Opinion of the European Central Bank of 26 April 2024 on the legal framework for the High Council for Financial Stability (CON/2024/11)

OPINION OF THE EUROPEAN CENTRAL BANK of 26 April 2024 on the legal framework for the High Council for Financial Stability (CON/2024/11) Introduction and legal basis

On 23 January 2024, a draft law related to the French Haut Conseil de Stabilité financière (HCSF, High Council for Financial Stability) (hereinafter the ‘draft law’), which modifies Articles L.631-2 et seq. of the Code monétaire et financier (CMF, Monetary and Financial Code), the current wording of which results from the 2013 Law on the separation and regulation of banking activities , was presented for consideration by the French National Assembly. The draft law was amended by the Finance Committee of the French National Assembly on 10 April 2024. Although the draft law provides that the consultation of the European Central Bank (ECB) under Article 127(4) of the Treaty on the Functioning of the European Union is a requirement for the second article of the draft law to enter into force, the ECB has not, as of the time of adoption of this opinion, been consulted by the French authorities on the draft law. The ECB has decided to deliver an own initiative opinion on the draft law. The ECB’s competence to deliver an opinion is based on Article 127(4), second paragraph, and Article 282(5) of the Treaty, as the draft law relates to the Banque de France and to the European System of Central Banks’ task to contribute to the smooth conduct of policies relating to the stability of financial system pursuant to Article 127(5) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The draft law modifies the CMF with the intention of overhauling the legal framework governing the activities of the HCSF, which was first established in 2010, and then significantly revamped in 2013. 1.2 In 2010, the Law on banking and financial regulation established the Conseil de la régulation financière et du risque systémique (Corefris, Council of Financial Regulation and Systemic Risk). This was composed of the Minister for the Economy, who also chaired it, the Governor of the Banque de France, the Vice-President of the Autorité de contrôle prudentiel et de résolution (ACPR, Prudential Supervision and Resolution Authority), the President of the Autorité des marchés

1 The draft law proposes to amend Articles L.631-2 and L.631-2-1 of the CMF.

2 Loi n° 2013-672 du 26 juillet 2013 de séparation et de régulation des activités bancaires, JORF n° 0173 du 27 juillet 2013, texte n° 1.

3 See Article 2, II, of the draft law.

4 The draft law proposes to amend Articles L.631-2 and L.631-2-1 of the CMF.

5 Loi n° 2010-1249 du 22 octobre 2010 de régulation bancaire et financière, JORF n° 0247 du 23 octobre 2010, texte n° 1. financiers (Financial Markets Authority), the President of the Autorité des normes comptables (Accounting Standards Authority) and three qualified individuals appointed for their expertise in monetary, financial or economic matters by the Minister for the Economy. At a time when discussions at the Basel Committee on Banking Supervision on macroprudential instruments were still ongoing and Union legislation was yet to introduce such an instrument, the main task of Corefris was to monitor financial stability, especially systemic risks, and foster cooperation between the different institutions represented. 1.3 In 2013, while unchanged in its composition and governance (apart from the nomination of the qualified individuals now resting with the Chairpersons of both chambers of Parliament and the Minister, each of them nominating one qualified individual), the legal framework governing the activities of Corefris was substantially overhauled, in line with Union law . Corefris became the HCSF and was granted six tasks: (1) to foster cooperation between the different institutions represented ; (2) to analyse systemic risks taking into account the opinions and recommendations of European 8 9 authorities ; (3) to issue opinions and recommendations ; (4) to adopt legally binding measures to address systemic risks ; (5) to recommend to the relevant European authorities the adoption of measures preventing any systemic risk to the financial stability of France ; and (6) to facilitate the cooperation of its members with a view to contributing to the adoption of European or international norms . 1.4 The draft law intends to modify both the composition and the legal framework of the HCSF. According to the explanatory note to the draft law, the aim pursued is twofold. First, the draft law aims at increasing the democratic aspect in the adoption of the HCSF’s decisions by changing the composition of the HCSF. Second, the draft law intends to constrain the HCSF’s power to adopt legally binding measures setting the conditions for granting credit with a view to preventing the emergence of excessive upward movements in the prices of assets of any kind or excessive indebtedness on the part of economic agents (hereinafter ‘borrower-based measures’). 2. Consultation of ECB by national authorities regarding draft legislative provisions 2.1 As noted above, the draft law sets out that the consultation of the ECB under Article 127(4) of the Treaty is a requirement for the second article of the draft law to enter into force. Under Articles 127(4) and 282(5) of the Treaty, the ECB must be consulted by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out in Council Decision 98/415/EC . In accordance with Article 4 of Decision 98/415/EC, each Member

