The Legacy of State-led Finance in France
David Howarth, University of Edinburgh
Paper presented to the University of Victoria workshop on
‘National Financial Systems and the Financial Crisis’,
Victoria, British Columbia, 2 October 2010
Draft: please do not cite without the permission of the author.
Abstract
Despite the liberalization and financialization of the French banking system over the
past quarter century, French banks have suffered proportionately less in the recent
financial crisis than the banks in both liberalized systems like the UK and several less
liberalized systems such as Germany. This paper explains the paradox of a liberalized
but stable banking system in terms of State disengagement from the financial system
and the softer forms of intervention that have persisted into 2000s. The specificities of
this disengagement involved the creation of national banking champions, a highly
consolidated, saturated and anti-competitive banking system – despite de jure
liberalization – short-lived cross-shareholding networks centred around banks, a
closed banking system with only limited foreign presence, a legislated bias towards
retail for some of the mutual banks, and the encouragement of specific forms of
securitization. The focus in this analysis parallels that of O’Sullivan (2007) who
emphasises the French State’s role in directing financial market reform. O’Sullivan
analyses the impact of these State-led changes upon company finance and the
development French company bond markets. The focus of this paper is upon how
State-led changes shaped banks and the banking system. The footprint of the State,
through a directed and incomplete liberalization, has created a specific kind of
financial system, the intended and unintended features of which have been revealed in
the impact of the global financial crisis upon the system since 2008.
Keywords: French economy, varieties of
financialization, financial crisis; banking system.
capitalism,
interventionism,
Introduction
France is difficult to situate in the Varieties of Capitalism literature and is often
placed in its own category (Hall and Soskice 2001; Hancké 2001). More recently,
Hancké et al. (2007) have described France as a Mixed Market Economy (MME)
along with Southern European forms of capitalism but this is a broad category
containing considerable institutional variety. Nor can France’s financial system be
easily categorised. It contains features of the liberalized / deregulated and more
equity-based UK system but also features of more protected, regulated and less
equity-based Southern European and German systems. Zysman (1983) describes the
French financial system as State-led. Despite the relative importance of equity for
external company finance even by the early 1980s (approximately a half in 1980), the
French State directed finance through state owned banks in the Circuits de Tresor
system (Loriaux 1991). Despite liberalization and privatization of most of the large
French banks from the mid-1980s, studies from as late as the mid-1990s (Morin 1998;
Story and Walter 1997; Underhill 1997) continued to assign a central importance to
1
the State in the context of a ‘financial network economy’. Yet this description had
become largely invalid by the early 2000s. The source of non-financial firm external
finance is one principal indicator of financial system type. Even in the early 1980s,
French company liabilities were split pretty evenly between equity and bank-lending
(often state-directed). By 2000 almost 80% of company liabilities were in equity
(Cobham and Serre 2000; Byrne and Davis 2002, p. 89). The French financial system
had, by this important measure, become more ‘Anglo-Saxon’ than the the UK (70%
equity in 2000). Yet equity market capitalization remained comparatively low in real
terms and as a percentage of GDP ($457bn versus $1152bn for bank assets in 1993
and 36% versus 140%): the lack of private sector pension funds forced large French
companies to list shares in London and elsewhere. Thus, snap shots of the French
financial system tell us very different stories if we look at equity market capitalization
and if we look at company external finance – the latter being a typical measure used
to categories financial systems. The French system might be best described as an
‘equity-dependent but still largely bank-based financial system’. By the 1990s, French
companies relied far more on average than their UK and US counterparts on external
finance on foreign-held equity finance (35% versus 9% and 5% respectively in 1997).
From the mid-1980s both Socialist-led and conservative governments opted to
improve the funding of heavily indebted French companies by making it easier for
them to attract capital through internationally-oriented equity issues. Bank loans rose
in relative importance as a source of finance for non financial companies (NFCs) in
the 2000s in relation to equity and securities – contradicting previous expectations -reflecting low real interest rates in EMU as well as the impact of securitization (Table
X). This development was similar to, yet far less pronounced than the UK financial
system, and thus does not in itself contradict the development of a more liberalized
system.
Table X French non-financial firm debt raised in France (total)
Funds by source* / Loans (Crédits)
Equity and bonds Loans as a % of
date
(Titres de créance) total
2003
573.4
322.4
64.0
2004
601.9
319.8
65.3
2005
651.3
332.0
66.2
2006 (Dec)
712.4
334.0
68.1
2007 (Dec)
804.3
306.4
72.4
2008 (Dec)
882.4
320.7
73.3
2009 (June)
870.6
349.3
71.4
Source: Banque de France (2009) ‘Endettement des agents non financier resident
France, 2e trimestre 2009, 20 October, p. 2.
http://www.banquefrance.fr/fr/statistiques/telechar/titres/2009/agnfi2.pdf
The persistence of the State-led description into the 1990s, owes to French
conservative government attempts to retain an element of control in post-privatised
banks through emulating the more long-standing German practice of crossshareholding networks centred around the then three large commercial banks (BNP,
Société Générale and the now defunct Crédit Lyonnais) and insurance companies,
with the state retaining, indirectly, part ownership through the CDC and other
companies part-owned by the state. Yet, within a few years the cross-shareholding
networks had begun to unravel and foreign control of the largest national banks
2
increased (Maclean et al. 2001). Despite government efforts in the 1980s and 90s to
maintain national ownership of the largest commercial banks, the equity of BNP and
Société Générale banks was largely foreign held by the end of the 1990s. Another
feature of the UK system – securitization – was pronounced and French banks, both
commercial and mutual, were allowed to engage in a full range of investment banking
activities denied to Southern European banks. Thus, lumping France in regulatory
terms with Spain and Italy (as does Quaglia 2010) is problematic.
While the French financial system has become even more British than the British in
terms of reliance on equity finance and foreigner-held equity, some features of the
French banking system appear to align more with the protectionist Southern European
systems. In spite of the extent to which French companies (and banks) are reliant on
foreign-held equity, the French financial system remains largely closed to foreign
banks except in niche markets – making the French system more similar to the Italian
(prior to the mid-2000s) and the Spanish. The French financial system remains subject
to implicit protectionism – it is unlikely that a French government would tolerate the
takeover of one of the two commercial banks by a foreign rival – as well as explicit –
for example, until 2009, two mutual banks and the Post Office benefited as providers
of state-sponsored low-tax savings accounts. The legacy of post-privatization /
liberalization protectionism has had direct implications for the financial system,
contributing to a highly saturated and foreign-bank unfriendly domestic retail market
which has, in turn, shaped the French banking model. French universal banks are
different than their British competitors, retaining a heavy reliance on retail at home
and in their internationalization – despite their growing, and in some areas very
strong, presence in derivatives trading. The French banks themselves describe this as
a ‘balanced business model’ which, they claim, demonstrates the comparative stability
of the large universal French banks – both commercial and mutual – in the context of
the international financial crisis. The impact of the crisis in France – both as a new
and traditional form of financial crisis – was muted compared with many other
European countries. However, the French banking system suffered the immediate
consequences of the new kind of crisis far more than Spanish and Italian systems. As
in Germany, some of the non-commercial banks seeking rapid expansion abroad in a
saturated domestic context – in France mutual banks, in Germany the LB – were hit
hard by the financial crisis. However, unlike Germany they were not hit hardest
proportionately by the crisis. The credit crunch in France has been limited because
French bank lending has depended less upon securitization. In this respect the French
financial system is less British than even the Spanish system. The drop in bank
lending in 2008-9 reflected the state of the French economy rather than a significant
decline in the ability of banks to lend.
