Panic in Paris

Fears over French banks

Panic in Paris

Funding fears and nasty rumours have given French banks a torrid August

PARIS |

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“IN THIS anxious market environment, people lose their rationality,” says Frédéric Oudéa, the chief executive of Société Générale, a French bank. “Some even spread false information to create trading opportunities.” Mr Oudéa should know: on August 10th his bank’s share price fell by about a fifth during trading before closing 15% down. The stockmarket regulator is investigating the sudden drop. Shares in France’s other two biggest financial institutions, BNP Paribas and Crédit Agricole, also plunged on the day, by 9.5% and 12% respectively. “We saw an extraordinary concentration of rumours last week,” says Baudouin Prot, chief executive of BNP Paribas, which had just reported excellent results.

In this febrile mix, the tales about the source of some rumours sound almost as fanciful as the rumours themselves. Stories that Société Générale was dumping gold seemed to have stemmed from a data-entry error on a derivatives screen used by traders. Another theory to explain panicked selling of French banks was that British journalists speak poor French. It held that a fictional account of the collapse of the euro published by Le Monde, a highbrow newspaper known more for its political than its financial coverage, sparked talk of trouble in French banks. Britain’s Mail on Sunday, a tabloid, published a story on August 7th saying that Société Générale was in a “perilous” state and possibly on the “brink of disaster”. It subsequently withdrew the story and has denied that it was inspired by Le Monde.

Although shares in French banks have since regained some of their lost ground, investors were left asking whether there was indeed cause to fret over their health. Many are concluding that although the biggest of them had a fairly good financial crisis (mainly because of their limited exposures to dodgy American subprime assets) they may yet have a poorer euro crisis because of two vulnerabilities.

First, French banks are particularly reliant on potentially flighty short-term wholesale funding, rather than on stickier deposits or long-term debt. One measure of this is the portion of long-term assets (such as mortgages) that are financed by long-term stable funding. By this yardstick, French banks rank relatively poorly with ratios of between 77% (Crédit Agricole) and 91% (BNP Paribas), especially when compared with Swiss, Spanish or British banks, according to Stefan Stalmann, an analyst at the Royal Bank of Scotland. That means French banks (as well as some Italian and German ones) are relatively vulnerable to the sorts of system-wide freezes that occurred in credit markets in the aftermath of Lehman’s failure in 2008. The more reliant banks are on short-term finance, the more dependent on confidence they are.

French banks’ dependence on shorter-term, wholesale finance is partly structural. “The French, who have a high savings rate, are large users of money-market funds and life-insurance products, neither of which appear on banks’ balance-sheets, which means that French banks’ liquidity ratios according to the Basel rules appear lower than in other markets,” says Mr Prot.

BNP Paribas is trying to change this by encouraging customers to move out of money-market funds into deposits. Its acquisition of Fortis in 2008 strengthened its deposit base. Société Générale has been increasing its store of deposits for the past two years, says Mr Oudéa.

The second vulnerability of French banks relates to their exposure to shakier countries within the euro zone. To be fair, the shares of almost all banks in Europe have been hurt by concerns over the government debt crisis (see chart). These worries are also reflected in the premium that banks pay to borrow euros for three months compared with a risk-free swap rate. Across Europe this has shot up in recent weeks, reflecting the market’s perception that the risks of interbank lending have increased (though premiums are still far from their 2008 peaks).

French banks, however, appear particularly vulnerable because they have lent heavily to countries on the troubled periphery. Write-downs on their holdings of Greek government bonds cost them dearly in the past quarter, yet were manageable when set against their profits. They would also be able to absorb losses on their holdings of Irish and Portuguese government bonds. If Spain or Italy were eventually to require debt restructuring, however, French banks would be badly hit. BNP Paribas, for instance, has €21.8 billion of exposure to Italy, partly through a big local operation, and €31.7 billion in exposure to Greece, Ireland, Italy, Portugal and Spain. Crédit Agricole has €12 billion at risk, and Société Générale has €6.6 billion. For the next gripping twist in this convoluted euro plot, see Le Monde.