How can international banks operate

International headquartered banks can operate in France either as subsidiaries or branches. A subsidiary is a separate legal entity from its parent and, as such, requires its own governance and risk management, as well as being subject to capital and liquidity requirements in France. A branch forms part of the same legal entity as its head office and, therefore, will not have its own capital base or board (as this is covered in the head office), though local governance is required. Branches of international banks form an important part of the French banking sector. As of 1 January 2015, 65 banks having their head offices in the European Economic Area had branches operating in France on the basis of EEA “passports”, and an additional 21 international banks outside of the EEA had licensed branches in France.

The above structure is mirrored in relation to supervision. For subsidiaries, the French Prudential Control and Resolution Authority (Autorité du Contrôle Prudentiel et de Résolution) (ACPR) has the same legal powers and follows broadly the same supervisory framework as French-headquartered firms. However, the responsibilities for prudential supervision of branches are split between the regulator where the bank is headquartered and the ACPR. Non-EEA banks wishing to open a French branch, need to obtain authorisation from the ACPR. EEA banks, in contrast, have EU Treaty rights to passport into other Member States. EEA banks can provide banking services in France either through a French branch or through a branch or subsidiary in another EEA country (i.e., on a cross-border basis). For EEA banks seeking to passport into France, their home state regulator notifies the ACPR.

What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

For French branches of non-EEA banks, the ACPR will only grant authorisation after consultation with the bank’s home state regulator and provided that certain local authorisation requirements are met, which are similar to those that apply to French banks. Some of these requirements apply only to the French branch (e.g., organisational requirements), whereas others apply to the non-EEA bank as a whole (e.g., requirements relating to the sound and prudent management of the bank). In addition, non-EEA banks wishing to establish a French branch must comply with additional requirements, including inter alia that they are subject in their home state to prudential supervision equivalent to supervision under the CRD IV.

Based on the reciprocity principle, the ACPR can refuse to grant authorisation for the establishment of a French branch of a non-EEA bank if the bank’s country of origin does not offer the same opportunity for access to its market. In addition, the ACPR can refuse to provide authorisation if it considers that the protection of investors, or the sound and prudent management of the bank or the stability of the financial system requires the establishment of a French law company. In this case, the bank will need to operate  as a subsidiary in France.

In relation to French branches of EEA banks, the bank’s home state regulator is responsible for prudential supervision of the whole bank (including the branch). Under article 51 of the CRD IV, however, if the ACPR as branch regulator, considers a French branch to be important to domestic financial stability, it may designate the branch as “significant” under EU law. Where this occurs, the bank’s home state regulator must provide more information about the bank to the ACPR and consult with it on certain issues, such as planning for emergency situations.

Is resolution an important factor in your supervisor’s determination of a branch?

For French branches of non-EEA banks, the ACPR will seek to understand if the branch undertakes critical economic functions and work with the bank’s home state regulator to gain adequate assurances over how, in case of need, these functions would be resolved in line with the ACPR’s objectives. Where the ACPR identifies concerns, it will first raise these with the bank’s home state regulator. If it is not content with the response, the ACPR will consider using its powers over the branch to address it’s concerns. Where serious concerns exist, the ACPR may revoke the branch’s authorisation to operate in France. In this circumstance, the bank may choose to apply to operate as a subsidiary in France, which would require separate authorisation from the ACPR.

For French branches of EEA banks, the ACPR’s approach is consistent with the CRD IV. The ACPR will seek to understand if the branch undertakes any critical economic functions in France. If it does, the ACPR will seek to work with the bank’s home state regulator to ensure that its resolution strategy takes into account the branch’s potential impact on France’s financial stability and to agree with it how the ACPR can support prudential supervision.

Where the ACPR has material concerns about the bank’s viability or the branch’s activities that the home state regulator is not addressing, the usual recourse is for the ACPR to refer the issue to the European Banking Authority. In emergency situations, and in accordance with articles 43 and 44 of the CRD IV, where the home state regulator has not taken appropriate action, the ACPR will take precautionary measures that will protect against financial instability that would seriously threaten the collective interests of depositors, investors and clients in France.

What are the regulatory reporting requirements placed on branches?

EEA and non-EEA banks must provide periodic reports to the ACPR regarding operations of their French branches, including their detailed financial situation.

Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

It is entirely possible and not infrequent for foreign banking groups to request and be granted separate licenses to open both branches and subsidiaries in France. This is often done both for tax purposes (the relevant tax treaty may be different depending on whether payments are made to or from a subsidiary or a branch) and for prudential ratio reasons. Several foreign banks maintain both branches and subsidiaries in France.

The principal difference between the two modes of operation is that the establishment of a branch in France by a credit institution which is itself constituted under the laws of another European Union member state can be effected through the freedom of establishment while one of the opening of a subsidiary cannot. Therefore, if the foreign bank is itself an EU or EEA credit institution, it is likely to find it easier to establish a branch first as it will be entitled to use “passport privileges” to obtain the necessary authorisations on an expedited basis. In the case of non-EU/EEA credit institutions, the French authorities will typically look to see that the jurisdiction of the bank seeking branch approval practices reciprocity, i.e., also entitles French banks to open branches in that country.

As of 1 January 2015, there are 65 EU/EEA banks with branches in France (i.e., availing themselves of “passport” privileges) and 21 branches of other foreign banks.

Where can I find further information?