This article seeks to explain this apparent paradox of a liberalized but comparatively
stable banking system. The answer to this paradox provided by the French banks and
their representative associations is regularly presented in terms of a ‘balanced
business model’ of banking with a strong retail base. Despite this strong retail base,
the largest French banks were engaged in a full range of investment banking
activities. This article explains this ‘balanced business model’ as the product of
French state disengagement from the financial sector since the mid-1980s. The
specificities of this disengagement involved the creation of national banking
champions, a highly consolidated, saturated and anti-competitive banking system,
short-lived cross-shareholding networks centred around banks, a closed banking
3
system with only limited foreign presence due to both de facto protectionism (despite
the encouragement of open equity markets) and a legislated bias towards retail for
some of the mutual banks. Banks themselves were agents of change, notably through
their efforts to expand in the context of sluggish domestic economic growth and a
saturated domestic retail market. French banks engaged more in investment banking
activities and expanded their retail operations abroad. However, the French State
shaped this financialization. The focus in this analysis parallels that of O’Sullivan
(2007) who emphasises the French State’s role in directing financial market reform.
However, O’Sullivan analyses the impact of these State-led changes upon how NFCs
finance themselves. The focus of this paper is upon how State-led changes shaped
banks and the banking system. Zysman (1983) provides little guidance as to the
French variety of financial capitalism today. However, the footprint of the State,
through a directed and incomplete liberalization, has created a specific kind of
financial system, the intended and unintended features of which have been revealed in
the impact of the global financial crisis upon the system since 2008. The argument of
this paper thus parallels the CPE literature that stresses the transformation of French
capitalism away from a state-led model yet struggles to categorise France (Schmidt
2003; Culpepper 2008).
The focus of this article is on the banking system. Although the French financial
system contains a growing number of non-bank financial institutions, banks continue
to dominate. There was a decline in this dominance over the two decades prior to
2004 but since then the dominance has risen again. In December 2003, depository
institutions held 64 per cent of financial institution assets, down from 68 per cent in
1999 (IMF, 2004) but by 2008 this had risen again to almost 73 per cent (IMF,
2009b). This relative position of dominance is similar to Italy (Ciocca 2005) where
the banks held 66.5 per cent of financial assets in 2005 (IMF 2006a). Banks are even
more dominant in Germany (80.6 per cent of total assets in December 2006 (IMF,
2008)) with only a small decline since the late 1990s and in Spain (80.4 per cent in
December 2005 (IMF, 2006b)). There has been no rapid rise in French private equity
firms and hedge funds, although these do exist (non-bank credit institutions held 10.2
per cent of assets in late 2004) (IMF 2004). Furthermore, the largest hedge fund
managers are subsidiaries of banks (EuroHedge, 2008). Mutual banks also have close
relations with the other important element of the financial system, the insurance
companies (and especially life insurance, which serves as a vehicle for retirement
savings).
A term used frequently in this paper is financialization which is defined here as the
increased trading of, and exposure to, risk. The term is defined in a variety of ways in
the IPE literature (see Engelen, 2008; Ertürk et al., 2008). The usage here is closest to
Aglietta and Breton (2001, p.437), although financialization is not a term they
employ. They link the change from a bank-based to a more market-based financial
system to financial liberalization and financial innovation linked to technological
advance. They also recognise how banks add a ‘new market portfolio’ to their
‘traditional credit portfolio’ (2001, p.441; see also Froud et al. 2007). Financialization
almost always in practice involves internationalization and, always, the reverse, but
the level of financialization involved in internationalization (i.e., the extent to which it
involves the increased taking and trading of risk) is central to the distinction between
different banks and financial systems. The financialization of banks involves a range
of activities, from increasing retail activities internationally (a relatively low exposure
4
to risk, depending on the host country) to derivatives trading and investment in
complex securities.
The facts: the significant but limited impact of the financial crisis on France
Recent record losses in complex financial instruments have seriously weakened many
large European and American banks, bringing several to collapse or near to collapse.
French bank losses have been lower than those in the United States, United Kingdom
and Germany, and French government leaders have lauded the comparative stability
of the French financial system. French bank losses have been on an unprecedented
scale: as of August 2008, six French banks had write-downs of more than $1bn,
totalling US$23.3bn (Bloomberg, 2008) and by August 2010 total write-downs for the
five largest banks reached $69.7bn (Reuters 2010). Yet this was less in both total and
relative terms to losses in the UK and Germany. In August 2008, six UK banks had
writedowns of more than $1 billion with total losses of $64.9 billion and twelve
German banks, with total losses of US$55.9 billion. German bank losses thus more
than doubled French losses during the first year of the crisis even though the total
assets of these German and French banks involved were roughly similar. By August
2010, the four largest British banks reported losses of $177.8bn and overall figures
were much higher. Five German banks had lost more than $3bn by August 2010 and a
combined total of $69.8bn, with much higher total figures given losses in the smaller
public banks. The announcement of German write-downs thus reached a peak in 2008
and declined in 2009 and 2010, although the German refusal to mark to market
disguises losses. French losses reached a peak in 2009, even though all the banks
remained in profit that year. The write-downs at the two large Spanish banks
increased markedly in 2009, reflecting the traditional banking crisis that affected that
country. IMF figures from mid-2009 place French write-downs at only 3 per cent of
the global total – much less than the share of French banks in the global banking
assets (at approximately 10 per cent) – while Swiss write-downs were at 7 per cent,
German at 9 per cent and British at 12 per cent (IMF 2009b, p. 7). In relative terms,
the French banking system was also hit far less hard than the Belgian and Dutch
systems. One international comparison (IMF 2009b, p. 15) on the direct cost of the
crisis for large international banks shows that the direct cost for French banks was
about 18 percent of Tier 1 capital, lower than that of Germany (about 33 percent), the
U.K. (about 37 percent), the U.S. (about 86 percent), and Switzerland (about 87
percent). In contrast, to August 2008 no Italian or Spanish banks suffered losses
greater than US$1 billion as a result of sub-prime. Several have suffered since
because of losses connected to the recessions in those two countries and foreign
exposure (Quaglia 2009; Pagoulatos and Quaglia 2010; Royo 2010). However, by
mid-2009 Italy suffered only 1 per cent of global write-downs (IMF 2009b) and Spain
even less.
Table X sets out French bank losses until end August 2010 and the announced areas
of those losses, sourced from banks’ reports and accounts. The data are possibly
partial and can only be preliminary because they show what the banks deemed
material enough to highlight. However, they are very likely to highlight the main
areas of loss. French banks have continued to announce losses.
Table X Bank Losses
Total
Write-
Writed
owns
Total
Write-
Total
Write-
5
CDO/
MBS
LBOs
Mono
-line3
ABCP /
SIVs
4
Other
Tradin
Iceland/
Lehma
downs
to 8/08
($bn)
BNP-P
SocGen
Credit
Ag
Credit
Mutuel
Caisse
d’Ep
Banque
Pop
4
6.8
8
No
figure
1.2
+
impact
of
Natixis
Impact
of
Natixis
(to
8/09)/
Total
Assets
(at end
2007)
%
0.16
0.43
0.38
owns at
end of
2009 ($
US)1
downs
end
August
2010 ($
US)2
21.8
12.9
13.4
24.9
15.7
15.9
X
X
X
X
X
X
X
g
n/
Washin
gton
Mutual
X
X
X
X
X
X
0.14
(Natixis
6.5
(Natixis
6.6
X
X
X
X
X
No
figure
(Natixis
6.5
(Natixis
6.6
X
X
X
X
X
The data highlight the range of bank activities. The multiple sources of losses at the
large commercial banks is unsurprising. At times, French banks appeared to be at the
forefront of the crisis in Europe. In August 2007, BNP-Paribas froze three investment
funds. In January 2008, Société Générale announced losses of €4.9 billion – the
largest in banking history – through rogue trading in derivatives. Yet, in terms of total
write-downs, the biggest French loser, BNP-Paribas, was in August 2010 in sixteenth
place globally (and in a distant seventh place in Europe). French banks did not
experience significant losses in ABCP and SIVs (although BNP-Paribas has a large
exposure).
