Banque De France, ACPR, AMF Launch Stress Test On Interconnections With

The Banque de France, the ACPR and the AMF have reportedly launched a first system-wide stress test on interconnections within the financial system.

The Banque de France, the Autorité de Contrôle Prudentiel et de Résolution (French Prudential Supervisory and Resolution Authority) and the Autorité des Marchés Financiers (AMF) are now formally introducing a ‘system-wide’ exploratory stress test exercise with the major French FIs.

This exercise is being conducted within a steady French financial system in order to understand the interconnections as well as any interdependencies between the various players, as well as the potential for destabilisation that could arise in a context of financial stress.

A series of events have highlighted the role of interconnections and interdependencies between financial players in the development of stress within the financial system, especially between the banking industry and non-bank financial institutions.

For instance, considerable stress was observed:

• On the liquidity in the European and American markets in March 2020, at the start of the Covid-19 pandemic;
• on the energy markets at the end of 2021 and in 2022, following Russia’s invasion of Ukraine;
• on the British Gilt market in September and October 2022; and
  in the US financial sector following the difficulties encountered by US regional banks in March 2023.

During each of these episodes, “shock amplification phenomena” were observed, sometimes involving banking and non-banking players.

To gain a better understanding of this type of phenomenon, the Banque de France, the ACPR and the AMF join forces to conduct an “integrated system-wide stress test (taking into account the interactions between players), with the participation of more than 25 French financial institutions, including all globally systemically important banks established in France and, more broadly, a wide coverage of the various sectors involved (banking, insurance, and asset management).”

Unlike traditional stress tests, which tend to focus on a single sector, this latest exploratory exercise aims to understand “how a severe market shock spreads across the financial system and the system-wide consequences of the management decisions taken by each actor, in particular to manage their liquidity needs and meet their obligations (sales of securities, borrowing, issuance of securities, or entering into repurchase agreements).”

The institutions participating in the exercise implement a scenario that reproduces “the characteristics of a stress situation, the severity of which has been calibrated to exceed that of the worst fortnight observed over the last twenty years.”

They analyse the overall impacts of this type of a scenario and then try to explain how they would respond to it.

To date, only the UK authorities (central bank, prudential authority and market authority) have “conducted a comparable exercise in 2023 and 2024.”

The French authorities have now…