6 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

7 Article L.631-2-1, 1°, of the CMF.

8 Article L.631-2-1, 2°, of the CMF.

9 Article L.631-2-1, 3°, of the CMF.

10 Article L.631-2-1, 4°, 4° bis, 4° ter, 5°, 5° bis and 5° ter, of the CMF.

11 Article L.631-2-1, 6°, of the CMF.

12 Article L.631-2-1, 7°, of the CMF.

13 Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). State must ensure that the ECB is consulted at an appropriate stage enabling the authority initiating the draft legislative provision to take into consideration the ECB’s opinion before taking its decision on the substance. 2.2 Based on this, the ECB should be consulted not only in respect of a single article, but on the draft law in its entirety prior to its adoption .

3. Changes to the nomination and appointment of the members of the HCSF

3.1 Composition of the HCSF 3.1.1 The draft law introduces changes to the nomination and appointment of the members of the HCSF. To that end the draft law provides for an increase in the number of members sitting in the HCSF from eight to ten. These two new members to be appointed are both members of the French Parliament, respectively a member of the National Assembly and a member of the Senate. 3.1.2 In this respect, the draft law also requires that, following the increase in appointed members, the two members of Parliament to be appointed are chosen so that gender balance is achieved at the HCSF level; the current arrangement provides that the three qualified representatives are chosen so that the overall composition of the HCSF tends to be gender balanced. 3.1.3 In its previous opinions on macroprudential oversight the ECB expressed support for the design of effective macroprudential policy frameworks within Member States, in line with the guiding principles set out in Recommendation ESRB/2011/3 of the European Systemic Risk Board . It should be highlighted that the European Systemic Risk Board (ESRB) recommends that national central banks should have a leading role in macroprudential oversight because of their expertise and their existing responsibilities in the area of financial stability. The ECB takes note that this principle is also indicated by Regulation (EU) No 1092/2010 of the European Parliament and of the Council . In addition, Recommendation ESRB/2011/3 also recommends that, in the pursuit of its objective, the macroprudential authority is as a minimum operationally independent, in particular from political bodies. This includes that organisational and financial arrangements do not jeopardise the conduct of macroprudential policy. In this regard, the ESRB, in its 2014 Compliance Report on the implementation of Recommendation 2011/3, considered that France was only partially compliant with regard to Recommendation E on independence, as the government was deemed to play a leading role in the macroprudential authority .

14 See paragraph 2.1 of Opinion CON/2024/5. All ECB opinions are published on EUR-Lex. See also Guide to consultation of the European Central Bank by national authorities regarding draft legislative provisions, pp. 18-20, available on the ECB’s website at www.ecb.europa.eu.

15 See, for example, paragraph 2.1 of Opinion CON/2013/82 and paragraph 2.1 of Opinion CON/2022/8.

16 Recommendation ESRB/2011/3 of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (OJ C 41, 14.2.2012, p. 1).

17 Recital 24 of Regulation (EU) No 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Board (OJ L 331, 15.12.2010, p. 1).

