French lenders’ trading assets have grown to almost match the size of the nation’s economy, making them vulnerable to government efforts to wall off banking risk.
Investment-banking units of BNP Paribas SA, Societe Generale SA, Credit Agricole SA and Natixis SA have 2.05 trillion euros ($2.64 trillion) in trading assets, including bonds, equities and derivatives, data compiled from the banks show. That’s a 21 percent jump in the 12 months to June and a two-year high, just shy of France’s $2.77 trillion gross domestic product.
“The very growth of these market products creates systemic risk,” said Jean-Paul Pollin, a professor at France’s Orleans University. “Interconnections among players rise, even assuming that on the micro level the risks are well checked.”
The increase in banks’ trading assets comes as a European Union-commissioned group, led by Bank of Finland Governor Erkki Liikanen, yesterday presented a report that recommends a “legal separation of certain particularly risky financial activities from deposit-taking banks within the banking group.”
French President Francois Hollande, elected in May, has pledged to overhaul the country’s banking industry -- which has the biggest holdings in public and private debt in the euro-area’s troubled economies -- to better separate the consumer and the riskier investment-banking operations.
The EU report found that Paris-based BNP Paribas and Societe Generale, together with Barclays Plc of London, Frankfurt-based Deutsche Bank AG and Royal Bank of Scotland Group Plc of Edinburgh had the highest proportion of trading assets, accounting for more than 30 percent of total assets. The value of trading assets fluctuates with their market performance.
BNP Paribas’s spokesman Pascal Henisse declined to comment on the Liikanen report, as did Societe Generale’s spokeswoman Nathalie Boschat, Credit Agricole’s spokeswoman Anne-Sophie Gentil and Natixis’s spokeswoman Barbara Durand.
The French Banking Federation in a statement yesterday cautioned against “measures that would lead to a disproportionate increase in costs, even to the disappearance of some market activities useful for the economy.”
European efforts to shield deposits from risky activities mirror measures proposed in the U.S. and the U.K. Named after former U.S. Federal Reserve Chairman Paul Volcker, the U.S. plan would ban commercial lenders from proprietary trading.
The U.K.’s Vickers proposals, from a group led by the former Bank of England Chief Economist John Vickers, recommended banks separate their consumer and investment banking units.
Hollande pledged during his campaign to split retail and “speculative” operations at French banks. His finance minister, Pierre Moscovici, said on Sept. 22 in Asperg, Germany, that he favors keeping the French “universal” banking model.
Still, French banks’ ballooning derivatives businesses may invite greater regulatory scrutiny.
Trading in derivatives for BNP Paribas increased 48 percent to 446.1 billion euros in the 12 months through the end of June. For Societe Generale, it rose 38 percent to 242.8 billion euros.
“The very big decline in interest rates in the period mechanically triggered a re-evaluation of interest-rate derivatives in our balance sheet,” BNP Paribas spokesman Henisse said in an e-mail.
Excluding its derivatives trading-book, BNP Paribas’s financial assets shrank by 25 percent in the 12 months through June as it cut governments bonds, equities and its repurchase-agreement holdings, according to its website. Societe Generale’s financial instruments excluding derivatives fell 10 percent.
“If derivatives exposures increase, it means that market risks don’t decline and the too-big-to-fail issue lingers,” said Christophe Nijdam, an analyst at AlphaValue in Paris.
Concern that they had gotten too big to save drove French banks to shrink some of their corporate- and investment-banking, or CIB, operations. They unveiled plans to cut 5,000 CIB jobs and sell assets to meet stricter capital and liquidity rules.
“BNP Paribas, Societe Generale and Credit Agricole have been doing their job” in complying with stricter capital rules and reducing assets, said Jerome Forneris, who helps manage $8 billion at Banque Martin Maurel in Marseille and owns shares in the banks.
The three banks shrank their corporate- and investment-banking risk-weighted assets by a combined 116 billion euros in the year through June to meet stricter Basel III capital rules.
BNP Paribas’s capital-market activities “serve clients’ needs without taking large market positions,” Chief Executive Officer Jean-Laurent Bonnafe said Sept. 26 at a London conference. BNP Paribas says its market risks represent 6.3 percent of its total risk-weighted assets.
In the past five years, France’s largest bank had only 10 days when losses exceeded its value-at-risk, showing “the robustness” of its model, he said. Banks use value-at-risk models to predict maximum potential trading losses under extreme market conditions.
Societe Generale trimmed risk-weighted assets at the corporate and investment bank by 33 billion euros in the period, mostly by cutting subprime-era portfolios, bank data shows. The company has “refocused trading activities and reduced risk appetite,” it said on Sept. 26.
Credit Agricole said its CIB unit cut 44 billion euros in risk-weighted assets in the 12 months through June 30. It has “no proprietary trading desks left” and is exiting its most complex structured rates and equity-derivatives business, according to a Sept. 26 presentation by Jean-Yves Hocher, head of the division.
For all those cuts in risk-weighted assets, the banks’ trading books have still expanded, showing they remain vulnerable, said AlphaValue’s Nijdam.
“The slimming cure should also show up as a reduction of the cash balance sheet,” which it hasn’t, he said.
French banks, while opposing an outright split between deposit-taking activities and investment banking, may be willing to accept measures like the Volcker rule.
Societe Generale CEO Frederic Oudea said in a Sept. 13 Bloomberg Television interview that “perhaps a Volcker rule” could be applied to the European universal banking model, which is “the right one” for the region.
Most bankers oppose a return to the separation between retail and investment banks. It might be needed to fully protect retail customers, University of Orleans’ Pollin said. “Vickers does prohibit movements of capital and liquidity between an investment and a retail bank, and that’s key,” he said.
Any move in that direction may hurt France’s largest banks, said Martin Maurel’s Forneris.
“BNP and Societe Generale are leaders in euro bonds and in equity derivatives,” he said. “These activities provide corporates with financings and hedgings. How can you split them without putting in danger the banks’ profitability?”