European bank-instability risk falls by around 30%; France remains outlier

By:
Sid Verma
Published on:

The leverage of the French banking system poses a European-wide risk to financial stability, according to the Centre for Risk Management at Lausanne, which otherwise notes positive bank-leveraging progress in the region in recent months.

The systemic risk of European banks has fallen by 28.5% in the nine months to September, thanks to a wave of deleveraging, according to a benchmark systemic risk index, Euromoney can reveal.

However, France, during the same period, has only managed to reduce its systemic risk by 16%, according to the Centre for Risk Management (CRML) at HEC Lausanne, University of Lausanne, which defines an international financial crisis as a 40% semi-annualized fall in global stock markets.

Three French banks – Crédit Agricole, BNP Paribas and Société Générale – are among the five banks in Europe most exposed, according to the index, which uses methodology developed in collaboration with the well-known and influential New York University Stern’s Volatility Institute, run by professor Leonard Stern and Nobel laureate Robert Engle.

The study highlights that systemic risk of the French banking system represents around 13% of GDP, the highest of any European country, compared with 5% in Germany.

According to the index – which gauges large European banks’ systemic risk by measuring size, leverage and exposure to global equity market shocks – French banks, which have the second-largest market cap in Europe, have been "leveraging assets or lending money worth 28 times more than its market capitalization".

By contrast, systemic risk in the UK has fallen from €350 billion to €200 billion, a 43% decrease over nine months, concludes the dynamic index, which is updated on a monthly basis.

On a region-wide basis, the risk of the European banking industry has fallen from €1,400 billion at its peak in June 2013 to a current level of €1,000 billion, while Italy has changed little since the start of the year, in contrast to progress in Greece thanks to bank-recapitalization efforts during the summer.

Michael Rockinger, professor of finance at HEC Lausanne, concludes: "The overall downward trend in risk across Europe is encouraging. However, French banks need to cut the amount of money they are lending.

"It’s time for the French government to ask itself if its banks have become too large and which creditors are backing French banks."

The study’s conclusion – the high leverage of the French banking system is a region-wide outlier – contrasts with the market rally for French banking stocks in recent months, as investors reward efforts taken by the country’s lenders to gut risk-weight assets and gradually meet new leverage rules, aided by the market-friendly national regulator that has sought to moderate the pace of deleveraging to avoid damage to the real economy.

France’s largest bank BNP Paribas, meanwhile, has expanded its geographical footprint to the US, most notably.

More information on the methodology can be found on CRML’s website.