Banking Crisis, Bank Failure Risk, and Bank Failure

BANKING RISK AND BANK FAILURE

Before the financial crisis of 2008-2010, financial stability and the approach to banking and financial risk were based on the assumption that if each individual financial institution was well-capitalized and stable, then the financial system as a whole was secure. The 2008-2010 financial crisis largely challenged this approach. Spillover effects between institutions, markets, and countries were observed, with significant shock propagation highlighting the need for an overall view of the banking and financial sector.

ACPR and banking risk supervision

The Autorité de Contrôle Prudentiel et de Résolution (ACPR) is responsible for supervising the banking and insurance sectors in France. It ensures the stability of the financial system and the protection of clients. It exercises what is called prudential banking supervision, which involves continuous oversight of all banking sector entities in France and ensuring compliance with legislative and regulatory provisions.

The 2008-2010 crisis highlighted the interactions between the individual health of institutions and broader financial stability issues. Indeed, this banking crisis demonstrated that the destabilization of one institution could trigger wider effects, potentially impacting other institutions or even the entire banking and financial sector, thereby causing a "systemic" banking crisis. Since then, banking crisis prevention has been reinforced with new regulatory measures implemented in 2015 and 2016, involving both regulatory authorities and the institutions themselves.

• Institutions covered by the "resolution" framework are required to draft, update, and submit a preventive recovery plan to the supervisory authority each year.
• The resolution authority prepares and updates its own resolution plan for each systemically important institution falling under the banking resolution framework.

Enhanced prudential supervision to address bank failure risk

To better combat banking risk and prevent an incident—such as an insolvent or failing bank—from escalating into further failures within the sector, prudential supervision has shifted toward a more holistic and integrated approach covering the entire financial sector: banks and insurance companies. The goal is to identify and address a broader range of banking risk factors at the institutional level, within the banking and insurance sectors, and at the systemic level.

FGDR, the banking crisis operator

The FGDR (Fonds de Garantie des Dépôts et de Résolution) has three intervention mechanisms for a banking institution in crisis or near failure. It can intervene through compensation, preventive measures, or resolution.

FGDR intervention before bank failure

As part of prevention and resolution, the FGDR can intervene at different levels on capital or financial support for the failing bank, on capital or financial support for a bridge bank or asset management structure, on acquisition of assets or coverage of costs related to measures aimed at restoring the solvency of the institution in crisis. It can act as substitute for certain creditors in the internal recapitalization process.

FGDR intervention after a bank failure

For compensation, the FGDR intervenes when a bank failure is declared, upon request from the supervisory authority. It compensates depositors for their deposits (current accounts, other accounts, and regulated savings accounts) within 7 business days, up to a limit of €100,000 per client.

Additionally, the FGDR reimburses regulated savings accounts guaranteed by the State (Livret A, LEP, and LDDS), also within a maximum of 7 business days and up to €100,000 per client.

Learn more about ACPR's mission regarding banking crises and bank failures