The two mutual banks, Banque Populaire and the Caisse d’Epargne have been badly
affected through the difficulties faced by their common investment banking arm,
Natixis. To the autumn of 2008, Natixis’ share price lost 95 per cent of its value in
two years and it announced a loss of €2.622 billion for 2008. By mid-2008, Banque
Populaire and Caisse d’Epargne had advanced a total of €2.5bn. Natixis suffered
losses from a range of sources, with losses in both CDOs, sub-prime mortgages, other
See ‘FACTBOX-U.S., European bank writedowns, credit losses’, Reuters, 28 26 August 2010,
http://www.reuters.com/article/idUSLDE67P14S20100826 Sources: Reuters/annual reports/company
filings. Estimates based on writedowns and losses from subprime securities, mortgages, CDOs,
derivatives and SIVs, and losses on bad loans, or non-performing loans. The definition of a bad loan is
complex and can vary between countries and often includes a provision for future loan losses. Figures
marked with an asterix only include writedowns for 2007 and 2008. The figures for 2009 are estimates.
2
See ‘FACTBOX-U.S., European bank writedowns, credit losses’, Reuters, 28 26 August 2010,
http://www.reuters.com/article/idUSLDE67P14S20100826 Sources: Reuters/annual reports/company
filings. Estimates based on writedowns and losses from subprime securities, mortgages, CDOs,
derivatives and SIVs, and losses on bad loans, or non-performing loans. The definition of a bad loan is
complex and can vary between countries and often includes a provision for future loan losses. Figures
marked with an asterix only include writedowns for 2007 and 2008. The figures for 2009 are estimates.
3
Exposure to insurance companies that provided guarantees for various types of securities.
4
Asset Backed Commercial Paper Conduits. These vehicles, generally off balance sheet, bought longer
term assets, frequently CDOs and MBS, and issued short term commercial paper. They were often
backed by credit commitments from one or more sponsoring banks if the commercial paper could not
be sold.
1
6
complex derivatives and on monoline insurers. Increased funding costs also increased
losses, as did direct exposure to Lehman and Icelandic banks. Crédit Agricole
suffered the second highest losses faced by a French bank, through its investment arm,
Calyon, which was badly exposed to US subprime. Losses were also widely spread,
including CDOs and ABS, monoline insurers, and trading of structured credit and
‘exotic equity derivatives’. These losses demonstrate further the shift in mutual bank
operations.
While many of these figures are already outdated and many losses have yet to be
recorded, they are still indicative of significant differences between French bank
operations and its banking system and those of these other European countries.
However, the much greater exposure of French banks to the financial crisis than their
Italian and Spanish competitors demonstrates significant differences in operations and
systems. At the same time, despite over twenty years of far-reaching liberalization,
French banks also appear to operate, on the whole, differently than British banks.
Placing the French financial system in comparative context
A matrix of seven features can be applied to distinguish national financial systems:
underlying regulatory and supervisory frameworks, external finance for non-financial
companies (NFCs), bank assets to equity market capitalization, relative importance of
retail banking in bank activities, international penetration, concentration in the
banking sector, state intervention. The British system is rooted in common law and is
based on market trust: laissez-faire. Its focus is on market-making and is in favour of
light-touch, principles-based, competition-friendly regulation, even when this implies
a trade off with consumer protection. The legitimacy of the system resides in the
assertion that, ceteris paribus, it is the most efficient in maximizing wealth. The
British system is geared towards an internationalised free market approach. It is
normally though of as an equity-market system: although banks provide short-term
financing for firms, the major source of external financing is the capital market. The
British system consists of wholesale markets, servicing business from all over the
world. British banks are not focused principally upon domestic markets and the
funding of national corporations. British companies have thus had to focus on share
price because of the limited availability of patient capital. In the UK the international
free market approach is also influenced by the strong presence of foreign owned
companies (especially from the US but also EU countries) located in the City, which
was reinforced by the 1980s ‘Big Bang’. The largest banks rely upon investment
activities for a large part of their revenue. The British system upholds a belief in
private sector governance (cf Knill and Lehmkuhl 2002), based on the involvement of
industry through consultation, drafting and implementing soft law. In the UK there is
traditionally an intense and constructive interaction between the public authorities and
industry (Josselin 1997, Moran 1991).
The ‘Southern European’ approach is rooted in the Napoleonic code, based on market
distrust and focused upon market-shaping. It is rules-based and heavily regulated,
with emphasis on consumer protection, even when this reduces competition. National
ownership is important: while this does not necessitate state ownership, state
intervention to maintain national ownership has been typical. The ‘Southern Europe’
classification includes what can be described as network forms of financial systems,
in which cross-shareholding of national firms has limited foreign penetration. In the
Southern group there is traditionally a strong steering action by the state with limited
7
consultation with the private sector (Josselin 1997, Grossman 2005). The German
approach has been considered something of a hybrid. It is stability-oriented, with a
traditional (although declining) emphasis placed upon patient capital. ‘Bank power’ in
the German system is tolerated because family firms were loath to turn to public
listing on the German stock exchange. There is a preference for national ownership.
While there has been a traditional preference for national and state-ownership, and the
publicly owned Landesbanken (LB) and Sparkassen have been a central part of the
German system providing capital to the Mittelstand (small and medium sized
enterprises, SMEs), the large internationally-oriented German commercial banks
share the dominant policy preferences of the British system, in favour of light-touch,
principles-based and competition-friendly regulation. Table X sums up the four
systems according to the seven features.
Table X National financial systems in 2000s
British
Southern
Europe
Light-touch,
Tighter, focus
Regulatory and
industry
led,
on consumer
supervisory
competitionprotection.
framework
friendly, self-
German
French
Increasingly light
touch regulation
and supervision
Mid-range touch
on regulation;
rigorous
supervision.
Increasingly
equity based but
important banklending
High and rising
in 2000s
Bank-based but in
decline, rising
import of equity.
More equity
based
High
High and rising
in 2000s
Decreasing.
Investment
banking
increasingly
important.
Marginal
Important
Important but
decreasing
Important but
less than
Southern
European
Significant but
declining
Limited but
important legacy
International
penetration
High in equity
and banking
Concentration
High and
increasing
Low in banking
but increasing
in 2000s.
Network
capitalism.
Medium
Considerable with
LB and
Sparkassen; less
with large
commercial banks
High in equity.
Very low in
banking. Network
capitalism
(traditionally).
Very low
The provision
of capital to
firms
Bank assets to
equity market
capitalization
Importance of
retail banking
in bank
activities
State
intervention
regulation
More equity
based but growing
importance of
bank assets
Low but rising
Comparatively
high in equity.
Very low in
banking.
