Zurich/Paris: The world’s biggest bank isn’t in the US, where regulators banned lenders from proprietary trading, nor in Switzerland, which is doubling capital requirements.
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BNP Paribas SA is in France, which is doing neither.
BNP Paribas’ assets rose 34% in the three years through June, reaching €2.24 trillion (Rs.140.2 trillion on Wednesday), equal to the size of Bank of America Corp., the largest US bank, and Morgan Stanley combined. The company may also have one of the lowest capital ratios among major European banks under new Basel rules, Morgan Stanley analysts estimated.
Regulators around the world are considering how to rein in their biggest banks to avoid future bailouts without stifling an economic recovery. France, which will hold the rotating chair of the Group of Twenty nations in 2011, is taking a laissez-faire approach even as concerns persist that Europe’s sovereign debt crisis may pose renewed risks to financial stability.
“The French are pretending not to see this,” said Carmen Reinhart, a senior fellow at the Washington-based Peterson Institute for International Economics and co-author of a 2009 book examining financial crises throughout history. “What policymakers are doing is delaying the inevitable. But delaying malaise is not unique to the French.”
The Basel Committee on Banking Supervision that sets capital standards for banks worldwide softened planned capital and liquidity requirements in September and gave lenders about a decade to comply. France and Germany led efforts to weaken regulations proposed by the committee in 2009, concerned that their banks and economies wouldn’t be able to bear the burden of tougher rules until a recovery takes hold, say bankers, regulators and lobbyists involved in the talks.
The committee agreed to increase the minimum common equity requirement to 7% of assets, weighted according to their risks, from 2% previously. Individual countries may enforce higher capital requirements for their biggest lenders.
Switzerland, which pushed for tougher rules, is moving ahead with additional restrictions to curb risks from its biggest banks. A government-appointed committee proposed last month that UBS AG and Credit Suisse Group AG, the country’s largest banks, should hold almost twice as much capital as required under the new Basel rules.
Britain may follow with similar requirements, Morgan Stanley analysts said, while a UK government panel is also examining whether the largest banks should be broken up. In the US, the Dodd-Frank Act, signed by President Barack Obama in July, prohibits banks such as Goldman Sachs from engaging in trading for their own account.
Banks’ size wasn’t the main indicator of whether they posed a risk during the financial crisis, and regulators should be wary of making rules specifically targeting size, Bank of France governor Christian Noyer had said at a press conference with French finance minister Christine Lagarde in Paris on 15 October.
“Asking for more capital isn’t necessarily more virtuous if it’s simply the counterparty to more risk,” Noyer said. “If banks in some countries have very risky profiles and regulators ask them to hold more capital, it’s their problem. Don’t conclude that everyone has to do exactly the same thing,” Noyer had said.
France last month passed a law to increase the power of supervisors over bonuses and rating firms. Starting next year, France will also introduce a “systemic tax on big banks’ riskiest activities”, according to the finance ministry.
“I see absolutely no reason whatsoever that we should be asked any capital surcharge,” BNP Paribas chief executive Baudouin Prot said in an interview. “You should ask a capital surcharge from the banks whose business model, whose track record has been between bad and horrendous. And there have been a number of them, but not for BNP Paribas.”
The bank reported a 46% increase in third quarter profit to €1.91 billion, helped by its consumer-banking networks in France, Belgium and the US.
Frederic Oudea, CEO of Societe Generale SA, France’s No. 3 bank by assets, told a French parliament hearing on Wednesday that the financial crisis showed “size isn’t linked to risk”. Applying capital standards like those planned in Switzerland “makes no sense” in France, and could curb lending or make it more expensive, he said.
French presidents since Charles de Gaulle in the 1960s have protected France’s so-called national champions, firms spanning industries from energy to aircraft to drug makers. President Nicolas Sarkozy led a 2004 state bailout of Alstom SA when he was finance minister and that same year encouraged the nation’s two biggest drug makers to combine and create Sanofi-Aventis SA, dissuading Switzerland’s Novartis AG from making a competing offer for Aventis.
When Rome-based power company Enel SpA said it wanted to bid for France’s Suez SA in 2006, the government orchestrated Suez’s merger with state-owned Gaz de France SA of Paris.
BNP Paribas spent about $43 billion on acquisitions since 2000, including the 2009 purchase of Fortis assets in Belgium and Luxembourg, data compiled by Bloomberg shows, making it the biggest bank by deposits in the euro area. The number of employees has doubled to at least 200,000 since 2004.
“The French government clearly desires to defend and promote French banks’ capacity to expand abroad,” said Nicolas Veron, a senior economist at Brussels-based economics research organization Bruegel. The fact that French banks did better in the last crisis “doesn’t mean that France has no systemic-risk problems. You must think about scenarios of future risks”.
