France's regulated savings: A growing cost of tradition
The increasing burden of France’s regulated savings comes just when banks are less able to afford them.
Despite the wild proposals being thrown around by the motley group of presidential contenders, one thing is certain; France’s next leader will not touch the country’s regulated savings system. This holds some €400 billion, including 62 million overnight Livret A accounts. The first such were set up 200 years ago to help repay debts from the Napoleonic wars. President François Hollande has increased the Livret A limit by about 50% to €22,950 and money continues to pour in.
The French have long been introduced to banking with Livret A, much like German schoolchildren are handed Sparkasse savings books. However, like the impact of municipally owned banks in Germany, regulated savings are now making it harder for French banks to maintain adequate capital at a time of low rates and heavy regulation. Witness, for example, the €491 million goodwill write-off from LCL in the 2016 results of the listed arm of France’s biggest retail bank, Crédit Agricole.
France’s banking sector is more consolidated than its German equivalent. French banks such as BPCE and Crédit Agricole use their greater cohesion to better market products like life insurance and asset management and to operate internationally in wholesale banking. But partly as a result of regulated savings, French domestic net interest margins are low, even by European standards. The system also makes French banks more reliant on market funding, as the majority of the regulated deposits goes to the state-owned Caisse des Dépôts et Consignations, much of it to fund social housing.
The deposits are attractive as they are tax-free, guaranteed by the state and because politicians determine the rate. The government follows a formula calculated by the Bank of France on the basis of Euribor and inflation. Last summer, it cut the rate below 1% for the first time, to 0.75%. However, strictly interpreted, the formula would have demanded a cut to 0.5%, according to Fitch and others.
This is particularly worrisome for the banks when so many households in France are successfully renegotiating their mortgage rates downward. Crédit Agricole cited the low-rate environment and widespread renegotiation of home loans to justify its LCL write-off. About 40% of French domestic lending is for housing, according to Fitch, and the Livret A rate is used as a benchmark for other savings and deposits products.
Even more irritatingly for the banks, the system will further weigh on capital ratios under the ECB’s new risk-blind leverage rule, by factoring in money the banks say they are obliged to park with Caisse des Dépôts. The banks have got together to sue the ECB on the Caisse des Dépôts assets at the European Court of Justice, making it a very public contest by a national lobby against the single regulator and its push for common rules.
Whatever the legal merits of the case, French politicians are unlikely to tackle such a cherished tradition, so the onus is on the ECB – or the banks.