High and
increasing
The French financial system demonstrates features of both the British and Southern
European systems. It shares some features of the German system but remains
distinctive: the reliance on equity in the French system is much higher, the
concentration of the banking system greater and the features of protectionism differ
markedly. The analysis below will also indicate the marked difference between the
four systems in terms of banking operations, the relative reliance on retail and
securitization, which explains the different impact of the financial crisis. The analysis
8
of this paper relies on an eighth feature – the nature of securitization – itself partly
related to the retail focus on banks – to explain the differing impact of financial crisis.
There have been significant changes in all European financial systems over the past
two decades due to liberalization and securitization. The ‘Southern Europe’ countries
have, in particular the Italian, have undergone some liberalization. The German
system has seen a rise in the importance of equity and there have been high levels of
securitization (Hardie and Howarth 2009). Nonetheless, the systems remain
distinctive. This paper argues that this characterization of the French system serves to
highlight the reasons for the unique exposure of the French system to the crisis.
The transformation of the French financial system
The liberalization of the French financial system since the mid-1980s has been
substantial. Prior to 1987, all the largest French banks were state-owned. With the
privatizations of 1987 – 2002, four of the largest French banks – Société Générale,
Banque Nationale de Paris (BNP), the now defunct Crédit Lyonnais and Crédit
Commercial de France – became fully commercial operations, listed on the French
stock exchange, the CAC-40, while several others, most importantly Crédit Agricole,
opted to become non-listed mutual banks, owned by smaller regional cooperative
banks. Mutual banks are majority-owned by their depositors and, at least in principle,
operated for their benefit, rather than, as with the listed commercial banks, for the
benefit of private shareholders. All French banks were subject to the same broad legal
framework, adopted in 1984, which allowed them to become universal banks. There
have been several regulatory changes since then but with a trend towards even greater
legislative harmonization in the treatment of banking types. As a consequence of
credit liberalization, all these institutions entered into competition in the domestic
market, under equal terms, with practically no restrictions, and engaged in the broad
range of retail, corporate and investment banking activity.
The relationship of French banks with NFCs – never as close as in Germany – became
more distant (Bertero, 1994; O’Sullivan, 2007) as France moved from a financial
network to a financial market form of capitalism (Morin, 1998, 2000). The
importance of bank finance for French companies – especially the largest CAC-40
listed companies – declined dramatically in the 1980s and 90s, and large French banks
compensated by developing investment banking. However, the comparative strength
of French banking was in domestic retail banking, and reduced profits there
encouraged the largest French banks to expand retail activities abroad. This strong
retail component to internationalization is in marked contrast to the response of
German and British banks to similar competitive pressures. Their internationalization
was almost exclusively in corporate lending and investment banking. The contrast is
highly significant to the differential impact of the crisis in the three countries. The
internationalization strategies of the large, especially the commercial, French banks
once again sit between the ‘Southern European’ and British banks. Large French
banks have developed their international trading activities significantly, but a large
component of this internationalization, in contrast to the UK and Germany, remains in
retail banking. For Italian and Spanish banks, meanwhile, internationalization has
been even more about the expansion of international retail banking activities.
The available data on internationalization support two observations. First, on the asset
side of the balance sheet, internationalization has been very significant, and has
accelerated in recent years. Second, the internationalization of French banking
9
activities conforms to the expected impact of European financial integration with, on
average, an increased euro area exposure outside the home market. French banks have
also increased their exposure outside Europe, particularly in North America, but this
North American exposure has declined relative to the total over the past decade. 5 The
available data is set out in Table X (and X appendix). This EU focus of French bank
internationalization is also found with the largest Italian banks, while the
internationalization of German banks has been more focused on North America (a
reflection of the relative importance of investment banking to this
internationalization) and Eastern Europe, while there is a strong Latin American
dimension to the internationalization of Spanish banks, which reflects strong preexistent ties to that region.
Table X French Bank Internationalization.
BNP Paribas 57.2 per cent of assets in France in 2007, 20.9 per cent outside Europe.
Société
Commitments in France 50 per cent of total in 2007 (65 per cent in
Générale
2003). Exposure outside Europe from 10 per cent in 2003 to 19 per
cent of total in 2007.
Crédit
In 2007, 48 per cent of commercial lending exposure in France, 24 per
Agricole
cent outside Western Europe. In 2002, 84.8 per cent in France, and
10.1 per cent outside EU.
Banque
83.6 per cent of assets in France in 2007.
Populaire
Caisse
Over 90 per cent of customer risks in France in 2007.
d’Epargne
Crédit
95 per cent of customer risks in France in 2007.
Mutuel
French bank internationalization has included, in the cases of BNP-Paribas, Crédit
Agricole and Société Générale, significant expansion in retail banking, particularly
into the Italian market. BNP Paribas, which has 6000 branches outside France, owns
BNL, the sixth largest Italian bank, and BancWest, a US retail bank. The proportion
of BNP-Paribas’ North American exposure has fallen since 2002, although it
remained 16 percent in 2008. Crédit Agricole has considered Greece and Italy to be
‘domestic’ markets since its takeover in 2006 of major retail banks there. As of end
2008, Société Générale’s international retail banking consisted of 40 different entities
with 3700 branches. The overall level of financialization in this internationalization is
lower than for German and British banks, but higher than the Italian and Spanish.
French mutual banks remain overwhelmingly domestic institutions.
The French banking system has been persistently protectionist in terms of foreign
institutional presence – a feature of ‘Southern European’ financial systems prior to the
2000s – although not equity ownership. In the 1980s and 90s, French governments
encouraged the emergence of a limited number of large, vertically integrated banking
groups controlled by French corporate shareholders – in a complex network of crossshareholding with national firms, both to improve the stability of the system and to
foster national champions. Morin (2000: 37) described the France of the 1980s and
1990s as a financial network economy. The ‘hard core’ concept reserved 25 per cent
of privatised firms’ capital to major bank or corporate shareholders, selected by the
5
Note, however, that the data generally obscures the euro area by categorising only Western Europe.
10
state. The expectation was that the state would be able to manipulate this ‘hard core’
to block takeovers by foreign banks. Most of the largest banks were directed by
former ministry of finance officials, advisers to the finance minister and, in several
cases, members of the financial inspectorate, the elite network, grand corps, of
financial sector administrators (Maclean et al. 2001). Thus while no explicit law
blocked foreign ownership of banks, throughout the 1990s it was widely believed that
no French government would sell a privatised bank to foreigners and that the state
would also step in to block foreign firms from taking too large a shareholding of the
listed banks. The decision by the Socialist-led Jospin Government to allow the
London-based HSBC to take over the regional branches of Credit Commercial de
France (CCF) in 2000 could be seen as a sign of changing government attitudes (see
Le Monde, 04.04.2000). The CCF was France’s seventh largest bank and one of the
country’s most profitable banks and the move could be seen as a sign of changing
government attitudes However, no other French banks has since been taken over by a
foreign bank.
Legislation and government policy made foreign penetration into the French banking
sector very difficult in the 1990s, despite broader liberalization and the absence of
sector-wide anti-competitive practices. ‘Security and market transparency’ legislation
adopted in 1989 strengthened the Commission des Operations du Bourse to protect
companies against hostile takeovers by other companies by forcing owners of over 33
per cent of a listed company’s shares to make a bid for at least 66 per cent of shares.
Despite increased competition among French banks, the government also encouraged
the practice of ‘interbancarité’, with cooperation amongst the biggest banks through
an electronic banking card system (Story and Walter 1998). The minitel information
system, developed by the State-owned telecommunication monopoly, France
Telecom, enabled French banks to access households directly, over fifteen years prior
to the advent of internet banking in other countries (Le Monde, 22 October 1992).
