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December 18, 2012 6:15 pm
Almost 12 months after France’s President François Hollande described the world of finance as his “true adversary”, his Socialist government will on Wednesday reveal the details of a bank reform law aimed at fulfilling a manifesto promise to separate “speculative” activities from those “useful” to the economy.
Like other administrations – mainly the US with the Volcker rule, the UK with the Vickers report and the European Union, which is digesting the Liikanen proposals – the French government is grappling with how to protect taxpayers from picking up the tab for a future banking crisis.
Pierre Moscovici, finance minister, says the reform will be “very bold [and] very radical”. However, many in the industry say it falls well short of the sweeping reform initially promised.
It will force banks to set up a subsidiary for speculative trading activities deemed unrelated to the financing of the economy. These include proprietary trading, algorithmic arbitrage and financing for certain types of hedge funds and private equity.
Some types of high-frequency trading and commodities speculation will be banned, according to an earlier draft of the law seen by the Financial Times. The subsidiary will have to be financed independently and the regulator will be given more powers to allow for more intrusive regulation.
However, in a big break with the recommendations of Liikanen that banks ringfence their trading operations above a certain size, French banks will not be required to place the vast bulk of their market-making activities in the separate subsidiary.
“I am not going to break the banks in two,” said Mr Moscovici this month, explaining he would not threaten the so-called universal banking model common in Europe, through which banks sell a wide range of services, from car loans to equity derivatives.
French officials like to tout their banking reforms as the most advanced in the world. If they were to put them in place today that might be true, but there are several other initiatives – notably in the UK, the wider European Union and the US – that are further down the road towards implementation, writes Patrick Jenkins in London.
The EU idea, as espoused by the Liikanen review three months ago, is to force groups with a “universal” model – comprising investment banking and retail banking – to “ringfence” almost all of their trading operations within separately capitalised and funded subsidiaries.
Those activities it does target are ones that most French banks say they hardly indulge in any more.
Alain Papiasse, head of the investment bank at BNP Paribas, France’s biggest bank by assets, said recently that these activities accounted for about 2 per cent of the bank’s market operations – a figure BNP has since sought to row back on, emphasising that without the detail of the law, calculating what might be proscribed is impossible.
Laurent Mignon, chief executive of Natixis, which specialises in investment banking and asset management, said this month: “Natixis no longer has operations that I consider speculative.”
Analysts at Citigroup said in a note: “We previously estimated that a full split could have led to a reduction of 6-10 per cent of [French bank] group earnings. We expect a relatively marginal impact from the current proposals [as reported].”
The price to be paid, however, for keeping market-making activities within the deposit-taking group will be a beefed up regulatory regime to ensure that the trading activities are useful for the economy and are not speculative.
By enshrining in law the control of the prudent management of risk for investment services, the French banks fear increased bureaucratic intervention. This includes legislators potentially being given the power to slap limits on what the banks can earn from the market as opposed to their clients, which is likely to eat into profit margins.
Jean-Paul Chifflet, chief executive of Crédit Agricole and head of the Fédération Bancaire Francaise, the national industry group, has attacked the upcoming regulation. “The banking reform proposals currently have no equal anywhere in Europe,” he said last month. “It is going to become extremely difficult for French banks to lend to the economy.”
He was particularly critical of the crisis resolution section of the proposals, which requires the banks to bear the cost of rescuing rivals if they collapse, and he has insisted on limits being set.
Frédéric Oudéa, chief executive of Société Générale, France’s second-largest bank by market value, last month described as “a nightmare” the preponderance of new regulations. French banks were “bombarded with a multitude of reforms all at the same time. The risk is that foreign banks will take our place. I don’t share this suicidal tendency”.
The fear of being put at a competitive disadvantage, particularly to peers in the US, where the implementation of Basel III capital rules is likely to be delayed, may be genuine but it is not clear that it is justified.
The French reform proposals will need to go through parliament and the banks have been given until July 1 2015 to put the speculative activities in the separate units.
However, there is no doubt of a lingering resentment among French bankers about the sudden withdrawal of investment by US money market funds last year at the height of the eurozone debt crisis.
The banking reform proposals currently have no equal anywhere in Europe ... It is going to become extremely difficult for French banks to lend to the economy
- Jean-Paul Chifflet, chief executive of Crédit Agricole
This intensified the plunge in their share prices; credit default swaps rose and hastened the deleveraging plans aimed at beefing up capital, particularly through a reduction of dollar-dependent activities.
US money market funds have increased their investments in eurozone banks this year, but Mr Papiasse said: “I don’t want this money any more – it’s too volatile.”
Janus, the fund manager which has investments in the sector, says the deleveraging has been successful.
“I have been pleasantly surprised by the French banks’ quick and efficient execution of their deleveraging plans,” said Carmel Wellso, portfolio manager, financials, at Janus Capital. “The French banking reform law seeks to limit speculative trading activities . . . it is my belief that all three of the banks have very limited exposure to the types of business and therefore the impact on their daily operations will not be material. I also think that the law will be difficult to implement and monitor.”
Mr Mignon of Natixis said there was a silver lining to the reform. He said it would “give reassurance that the banks will no longer engage in speculative activities, other than through dedicated subsidiaries. This, I hope, will contribute to re-establishing confidence in, and improving the image of, the banks”.
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