France has four banks with more than $1 trillion in assets, as many as the US, whose economy is five times the size. In the euro region’s four largest nations, Spain’s Banco Santander SA is the only bank aside from BNP Paribas with assets that exceed its home country’s gross domestic product (GDP).
European and US banks use different accounting standards, making a direct comparison of their size difficult. In particular, US Generally Accepted Accounting Principles net out the banks’ derivatives positions, unlike the international financial reporting standards used in Europe. This results in higher reported assets under the International Financial Reporting Standards. The comparison also excludes assets held by banks off their balance sheets.
Total banking assets in France rose 41% to €7.16 trillion between 2005 and 2009, narrowing the gap with Germany, the biggest banking system in the euro region, according to European Central Bank data. The industry’s assets amount to almost four times French GDP.
Oudea, 47, said on Wednesday that “French banks’ size relative to the country’s economy remains manageable”.
BNP Paribas, which temporarily froze three investment funds on 9 August 2007, signalling the onset of the credit crunch in Europe, weathered the crisis better than some of its largest competitors.
Its writedowns were a fraction of those taken by Royal Bank of Scotland Group Plc (RBS) and UBS, which posted the biggest losses among European banks. Still, both Edinburgh-based RBS and UBS of Zurich are likely to have higher core tier I capital ratios than BNP Paribas’ 8.5% under Basel III rules in 2012, Morgan Stanley analysts estimated.
BNP Paribas is popular with analysts, with 84% advising investors to buy the shares in the past three months, the highest proportion among the world’s 10 largest banks by assets, data compiled by Bloomberg shows. The company fell 6.2% this year in Paris trading.
France provided about €20 billion of capital to its largest banks after Lehman Brothers’ September 2008 bankruptcy. BNP Paribas repaid its portion of the aid, with interest, last year, after raising funds from investors. France also joined Belgium in the €6 billion rescue of Dexia SA in 2008. France’s aid compares with the $309 billion the US government injected into banks and insurers, under its Troubled Assets Relief Program.
Because French banks had a “milder” crisis, the country sees less reason for a change in regulation, said Reinhart. Even countries such as the US that had a “systemic crisis” are doing less than they should, she said.
France has had its share of banking crises. Reinhart and Rogoff counted 15 since 1800, compared with 13 in the US and 12 in the UK. In the early 1990s, Credit Lyonnais SA, then France’s largest bank, ran up an estimated €15 billion in losses after buying assets, including Paris real estate, a Hollywood film studio and golf courses. The government rescued the bank through a series of bailouts. Credit Agricole SA bought Credit Lyonnais in 2003.
Societe Generale announced a record €4.9 billion trading loss in January 2008 after trader Jerome Kerviel amassed €50 billion of unauthorized positions. The loss, together with write-downs on US subprime mortgage-related assets, forced the company to turn to shareholders for €5.5 billion.
France’s Banking Commission fined the bank €4 million in 2008 for “serious shortcomings” in risk controls. Kerviel, 33, was sentenced last month to three years in jail and to repay Societe Generale the loss by a Paris judge, who said his actions had threatened the existence of the bank. Kerviel remains free pending an appeal.
Credit Lyonnais’ losses, while dwarfed by the record numbers in the credit crisis, amounted to about 5% of the bank’s total assets, which peaked at €304.3 billion in 1993, according to data compiled by Bloomberg. The same proportion of assets at BNP Paribas would equal about €112 billion euros, exceeding its total shareholders’ equity by 34%.
This year’s Greek sovereign debt crisis “showed that French banks aren’t immune from risk, whatever the quality of the country’s regulation”, Bruegel’s Veron said.
French banks had claims on Greece of $57.3 billion at the end of June, the most of any country, according to data from the Bank for International Settlements.
“One of the reasons why I don’t like buying French banks, despite the fact that they’re very cheap, is the sove-reign debt crisis,” said Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein who has an “underperform” rating on BNP Paribas. “Because I don’t think it’s over.”
BNP Paribas’ exposure to Portugal, Ireland, Greece and Spain amounts to 15.4% of the bank’s tier I capital, Hoffmann-Becking said. That’s higher than 14.4% at Societe Generale, 9.5% at Credit Agricole, or 4.7% at Deutsche Bank AG of Frankfurt, and increases to 75.6% if Italy and Belgium become affected, he said.
France’s four largest banks—BNP Paribas, Credit Agricole, Societe Generale and Groupe BPCE—passed European Union stress tests in July, as did all but seven of the 91 banks scrutinized by regulators. The French lenders, which taken together account for 80% of the nation’s banking assets, have enough capital to outlast an economic slowdown and a sovereign-debt crisis, according to the tests.
The French banks probably won’t face stricter capital and liquidity requirements because of their importance for the economy, Hoffmann-Becking said. Introducing tougher rules would “take away their livelihood and the guy who’s going to pay for it is the French consumer on the street”, he said.