French governments continued to intervene in the financial sector though their
manipulation of publicly owned financial institutions and, more importantly, the tax
system. Two large financial institutions remained in government ownership: La Poste
and the Caisse des Dépôts et Consignations (CDC). The former expanded its lending
activities in the 2000s. In 2003, the latter merged its commercial activities with the
Caisse d’Epargne mutual bank. The CDC is mainly engaged in managing certain
specific funds, including a large part of the savings collected through governmentregulated savings schemes. It also holds stakes in a number of companies and
financially supports government policies.
Government legislation also strongly affected the composition and allocation of a
large part of financial savings through numerous schemes to mobilize and direct
savings and credit towards programs judged to be in the public interest. These
schemes encompassed certain controls on interest rates and fees, the design by the
government of various savings products (notably the Livret A), the centralization of
about a quarter of bank deposits in a fund managed by the State-owned CDC,
restrictions on the use of funds collected through some savings products, and
significant differences in tax treatment between financial products. In 2003 (IMF
2004) about 80 percent of bank deposits (including checking accounts) were subject
to significant product and/or price prescriptions, and differences in tax treatment have
steered household savings towards life insurance products and saving for house
11
purchases. Amongst other effects, these policies have distorted competition in the
banking sector by restricting the distribution of certain products with only certain
institutions, notably the public sector or mutual banks, allowed to offer specific taxexempt or high rate savings products, thus placing commercial banks, both domestic
and foreign, at a competitive disadvantage (Candida 2000). Until 1 January 2009, for
example, the Postal Bank and two mutual banks, Crédit Mutuel and Caisse d’Epargne,
were allowed to maintain the tax-exempt Livret A. Despite substantial liberalization
and privatization, therefore, French government involvement in the banking system
remained significant. In this sense, the French system conforms better to practice in
‘Southern European’ systems. The kind of protectionism that persisted in Germany
was markedly different. German Lander governments continued to provide guarantees
to the LB until 2005 and the LB and Sparkassen have continued to operate in what are
in effect fiefdoms closed to other public sector banks. The comparison of French and
German protectionism is potentially revealing. French protectionism encouraged
domestic retail activities, the saturation of the domestic market and encouraged retail
expansion abroad. German protectionism created a moral hazard for German public
banks to engage in reckless trading activities. The far greater toxic assets held by
German LB than French mutuals is one indication of the impact of different forms of
protectionism.
In response to increasing international and domestic competitive pressures, economic
recession and sluggish growth from 1993, there was considerable concentration in the
French banking sector, with a decline from 1556 institutions in 1984 to only 959 by
2003 and 450 by 2008 (Fédération bancaire française 2009), with eight of the largest
banks created (or transformed) as the result of mergers from 1995 to 2004. The
creation of very large banks also reflected deliberate government policy, part of a
broader industrial strategy of creating national champions. The proportion of total
banking assets held by the top twenty institutions rose from 65.1 per cent in 1988 to
78.4 per cent in 2002, on the basis of parent company balance sheets. On the basis of
consolidated balance sheets, which record the assets of subsidiaries as well, the top
five banking groups in France accounted for more than 64 per cent of lending and 75
per cent of deposits in 2006. The French banking system is one of the most
concentrated in the EU. By the late 1990s, four French banks were in the top 15
European banks by asset size.6 More recent figures show that the five largest French
banks have 52.3 per cent of total assets, compared to 22 per cent in Germany, 26 per
cent in Italy, 36 per cent in the United Kingdom and 40 per cent in Spain (ECB,
2008).
The dense provision of French retail banking services makes the entry of foreign
banks very difficult. Foreign penetration into the French banking markets is amongst
the lowest in the EU. Most depository institutions were French owned (85 per cent of
commercial bank assets in December 2008 (up slightly from the 83 per cent in 2003)
6
BNP-Paribas and Société Générale, the two largest French commercial banks, and Crédit Agricole,
the semi-commercial bank, are among the behemoths of European banking. In mid-2008, BNP-Paribas
was the largest bank in the Euro area by total assets and second largest by market capitalization.
Société Générale was the third largest corporate and investment bank in the Euro area by net banking
income and the sixth largest French company by market capitalization. In 2008, Crédit Agricole was
the largest retail bank in France, the second largest in the Europe Union (the largest by retail banking
revenues), the eighth largest in the world by Tier 1 capital (Crédit Agricole Annual Report 2009).
These three banks control the bulk of French bank assets: 83 per cent in 2008, up from 73 per cent in
2002.
12
and 87 per cent of all bank assets (only a slight decrease from the 88 per cent in 2003
(IMF, 2004, p.103; IMF, 2009, p. 44). Here, the French system is closer to the
‘Southern European’ grouping, but also to Germany, with Spain at 86 per cent and
92.8 (December 2005) (IMF 2006b) and Italy at 98.2 per cent and 99.4 (June 2005)
(IMF 2006a)7. As in many industrialized economies, foreign-owned banks mostly
operate in niche markets. By comparison, the foreign presence in the British banking
sector is strong (54 per cent of assets in 2002 (IMF 2003)8).
Although French banks dominate the system, the actual equity ownership of French
commercial banks questions such a picture of bank nationality. Despite cross
shareholdings and perceived government antipathy to foreign ownership, during the
1990s and 2000s, French commercial banks fell under increased foreign ownership,
although domestic corporate shareholders maintained blocking power. In 2002,
foreigners owned 67 percent of BNP-Paribas’ equity capital and 50.8 percent of
Société Générale. However, the French (CDC and NFCs) owned hard-core had yet to
breached. French commercials are similar to other EU commercial banks in this
regard – whether they are based in British, German or ‘Southern European’ systems –
with rapidly rising foreign ownership over the past two decades. For example, the
second largest Spanish commercial bank, BBVA, was foreign-owned at 45 per cent in
2008. French mutual banks have mostly not opened their capital, but Crédit Agricole
– one of the largest retail banks in Europe – was partially opened to private
shareholding in 2001. The actual impact of foreign ownership on bank operations is
hard to isolate. Nevertheless, this opening and the breakdown of cross-shareholding in
French banks is a likely influence on the pursuit of increased profits through more
aggressive strategies involving financialization. At the same time, the comparatively
high exposure of at least one mutual bank to the financial crisis, demonstrates that that
other factors have driven the increased focus on investment banking activities.
Several developments since the late 1980s demonstrate the beginning of a shift in
French banking culture, as banks previously seen as focused on the conservative, riskaverse domestic market looked to investment and international retail and commercial
banking to increase profits. This was pushed very directly by the French State: the
creation of the French futures market, the MATIF, in February 1986 was an early
element of Treasury financial reforms. The MATIF served several purposes (Story
and Walter 1998). It provided a market enabling institutional investors to hedge
against the risk of volatile interest or exchange rates. It represented France’s response
to the creation of LIFFE in 1982. It brought the Paris market into the world web of
futures markets. Above all, the MATIF was a central element in modernising issuing
of state paper. All its major derivative products originated with the Treasury. The
State floated a long-term ECU contract in October 1990 with the specific aim of
developing Paris as the centre for trade in ECUs, the euro’s predecessor. Paris rapidly
became the second market for futures in Europe. The development is significant in
terms of the subsequent securitization of French banking activities. French banks
7
These Italian figures have dropped with the increased French presence in the Italian market since
2005.
8
UK data from the World Bank (2007) includes all banks foreign owned at more than 50 per cent.
