Christian Noyer: France’s banking industry in 2006 – key trends Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the French Banking Commission, at the presentation of the 2006 Annual Report of the French Banking Commission, Paris, 29 June 2007. *  *  *  Welcome to this press breakfast, organised for the release today of the 2006 Annual Report of the Commission Bancaire. I would like to discuss the key trends that characterised France's banking industry in 2006, not just in terms of structure and performance but also the regulatory environment in which it operates. It is clear that the framework for financial activity and banking risk management has changed in recent months, confirming the ever more urgent need for new methods of risk assessment and for appropriate supervision that can react swiftly to these changes. In my view, several factors are important in this respect. First, in a highly international context, banks' performances are increasingly being judged from the outside, especially by shareholders. Those judgements are sometimes so harsh that they can have a direct structural impact. Consequently, banks can no longer afford simply to post excellent results – as again was the case in 2006 for most major international banks, especially French banks. They must also make sure that the underlying quality of those results is sound. To do this, they must pay special attention to the way they manage risks internally and plan their strategic expansion, and to their capital adequacy policy.

The missions were initiated after the Commission's General Secretariat had received the findings of the institutions' "internal validations". The purpose was to make sure that institutions were in compliance with the minimum regulatory requirements and, more generally, to check the quality of their information systems and the conditions in which these mechanisms are used and controlled. These inspections revealed that institutions had indeed already made extensive achievements, but also showed that some of them needed to make further progress on Pillar 1 of Basel II, especially with regard to: -  the collection and estimation of the Basel parameters, particularly probabilities of default (PD) and loss given default (LGD): on this point, it is important that banks should steadily upgrade again their historical data so as to cover full business cycles;  -  permanent control and validation of information systems and/or models: implementing thorough benchmarking and back-testing processes is crucial in this context. With regard to Pillar 2, the Commission Bancaire urges banks to make certain that their Internal Capital Adequacy Assessment Processes capture risks which are covered incompletely or not at all by Pillar 1, especially concentration risk, liquidity risk and overall interest rate risk. In the months ahead, priority must be given to developing stress tests that are more comprehensive, i.e. that encompass the various risks (credit, market, etc.) and that aim for exhaustive coverage of risk exposure. Banks must also meet their transparency requirements under Pillar 3 (market discipline), for both the content and the frequency of their disclosures.