18 On the other hand, the power conferred on the Governor of the Banque de France to propose measures was assessed as a positive organisational feature of the HCSF. See European Systemic Risk Board, ESRB Recommendation on the macro-prudential mandate of national authorities (ESRB/2011/3) Follow-up Report – Overall assessment, June 2014, available on the ESRB’s website at www.esrb.europa.eu. 3.1.4 The simultaneous increase in the number of members and the fact that these new members with voting rights are members of Parliament alters the composition of the HCSF. The number of HCSF members would increase to ten, with members who are politically appointed or representing political bodies now due to increase to six . Consequently, in its current form, the draft law risks further conflict with the principles sets out in ESRB Recommendation 2011/3, which recommends that the macroprudential authority should be as a minimum operationally independent, in particular from political bodies . This risk of conflict is potentially reinforced by the fact that to break a tie among the members of the HCSF during a vote the Minister for the Economy holds the casting vote . These changes de facto result in a dilution of the representation of technical bodies in the HCSF, including, but not limited to, the Banque de France and the ACPR. 3.1.5 In the light of the above, the ECB invites the French legislator to further reflect on how best to maintain the balance of powers and responsibilities within the HCSF. 3.2 Gender-balanced representation The ECB takes note of and welcomes the arrangements to further strengthen gender-balanced representation in the HCSF. 3.3 Hearing before the Parliament of the qualified candidates 3.3.1 The draft law provides that the three qualified individuals sitting on the HCSF are to be appointed after being heard by the Finance Committees of the National Assembly and the Senate. 3.3.2 The ECB understands that the hearing of the nominated qualified candidates before the French Parliament does not amount to a formal vote of approbation from the Parliament in respect of the candidates. This does not constitute a material change in the procedure to appoint the qualified candidates. The choice to appoint these qualified candidates to the HCSF continues to reflect the sole decision of, respectively, the President of the National Assembly, the President of the Senate and the Minister for the Economy.

4 Amendments to the framework for setting borrower-based measures in France

4.1 Summary of amendments 4.1.1 The draft law introduces substantial changes to the powers enjoyed by the HCSF with the aim of limiting the application of borrower-based measures . In this regard, the draft law also introduces a three-month sunset clause requiring the HCSF to periodically review and consult on a HCSF decision regarding a borrower-based measure . Moreover, it makes explicit that the HCSF, upon a proposal made by the Governor of the Banque de France, can set exemptions in respect of borrower-based

19 Under the draft law, the HCSF is composed of six members who are either representatives of, or appointed by, political authorities: three qualified individuals (appointed, as has been the case since 2013, respectively by the Minister for the Economy, the President of the Senate and the President of the National Assembly), the Minister for the Economy and two members of the French Parliament.20 See Section I of Recommendation ESRB/2011/3.

20 See Section I of Recommendation ESRB/2011/3.

21 Article R.631-8, II, of the CMF.

22 Adopted under Article L.631-2-1, 5°, of the CMF. rd

23 In Article L.631-2-1, 5°, 3 sentence, of the CMF. measures as part of its decisions on their adoption. Finally, the draft law amends the rules governing the publication of proposals made by the Governor to the HCSF to adopt borrower-based measures. 4.1.2 The ECB recalls its support for the implementation of a legislative framework for borrower-based measures in all euro area Member States, which are known to be effective in addressing macroprudential and systemic risks . The availability of a comprehensive set of borrower-based measures, including income-based measures, enables the HCSF to respond in a flexible and proportionate way to potential risks to financial stability. 4.1.3 The ECB understands that under the draft law, any proposal on borrower-based measures would have to be made by the Governor of the Banque de France, and that only a formal proposal from the Governor would be put to a vote among the members of the HCSF. The ECB also understands that the Governor of the Banque de France also retains the power to define in any such proposal the exemptions for borrower-based measures. The ECB supports the central role assigned to the Governor of the Banque de France to propose and define the conditions under which borrower-based measures are to be adopted and then implemented. 4.2 The sunset clause in respect of the borrower-based measures 4.2.1 As noted in paragraph 4.1.1, the draft law adds a sunset clause under which borrower-based measures, including any exemptions in respect of such measures, are in force for up to three months and are reassessed by the HCSF after consulting the Comité consultatif du secteur financier (CCSF, Consultative Committee for the Financial Sector), which is a consultative body composed of financial services stakeholders, before potentially being renewed. In this regard, the ECB notes that the consultation of the CCSF may further impact upon the effectiveness and independence of the HCSF’s decision-making process, as the members of such consultative body are appointed by the Minister for the Economy, among representatives of the financial sector and consumers of financial services, and also include a member of the National Assembly and a member of the Senate. The ECB further notes that the very limited timeframe during which borrower-based measures are in force would severely jeopardise their effectiveness in tackling risks to financial stability. 4.2.2 Borrower-based measures are macroprudential limits to lending standards, such as debt-to-serviceincome, debt-to-income and loan-to-value ratios, as well as maturity and amortisation requirements, that generally apply only to newly originated loans. The availability of a comprehensive set of borrower-based measures, including income-based measures, enables the relevant authorities to respond in a flexible and proportionate way to potential risks to financial stability. Against this background, it should be recalled that including exemptions in respect of borrower-based measures is a common practice in their design. The calibration of borrower-based measures, including possible exemptions, should be informed by thorough technical impact assessments conducted by the macroprudential authorities . A limited period of applicability would not allow for a proper technical assessment of borrower-based measures, potentially hindering the achievement of their financial stability objectives, namely increasing the resilience of both borrowers and banks.