World
Bank
(2007)
http://siteresources.worldbank.org/INTRES/Resources/4692321107449512766/Banking_regulation_Survey_III_06
1008.xls The Netherlands fits more the ‘Southern European’ classification in terms of foreign
penetration, with only 8.9 per cent of financial assets owned by foreign-owned banks (2006).
13
focused upon specific kinds of derivative trading: interest rate, exchange rate and
equity derivatives. They engaged in, comparatively, less in the creation of off-balance
sheet SIVs – even though they were not prohibited from doing so by government
legislation. In 1987, Société Générale started derivatives trading within two months of
being the first state-owned bank privatised. The French mutuals entered into
investment banking relatively late, with Banque Populaire taking over Natexis in
1999, transforming it into an investment bank and, in 2006, merging it with the Caisse
d’Epargne’s IXIS to form Natixis, one of France’s largest investment banks. In 2004,
Crédit Agricole set up its corporate and investment banking arm, Calyon. Investment
banking was thus developed and expanded both by those banks with (increasingly
foreign) private shareholders and those without: it was not driven by the push to
increase the share price alone. By the mid 2000s, the French mutual banks were
largely indistinguishable in the range of their operations from the large commercial
banks. Indeed in several years during the 2000s, the mutual banks relied more on the
wholesale markets to finance lending than did the large commercial banks (Table X).
This shift in banking culture is by no means unique to France. It also took place in
Spain and Italy, but the financialization of the commercial banks in these systems
owed more to the international expansion of the retail activities of the largest
commercial banks. The shift away from the domestic market also took place in
Germany where financialization owed more to the rapid expansion of investment
banking (Hackethal 2004 p.77). The impact of this different financialization was to be
very clear in the context of the international financial crisis since 2007.
French banks became increasingly exposed to wholesale, market based funding, as
with British and German banks, which can be indicated (with some caveats) by the
loan to deposit ratio. In the decade prior to the financial crisis, French banks were, on
average, less exposed than German and British banks, although some French banks
(notably the mutual banks) were significantly exposed (see Table X).
Table X Loans to Deposits Ratio of major French, British and German banks
2008 2007 2006 2005 2004 2003 2002 2001 2000
BNP Paribas 119
128
132
122
109
105
115
109
134
SocGen
126
113
99
102
114
111
114
111
120
Banques
177
183
187
140
132
114
117
Populaires
Caisse
151
151
112
93
88
72
d’Epargne
Crédit
121
128
124
114
105
101
101
102
Agricole
Crédit
151
151
141
127
110
108
110
Mutuel
Barclays
138
117
110
113
128
121
118
110
102
HBOS
196
177
178
171
147
154
156
141
134
HSBC
84
90
97
100
97
92
71
69
68
Lloyds
142
134
135
134
126
116
116
113
114
Northern
351
855
323
296
271
229
191
162
146
14
Rock
RBS
Commerz
Deutsche
Dresdner
Bayern LB
Heleba
HSH
Nordbank
LB Berlin
LBBW
LB Sachsen
NordLB
WestLB
DZ Bank
HRE
IKB
137
167
68
88
222
217
224
121
178
43
102
191
211
207
122
209
41
103
168
162
218
122
149
40
105
164
164
188
121
129
41
107
182
164
169
107
138
47
111
197
164
165
102
155
51
109
216
96
189
70
140
222
95
209
78
148
145
145
159
152
276
186
346
137
786
502
179
128
228
155
142
111
668
694
174
133
200
160
160
118
757
1101
141
137
189
162
112
121
873
1225
161
143
157
156
160
165
162
121
131
1090
1082
162
139
147
1346
1229
155
151
150
155
1093
1007
181
378
151
1393
480
Regulation and supervision
The French regulatory and supervisory model has been seen as very rigorous by
international standards (IMF 2003, 2004) with a high degree of observance of
international standards for financial policies. It relied less on self-regulation, which
increasingly dominated the US and UK systems, although it allowed banks to stresstest on the basis of their own models. The regulatory and supervisory authorities –
Bank of France employees who work on behalf of the Banking Commission – were
better staffed than their British and German equivalents and had considerable
inspection powers (interview Banking Commission official, 9 December 2009).
French regulation was more permissive of financial innovation than regulation in the
Southern European countries. The regulatory framework was effectively tolerant of
off balance sheet vehicles, unlike in Spain, where rigorous consolidation rules have
reduced incentives for these vehicles.9 In France, banks were able to avoid building
capital reserves in line with assumed risks. Neither the Basle II capital adequacy
requirement and the EU capital requirement directive nor domestic legislation
addressed this issue (Bank of France official interviews 29 January 2008; Banking
Commission interview, 9 December 2009). The French regulatory system also
operated on the basis of non-obligatory golden rules, which applied in a less straightforward manner in the context of complicated investment vehicles. One of these was
the assumption that a bank facing difficulties should immediately inform the
regulator. Disclosure procedures were as a result left largely to the banks. The
capitalization level of French banks was considered adequate both by Basle II
standards and in international terms, at similar levels to Spanish and Italian banks
(IMF 2004) and better than German and British banks (IMF 2003). Progressive
integration across financial sectors and international borders has presented challenges,
with implications for stability, but these developments have affected all national
financial systems. French supervisory authorities, like those in several other countries,
expressed concern with their inability to monitor the growing operations of national
9
Off-balance sheet refers to an accounting technique in which company debt does not appear on the
company's balance sheet activities as an asset and contingent liability. Keeping debt off the balance
sheet allows the company to appear more creditworthy but misrepresents its financial structure.
15
banks in other countries. The response has been the intensification of bilateral
agreements with other national regulatory bodies, the creation of international
colleges of supervisors for the main French banks and the push by French
governments for the reinforcement of the EU-level regulatory and supervisory
frameworks which would bolster French efforts to improve the cross-border
supervision of French institutions. Overall, the regulatory framework places France
between the more rigorous and constraining Spanish system and the self-regulation of
the British system.
French bank Securitization and the Credit Crisis
This section explores the trading activities of French banks, the trading of derivatives
in particular, and the losses made by banks in the crisis. It is necessary to concentrate
in the pre-crisis period on those activities that are apparent from an analysis of the
banks’ balance sheets. The losses announced as a result of the crisis reveal activities
that were not visible in this way; most obviously, sizeable losses resulting from off
balance sheet activities. Although these investments were not necessarily hidden
previously, greater detail has been given with the publication of write-downs by the
largest French banks. Three conclusions can be reached from the data. First, trading
activity and, in particular, the use of derivatives in trading activities increased in the
decade leading to the crisis. However, trading assets reached a peak of 51.8 and 31.9
percent of total assets in 2006 at BNP-Paribas and Société Générale respectively,
comfortably below the peak for the large US, British and German banks. Derivatives
are used to reduce the risks from credit but, in most French banks analysed, the
volume of derivatives traded massively exceeded that required for balance sheet and
financing risk hedging. All the French banks that distinguish classify derivatives
transactions as mainly for trading purposes. Second, however, there is no correlation
between the use of derivatives and the impact of announced losses. Some banks were
engaged in activities that were not enormously profitable but were perceived as safe,
notably investment in AAA-rated Asset Backed Securities. Third, French banks were
engaged in many of the same activities as British and German banks but purchased far
less junk (notably less mortgage-backed securities) and made smaller overall losses,
however substantial. While those French banks that suffered less were perhaps ‘better
traders’, the main difference is one of degree rather than different practices. Most
obviously, French banks were far smaller investors in the assets that became toxic,
less involved in setting up off-balance sheet vehicles, relative to their size. Only
Natixis appears to have suffered major losses in ABCP and SIVs.10 Crucially, the
large retail banking businesses of the French banks lessened the overall impact of the
crisis.
