In early September, Crédit Agricole CEO Philippe Brassac used prepared commentary for the Eurofi Financial Forum conference in Bratislava to call for a five-year delay in the implementation of Basel IV. “The planned revision of the capital framework must be suspended for five years to give time to the current reforms to bear fruit and assess whether further revisions are needed,” he insisted.
While many bankers across Europe doubtless agree with him, it is of little surprise that such a call comes from the head of one of France’s banks. French banks are in by far the weakest position running up to the implementation of the revised standards, according to research from academics led by Viral Acharya of NYU’s Stern School of Business.
“French banks lead almost each book and market capital shortfall measure, both in absolute euro amounts and relative to its GDP,” the academics found in their July report entitled Capital Shortfalls of European Banks since the Start of the Banking Union.
The report calculates that in a stressed scenario where the market index falls by 40% in six months the country’s banks could have a capital shortfall of an astonishing €248 billion, which corresponds to almost 12% of the country’s GDP. The ratio of risk-weighted assets to total assets at Crédit Agricole is just 19.95%. At Société Générale it is 26.73% and at BNP Paribas it is 31.57%.
Analyst Peter Richardson at Berenberg Bank has described the French banks as over-levered value traps and points out that rising capital requirements under Basel IV will force them to shrink their CIB businesses. He points out that BNP Paribas and Crédit Agricole have ratios of equity to gross assets of just 2.4% and 1.7% respectively.
Indeed, Philippe Bordenave, chief operating officer at BNP Paribas added his criticism to the pre-Eurofi conference comments, stating that revised RWA calculations under Basel IV would increase capital requirements “to an extent that would damage financial stability and growth in an economic environment that is already fragile”. European banks, he said, would not be able to rely on retained earnings or on raising capital to meet the new capital targets.
Meanwhile, Europe-wide issues around the certainty of asset values – one of the biggest challenges in crisis-stricken Italian banking – are also particularly relevant to France. French banks have some ability to gain revenues from fees (Crédit Agricole, for example, owns Europe’s biggest listed asset management company, while Natixis is also becoming more of an asset manager and insurer than an investment bank). They also enjoy a more concentrated banking sector than in Italy.
But as in Italy, badly allocated lending may have allowed poorly performing companies to survive in France, prolonging their misery and hurting productivity of firms that should be the bedrock of economic and banking-sector growth. More specifically to France, relatively loose fiscal accounts, while adding to the public debt burden, have also joined rock-bottom base rates, to again help weak companies survive and make it still easier for banks to brush their problems under the carpet.
This all gives the impression of a zombified industrial and economic base similar to that of Italy. For the French banks that means a long period of disappointment in terms of asset quality – perhaps at best leading to a long period of low profitability as bad debts gradually drip through into the system.