24 See paragraph 3.2 of Opinion CON/2018/9, paragraph 2.1 of Opinion CON/2019/34, paragraph 2.3 of Opinion CON/2020/1 and paragraph 3.1 of Opinion CON/2022/8.

25 Under Article L.631-2-1, 5°, of the CMF. 4.2.3 The very strict timeframe of three months, coupled with a cumbersome extension procedure, would jeopardise the effective implementation of borrower-based measures. 4.2.4 These characteristics explain why in other Union jurisdictions the review of borrower-based measures, when it is required, takes place after a longer period of time. For example, in Austria, borrower-based measures are effective for a period of up to three years . In Ireland, the macroprudential authority in general considers borrower-based measures to be permanent in nature and their calibration to be largely driven by structural factors and does not therefore envisage regular calibration changes. In this respect, structural factors are seen as slow-moving features that play a role in determining, for example, the magnitude of risks to affordability or a sustainable level of house prices relative to incomes . 4.2.5 In the light of the above, the ECB suggests that any sunset clause for borrower-based measures should extend over a sufficiently long period of time. 4.3 Publication of proposals made by the Governor of the Banque de France to adopt legally binding measures 4.3.1 The draft law introduces new requirements regarding the publication of proposals made by the Governor of the Banque de France under the relevant provisions of the CMF . The ECB understands that the draft law requires the publication of all proposals made by the Governor of the Banque de France pertaining to borrower-based measures , while it remains at the discretion of the Governor that proposals concerning other legally binding macroprudential measures may be published. 4.3.2 The ECB acknowledges the intention of this amendment to enhance transparency in the work of the HCSF but considers that the introduction of what amounts to a dual regime regarding publication of proposals made by the Governor of the Banque de France may have detrimental effects. The differentiated treatment of proposals increases the constraints on the actions of the Governor and may ultimately affect the reputation of the Banque de France by requiring the publication of market sensitive proposals in circumstances in which it may not always be appropriate to do so. 4.3.3 In addition, the potential application of a differentiated regime of transparency suggests that the proposals made by the Governor of the Banque de France are not equally considered. The ECB therefore recommends aligning the regime governing the disclosure of the Governor’s proposals regarding borrower-based measures with the provision currently governing the publication of the other proposals. At the very least, the ECB suggests including a provision giving the Governor the right to veto the publication of any proposals where this is considered necessary to preserve financial stability. 4.3.4 Should the provisions of the draft law become subject to further amendments in the course of the parliamentary process, and should these amendments substantially alter the draft law compared to

26 See Article 23h of the Austrian Banking Act.

27 See Central Bank of Ireland, The Central Bank’s framework for the macroprudential mortgage measures (October 2022), p. 22.

28 See Article L.631-2-1, 4°, 4° bis, 4° ter, 5°, 5° bis and 5° ter, of the CMF.

29 See Article L.631-2-1, 5°, of the CMF.

30 Under Article L.631-2-1, 5°, and under Article L.631-2-1, 4°, 4° bis, 4° ter, 5° bis and 5° ter, of the CMF.

31 Under Article L.631-2-1, 5°, of the CMF. the version on which the ECB expressed its opinion, the ECB would need to be consulted on these amendments . This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 26 April 2024. [signed] The President of the ECB Christine LAGARDE

32 See, for example, paragraph 3.4 of Opinion CON/2015/28.