The banks’ reports do not give a single way to track increased trading activity, but the
data all point in the same direction. The available data includes the percentage of total
assets designated ‘trading assets’, or, more narrowly, the proportion of securities held
for trading purposes. Table X summarises the available data for five of the six largest
French banks.
Table X Increased Bank Trading Activity
BNP
Trading assets 51.8 per cent of total assets in 2007 (14.2 per cent in
10
Both ABCP and SIVs are off-balance sheet entities that buy assets like mortgage-backed securities,
and finance the purchases through issuing debt, mainly short term. Bank’s exposure comes from either
holding the debt issued or through committing to provide financing if the debt cannot be sold.
16
Paribas
Société
Générale
Crédit
Agricole
Caisse
d’Epargne
Crédit
Mutuel
2002). Notional11 derivatives volume 17.4 times total assets in 2007
(23.4 times in 2003).
Trading assets peaked at 31.9 per cent of total assets in 2006 (more
than double 2002). Fall to 28.6 per cent in 2007. Notional derivatives
volume 15.0 times total assets in 2007 (10.4 times in 2002).
Trading assets 30.2 per cent of total assets in 2007. Notional
derivatives volume 11.1 times total assets in 2007 (7.8 times in 2002).
Trading assets 10.5 per cent of total assets in 2007. Notional
derivatives volume 5.3 times total assets in 2007.
Trading assets 13.8 per cent of total assets in 2008 (2007 not
available). Notional derivatives volume 1.5 times total assets in 2007
(3.6 times in 2004).
French banks overall were not as heavily involved in trading as the largest British and
German banks, relative to total assets that included substantial retail operations; nor
had they generally experienced the marked increase in this activity in British and
German banks. The one exception was BNP-Paribas, but its notional derivatives
volume fell between 2003 and 2007. Elsewhere, the picture is different. Société
Générale and Crédit Agricole (which both made heavy losses in derivatives trading)
had lower trading assets. The problems at Natixis were serious, but trading assets at
Caisse d’Epargne were low (although derivatives activity was relatively high). Crédit
Mutuel had similarly low trading assets, and derivatives activity fell well before the
crisis, despite growing reliance on the wholesale markets to finance lending. While
the French mutuals have become universal banks, the crisis has demonstrated the
extent to which they remain more rooted in their retail and commercial banking
activities than the French commercial banks. Preferential tax regimes encouraged this
focus.
French banks nevertheless play a leading role in certain derivatives trading, a direct
legacy of the creation of the MATIF in 1986. They have over the past two decades
consistently engaged in approximately a quarter of global equity derivatives trading
(Fédération Bancaire de France, 2007). For several years (2003-2007) Société
Générale was one of the world’s leading traders of equity derivatives and for five
years running (2003-07) reported more profits from equity derivative trading than any
other bank globally. When the recipients of collateral postings for credit default swaps
by AIG (using US government support) were revealed, Société Générale headed the
list, receiving US$11 billion, 22 percent of the total. Calyon, the Crédit Agricole
subsidiary, received a further US$2.3 billion. Named UK and German banks received
less than their French counterparts, respectively, US$12.7 billion and US$7.7 billion.
On the list of named banks to receive payments of more than .2 billion, only one is
Spanish (Santander to receive .3 billion) and none is Italian. Credit Agricole, through
its investment bank Calyon, was the world’s sixth largest traders of CDO (BarnettHart 2009: 19; with figures from Credit Rating Agencies), more than any European
bank apart from UBS and more than several of the largest US investment banks.12
Nevertheless, relative to the size of French banks, their volume of derivatives trading
11
Notional volumes indicate only the absolute volume of derivative transactions undertaken. They do
not represent risk taken. The positive value of derivative contracts appears in the bank’s assets, and,
where they have been entered into for trading purposes, this positive value will be included in trading
assets (see Banking Commission 2007: 56).
12
Calyon issued more CDOs than Goldman, Lehman, Bear Stearns, Morgan Stanley or JP Morgan.
17
is lower. This was a period of rapid expansion for BNP Paribas and Société Générale,
but the expansion was at least as much in the area of international retail banking as in
trading activity.
Apart from Natixis and Calyon and the losses at the two largest commercial banks, the
impact of the financial crisis on the French financial sector has been surprisingly
limited. French banks have, for the most part, proven more resilient than their German
and British competitors. In 2008 and 2009, the two large commercials, BNP Paribas
and Société Générale, and Crédit Agricole reported profits, with each suffering only
one quarter loss during the two year period despite the rising write-downs in 2009.
The FBF estimates that there was a net-creation of banking jobs in France in 2008 and
2009 (FBF 2009, 2010). The relatively high capital ratios (or low leverage) of French
banks has enabled them to cope with the losses incurred. Not only is leverage lower
than in Germany and the UK, but there is little evidence of increasing leverage in
recent years at the major banks. Despite the pre-eminence of some French banks,
notably Société Générale, in some derivative products, especially equity before the
Kerviel trading scandal, the overall use of derivatives remains relatively low. The
French cooperative model has proved its resilience – it is based principally on retail
banking which generates recurring revenue through lending funded by deposits and is
thus less prone to financial market pressures. In 2008, the Banque Populaire Groupe
relied on the wholesale markets for only 15 per cent of its funding. Across the whole
French banking system, the use of securitization to finance lending has been amongst
the lowest in Europe, relative to GDP. Outstanding collateral in securitizations at the
end of 2008 was only 1.4 per cent of GDP, compared to 3.5 in Germany, over 10 per
cent in Italy, over 20 per cent in Spain and over 30 per cent in the UK.13 These
figures demonstrate further the difficulties of making generalizations about financial
system types. The credit crunch has been a marginal phenomenon in France.
Some of the largest French banks have taken the opportunity to expand their
operations at home and abroad during the financial crisis. Banque Populaire, the
fourth largest retail bank in France, acquired HSBC France’s seven regional banks
and 400 additional branches, those which HSBC had taken over following its
purchase of Credit Commercial de France in 2000. This represents a significant
backwards step in the presence of foreign operators in French retail banking. By way
of example of internationalization, Crédit Mutuel, France’s second largest retail bank,
purchased the troubled Citibank Deutschland for €4.9 billion, a significant expansion
of its international operations. BNP Paribas expanded its presence in Belgium with
the takeover of Belgian part of Fortis, the Dutch-Belgian-Luxembourg bank. While
the financial crisis has resulted in a retreat in the international activities of British and
German banking activities, it appears that – on balance – the internationalization of
French banking has proceeded apace.
Conclusion
If French banks have been less badly hit by the present financial crisis than German
and British banks, this is due to the relative importance of retail banking activities to
their overall operations and the comparatively limited exposure to toxic assets. These
features of French banking reflect in large part the legacy of deliberate government
policy – a range of policies including capital tax and special interest rate regimes that
13
Author’s calculations from European Securitization Forum figures. Thanks to Iain Hardie for this
information.
18
worked to the advantage of mutual banks in domestic retail banking, stateencouraged-saturation of the retail sector and consolidation of the banking system.
