The world’s biggest bank isn’t in the U.S., where regulators banned lenders from proprietary trading, nor in Switzerland, which is doubling capital requirements. BNP Paribas SA is in France, which is doing neither.
BNP Paribas’s assets rose 34 percent in the three years through June, reaching 2.24 trillion euros ($3.2 trillion), equal to the size of Bank of America Corp., the largest U.S. bank, and Morgan Stanley combined. The Paris-based 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 20 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 policy makers are doing is delaying the inevitable. But delaying malaise is not unique to the French.”
The Basel Committee on Banking Supervision, which 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, according to bankers, regulators and lobbyists involved in the talks.
The Basel committee agreed to increase the minimum common equity requirement to 7 percent of assets, weighted according to their risks, from 2 percent 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 in an Oct. 20 report, while a U.K. government commission is also examining whether the largest banks should be broken up. In the U.S., the Dodd-Frank Act, signed by President Barack Obama in July, prohibits banks such as New York-based Goldman Sachs Group Inc. 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 said at a press conference with French Finance Minister Christine Lagarde in Paris on Oct. 15.
“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.”
France last month passed a law to increase the power of supervisors over bonuses and rating companies. 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 Officer Baudouin Prot, 59, said in an interview with Bloomberg Television. “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.”
BNP Paribas “deserves” a lower level of capital compared to most of its rivals and the bank shouldn’t seek to hold “a precise level” of common equity above the 7 percent set by the Basel committee, Chief Financial Officer Philippe Bordenave told analysts on a call today. A system with debt securities that convert to equity when a bank faces financial shocks would be “more effective than a capital surcharge” to reduce systemic risks, Bordenave said.
The bank reported a 46 percent increase in third-quarter profit today to 1.91 billion euros, beating analysts’ estimates, on consumer-banking earnings in France, Belgium and the U.S. The stock rose 3.7 percent in Paris trading.
Frederic Oudea, the CEO of Societe Generale SA, France’s No. 3 bank by assets, told a French parliament hearing yesterday 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 drugmakers. The current 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 drugmakers to combine and create Paris-based Sanofi-Aventis SA, dissuading Switzerland’s Novartis AG from making a competing offer for Aventis SA.
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 show, making it the biggest bank by deposits in the euro area. The number of employees has doubled to more than 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 U.S., 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.
European and U.S. banks use different accounting standards, making a direct comparison of their size difficult. In particular, U.S. 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 IFRS. The comparison also excludes assets held by banks off their balance sheets.
Total banking assets in France rose 41 percent to 7.16 trillion euros 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 gross domestic product.
Oudea, 47, said yesterday that “French banks’ size relative to the country’s economy remains manageable.”
BNP Paribas, which temporarily froze three investment funds on Aug. 9, 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 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 1 capital ratios than BNP Paribas’s 8.5 percent under Basel III rules in 2012, Morgan Stanley analysts led by Huw van Steenis estimated.
BNP Paribas is popular with analysts, with 81 percent 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 show.
France provided about 20 billion euros of capital to its largest banks after Lehman Brothers Holdings Inc.’s 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-euro rescue of Dexia SA in 2008. France’s aid compares with the $309 billion the U.S. 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, who co-wrote the 2009 book, “This Time Is Different: Eight Centuries of Financial Folly” with Kenneth Rogoff, a Harvard professor. Even countries such as the U.S. 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 U.S. and 12 in the U.K. In the early 1990s, Credit Lyonnais SA, then France’s largest bank, ran up an estimated 15 billion euros 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-euro trading loss in January 2008 after trader Jerome Kerviel amassed 50 billion euros of unauthorized positions. The loss, together with writedowns on U.S. subprime mortgage-related assets, forced the Paris-based company to turn to shareholders for 5.5 billion euros.
France’s Banking Commission fined the bank 4 million euros 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’s losses, while dwarfed by the record numbers in the credit crisis, amounted to about 5 percent of the bank’s total assets, which peaked at 304.3 billion euros 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 percent.
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 Bank for International Settlements’ data.
“One of the reasons why I don’t like buying French banks, despite the fact that they’re very cheap, is the sovereign 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’s exposure to Portugal, Ireland, Greece and Spain amounts to 15.4 percent of the bank’s tier 1 capital, Hoffmann-Becking said. That’s higher than 14.4 percent at Societe Generale, 9.5 percent at Credit Agricole, or 4.7 percent at Deutsche Bank AG of Frankfurt, and increases to 75.6 percent 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 percent 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.”
The following table ranks the world’s 15 biggest banks by assets as of June 30, 2010, using the currency conversion rates on that date. It includes the percentage change in assets from three years earlier in the original reporting currency. The data were compiled by Bloomberg from company reports, and figures are in millions of euros.
Bank Assets on Change June 30 from June 2007 BNP Paribas 2,237,034 34.47% HSBC 1,976,336 12.46% Barclays 1,938,203 37.03% Royal Bank of Scotland 1,932,161 56.44% Bank of America 1,931,737 54.06% Deutsche Bank 1,925,655 -0.65% Credit Agricole Group 1,900,600 N/A Mitsubishi UFJ 1,891,838 6.26% JPMorgan 1,645,836 38.13% Citigroup 1,583,433 -12.75% Mizuho Financial 1,426,751 -3.91% Lloyds Banking Group 1,255,649 191.18% Banco Santander 1,220,024 37.76% Bank of China 1,167,140 66.03% Societe Generale 1,133,684 1.01%