a raw food material, Opinion CON/2012/21 support s the empowerment of competent 
authorities to set ex ante position limits for commodity derivatives over a specified period of time, while the E uropean Securities and M arket Authorit y will be  granted a coordination role of such measures as 
well as specific direct powers in this area
9.  
 
4.  Financial Stability Council  
The ECB welcomes the exten sion to the powers of the Financial Regulation and Systemic Risk Council, 
now renamed as a Financial Stability Council . This will enhanc e its role as a national macro -prudential 
authority in France10.  
The tasks of the Financial Stability Council include: ( a) ensuring that t he institutions represented on its 
panel cooperate and exchange information, and examine the situation in the financial sector and markets, 
and ( b) cooperating with equivalent authorities in the other Member States and the competent European 
authorities. Moreover, actions of national macro -prudential authorities should take account of th e 
responsibility of the European Systemic Risk Board (ESRB) for macro -prudential oversight of the 
                                                 
7  See IOSCO Report ‘Regulatory Issues Raised by  the Impact of Technological Changes on Market Integrity and 
Efficiency ’, October 2011, and ‘Principles for the Regulation and Supervision of Commodity Derivatives Markets ’, 
September 2011.  
8  Opinion CON/2012/21 of 22 March 2012 on: (i) a proposal for a d irective on markets in financial instruments repealing 
Directive 2004/39/EC of the European Parliament and of the Council; (ii) a proposal for a regulation on markets in 
financial instruments and amending Regulation (EMIR) on OTC derivatives, central count erparties and trade repositories; 
(iii) a proposal for a directive on criminal sanctions for insider dealing and market manipulation; and (iv) a proposal for a  
regulation on insider dealing and market manipulation (market abuse) (OJ C 161, 7.6.2012, p. 3).  Paragraphs 10.1 to 
10.4.  
9  Paragraph 11.1.  
10  See for example ECB Opinion CON/2012/55.  All ECB documents are available on the ECB’s website at 
www.ecb.europa.eu.  
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5 financial system within the Union11. The ECB recommends in this respect that the draft law requires  the 
Financial Stability Council  to inform the ESRB of all a ctions taken to address systemic risks at national 
level . Further more , it should inform the ESRB prior to the issuance or publication of its opinion s and 
recommendations, if significant cross- border effects are to be expected.  
Lastly, the Financial Stabili ty Council’s activities will have to take account of the ECB’s macro -
prudential supervisory powers in the context of the single supervisory mechanism . 
 
5.  Involvement of the Banque de France in macro -prudential supervision  
The ECB  supports  the enhancement  of the macro -prudential functions performed by the Banque de 
France in cooperation with the Financial Stability Council. The ECB understands that the Banque de 
France will contribut e to: (a) monitoring financial stability and systemic risks, ( b) ensuring 
implementation of the Financial Stability Council’s recommendations, ( c) making proposals to the 
Financial Stability Council concerning the application of the specified macro- prudential instruments, such 
as capital or own funds requirements or conditions f or lending practices of credit institutions.  
As stated  in the ECB ’s Convergence Reports12, the involvement of  the Banque de France in  the 
application of  measures to  strengthen financial stability must be compatible with the Treaty . A national 
central bank’ s functions must be performed in a manner  that is fully  compatible  with it functional,  
institutional  and financial independence to safeguard the proper performance of i ts tasks under the Treaty 
and the Statute  of the European System of Central Banks and of  the European Central Bank . To the extent 
the role of the Banque de France under the new legislation goes beyond advisory functions and requires it 
to assume additional tasks, it must be ensured that these tasks will not affect the ability  of the Banque de  
France  to carry out its ESCB -related tasks from an operational and financial point of view.  
Additionally, the inclusion of  Banque de France representatives in collegiate decision -making supervisory 
bodies or other authorities such as the Financial Stabil ity Council or the Prudential Control and 
Resolution Authority  would need to give due consideration to safeguards for the personal independence 
of the members of Banque de France’s  decision -making bodies13. 
 
6.  Framework for the recovery and resolution of credit institutions and investment firms  
The ECB welcomes the proposed amendments  in the draft law . It notes that national legislation will have 
to be brought into line with forthcoming Union legislation, in particular the proposal for a directive of the 
European Parliament and of the Council establishing a framework for the  recovery and resolution of 
credit institution s and investment firms14 (hereinafter the ‘proposed directive’)  and the establishment of a 
                                                 
11  Article 3(1) of Regulation EU (No) 1092/2010  of the European Parliament and of the Counci l of 24 November 2010 on 
European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board 
(OJ L 331, 15.12.2010, p. 1).  
12  See for example ECB’s  Convergence Report 2012, p. 2 2. 
13  See for example ECB’s  Conve rgence Report 2012, p. 2 2. 
14  COM(2012) 28 0 final,  available on the European Commission’s website at http://ec.europa.eu.  
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6 single resolution mechanism, focused on a European  Resolution Authority, which the ECB fully 
supports15.  
The draft law provides that the Prudential Control and Resolution Authority  may, inter alia , write down 
or cancel shares.  The ECB welcomes the development of bail -in as a debt write down or conversion 
mechanism to absorb losses of institutions that are failing or likely to fail. The bail- in mechanism should 
be in line with internationally agreed key attributes for effective resolution16. In particular , the resolution 
authority should be empowered under a  resolution regime  to bail in a wide range of liabilities in 
accordance with the creditor hierarchy that would apply in liquidation . The ECB supports the introduction 
of such a bail -in tool by the Member States before  1 January 201817. This would allow for further work 
on bail -in, which may be necessary to as sess the possibility of introducing a minimum requirement for a 
targeted level of designated bail -in instruments while still maintaining the overall scope of bail -in and the 
practical implications of bai l-in as a resolution tool.  
 
This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main, 12 December 2012.  
 
[signed]   
The Vice -President of the ECB  
Vítor CONSTÂNCIO  
                                                 
15  Paragraph 1.5 of ECB Opinion CON/2012/96 of 27 November 2012 on a proposal for a Council regulation conferring 
specific tasks on th e European Central Bank concerning policies  relating to the prudential supervision of credit 
institutions and a proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 
No 1093/2010 establishing a European Supervisor y Authority (European Banking Authority), not yet published in the 
Official Journal.  
16  See ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, October 2011, available on the Financial 
Stability Board’s website at www.financialsta bilityboard.org.  
17  See Article 115(1), third paragraph of the proposed directive. See also paragraph 6.1 of ECB Opinion CON/2012/99.