The French financial system remains comparatively closed due to the legacy of these
anti-competitive policies. At the same time, French banks have rapidly expanded their
foreign operations. The financialization of French banks rather than increasing
activity by other financial market actors, is the more important change in the
country’s financial system over the past two decades. Trading activities increased in
the 2003-7 period but the financialization of the French system owes a great deal to
the rapid rise in the presence of French retail and commercial banking activities in
foreign markets. Spanish and Italian banks and financial systems more broadly are
considerably less financialized (IMF, 2006a&b; Quaglia, 2009; Royo, 2009).
The scaling down of some trading activities amidst the rhetoric of governments and
many banks themselves for a necessary ‘return’ to traditional banking activities
represents a time-honoured, and most likely time-limited, response to business
problems. The mea culpa of Calyon is typical: the investment bank announced to its
39 regional bank shareholders in the Crédit Agricole group that it would reduce its
risk exposure by pulling out of structured credit markets and cutting back on equity
and interest rate derivatives (Financial Times 10.9.2008). The chief executive of
Calyon, Marc Litzler, resigned in May 2008. Litzler, a former derivatives specialist at
Société Générale was hired specifically to expand Calyon’s capital markets business.
However, a retreat to the more cautious nationally-oriented banking of the past is
highly unlikely in all but the very short term: the opportunities in domestic markets
are limited and the lure of profits in risk-taking remains. French banks – commercial
and mutual – sought to expand their foreign and trading operations in order to
increase profitability after the lean years of the mid-1990s. The result was record
levels of profits for all six of the largest banks in the 2003-7 period.
The crisis has not brought substantial changes to the French banking / financial
system and has encouraged certain trends. The state emerged as a substantial
shareholder, in the case of BNP Paribas the largest, but without voting rights. These
shares bought back by the banks in 2009 / 2010. The merger of Caisse d’Epargne et
Banque Populaire appears something of a throw-back to state interventionism.
However, despite government rhetoric to the contrary, micromanagement of the bank
appears unlikely. Rather the merger should be seen as an opportunistic move to
further concentrate the banking system – by 2008 only 415 banks (715 credit
institutions) continued to operate in the country down from 481 (975) in 2002
(Fédération Bancaire de France, 2009; IMF 2009b). The expressed concerns of
government about ‘Too big to fail’ banks clearly do not direct government policy.
Any impact of government intervention on financialization is likely to be short-term
with a scaling back of trading activities across the system, most obviously with the
withdrawal from certain activities of Natixis and Calyon. However, the more broadbased French business model has been vindicated, and while banks such as BNPParibas and Crédit Mutuel have taken advantage of the crisis to internationalise
further, there has been a heavy retail element to this expansion.
Clearly, a crucial transformation in French political economy remains the move to a
‘financial market’ form of capitalism, as large and many medium-sized NFCs turned
increasingly to the equity markets (often foreign) for finance and French banks looked
abroad and to other activities to compensate (Morin, 1998, 2000). Nonetheless, the
19
importance of bank assets over equity market capitalization domestically remains and
increased in the years leading to the crisis. Thus, despite the importance of equity for
NFC financing, to understand France’s financial system it remains crucial to
understand its banking system. This article has studied the manner in which State
disengagement from and interference in the financial sector determined the extent to
which the French financial system (and specifically banking system) was affected
during the international financial crisis. Securitization has reshaped French banking
since the 1980s. However, a strong retail element remains. The French regulatory and
supervisory regime has tolerated and even supported securitization, allowing offbalance sheet activities and other financial innovations made difficult in ‘Southern
European’ financial systems. Moreover, the domestic regulatory response to the worst
financial crisis affecting French banks since the Second World War has been
negligible, was driven by the Bank of France rather than the government, and focused
upon rogue trading. There remains state intervention and ownership, although the
recent upswing has been temporary. Protectionism and limited foreign penetration
remain features. HSBC’s purchase of CCF and its retail operations in 2000 has, to
date, proven exceptional rather than the start of a new trend. Banque Populaire’s
purchase of HSBC’s French retail operations in 2008 moves the country in the
opposite direction. The drive of French banks to expand, with foreign equity issues
and financialization contributed to the unravelling of the cross-shareholding groups
created in the 1990s and centred around the then three largest commercial banks –
then BNP, Société Générale and Crédit Lyonnais. This article does not deny the
importance of bank or NFC agency in reshaping the French financial system
(Culpepper 2005). However, the French bank business model, securitization and
internationalization have been shaped by government action.
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Table X. Bank Internationalization.
Credit Exposure by Region (by %): Gross concentration of lending business by
geographical area
BNP-Paribas (%)
2008
2007 2006
2005
2004
2003
2002
2001
France
31
35
36
41
43
43
39
39
EEA
35*
30
29**
18
18
18
17
18
Other
2
6
5
5
5
5
6
7
Europe
North
16
12
19
23
22
22
25
23
America
Total
2,075,551
Commercial loans and commitments breakdown (2001-07)
Geographical Breakdown of Credit Risk by Counterparty’s country of business for 2008.
*In 2008, this figure includes Switzerland which moved from other European.
**A significant increase principally because of the integration of the Italian bank BNL. In 2006, 15%
of BNP commercial loans were in Italy.
Crédit Agricole
2008
2007
2006
2005
2004*
2003*
2002*
2001**
Total gross
436,912 397257
336,267 261,422 235575 200616
220890
278,187
value (million
euros)
France (incl.
38.72
43.72
45.40
50.6
55.42
52.06
48.27
81.57
DOM-TOM)
Other EU
36.34
33.87
31.98
22.93
24.41
23.34
22.55
4.92
countries
Rest of World 24.94
22.41
22.62
26.47
21.17
24.60
29.17
14.51
Rest of
3.69
3.43
3.01
3.14
4.20
3.45
3.30
1.87
Europe
North
8.38
6.30
7.58
5.91
4.59
6.66
9.98
1.69
America
Central and
2.55
3.3
2.5
3.47
2.85
2.66
2.80
2.27
South
America
Asia
6.49
5.74
5.50
9.08
4.4
6.72
8.75
5.17
Africa-M.E.
3.53
3.67
4.03
4.88
3.76
5.11
4.37
2.11
Other
0.30
(supranational
organizations)
*The figures for 2002-4 exclude other aggregates (including the delivered securities bought under
repurchase agreements from Crédit Lyonnais) and leasing and factoring (including accrued interest).
24
**Other European Economic Area (EEA) countries are included instead of other EU countries. Thus,
e.g., Norway is included.
Société Générale
(On and of balance sheet commitments)
2008
2007
2006
2004
France
41
50
51
52
W. Europe*
32
21
19
20
E. Europe**
4
10
9
6
N.America
13
10
12
13
Other
10
9
9
9
*In 2008, includes East European EU Member States
**In 2008, excludes East European EU Member States
Caisse d’Epargne
2008
France
2 565
Other EU
306
North
270
America
Asia /
106
Pacific
Rest of
227
World
Total
3 474
2003
65
20
5
2
8
2007
3 544
355
- 274
06
3671
176
1426
05
3009
117
1158
04
40,2
42,3
10,3
03
50,5 %
37.6
8
02
69,6
26,0
3,1
48
97
86
1.8
0.6 (just
Asia)
.2 (excl.
Japan)
321
15
3
3 974
5385
4373
100
100
Banques Populaires Groupe
2008
07
France
217 753 /
170404 /
82.73
83.55
EU
24 132 /
22964
9.17
Other
154
25
OECD
North
26 019 /
28571
America
9.89
Total
263 206
203957
06
229 084 /
75.03
31 926
05
268195 /
92.90
11 021
1 542
23
51 329
27218
305 307
288711
25