Commentary: A Defeat For Bnp, A Victory For Banking Reform

What a victory for market forces! And in France, of all places.

Just before dawn on Aug. 28, Banque de France Governor Jean-Claude Trichet reluctantly ordered Banque Nationale de Paris to sell the 31.8% stake it had built up in Societe Generale during a bitter six-month takeover battle. By so doing, Trichet acknowledged that shareholders rather than bureaucrats should control the restructuring of France's overcrowded banking system.

That's a huge step forward in a country where Finance Ministry and Central Bank functionaries have long had more influence over banks' strategies than have investors. The new way of doing things may be impossible for the authorities to control. It could be confusing and painful for the bankers involved. But it will ultimately benefit France far more than the outdated interventionism it replaces--even if some big banks end up in foreign hands.

Along with the rest of France's clubby and dirigiste Establishment, Trichet backed BNP Chairman Michel Pebereau's ambitious attempt to create a national champion by acquiring SG and Paribas. But Pebereau's $36 billion bid for the two banks, which had agreed to a friendly $19 billion merger, wasn't to the taste of SG shareholders. BNP amassed 65% of Paribas stock but failed to rake in enough SG shares to give it a boardroom veto.

For two weeks, Trichet tried vainly to persuade SG Chairman Daniel Bouton and Pebereau to work together. Bouton wouldn't budge, arguing that SG shareholders had rejected Pebereau's bid decisively. And with the eyes of France's European Union partners upon him, Trichet caved in rather than be accused of subverting market forces--potentially damaging to the man due to succeed Wim Duisenberg as head of the European Central Bank.

FOREIGN MARAUDERS? Trichet's landmark decision scuttled Pebereau's plan to build Europe's largest bank. But it won't hold back the long-overdue restructuring of French banking. French banks remain under pressure to cut costs, boost profits, and bulk up by merging just like their euro zone rivals. The big question is, which banks will join forces, and when? And what role will foreigners play?

Parisian bank salons are already abuzz with rumors of possible deals. Some analysts are even talking about a rematch of the fight between SG and BNP. "The two banks will be watching each other closely," says John D. Leonard, European banking analyst for Salomon Smith Barney in London. "And there's nothing to prevent one bidding for the other sometime in future."

The two former protagonists may look elsewhere. BNP might be tempted to bid for the recently privatized Credit Lyonnais, which would offer cost-cutting chances as well as the corporate relationships that Pebereau sought with SG. In turn, SG could make a suitable partner for the Caisse Nationale de Credit Agricole. Though CNAC is owned by France's mutual banks, it behaves like a private-sector bank. What's more, its investment banking subsidiary would give SG the entree into underwriting, trading, and dealmaking that attracted Bouton to Paribas.

Such deals would be fine, provided shareholders have the final say. Meanwhile, both BNP and SG are weakened enough by their slugfest to be vulnerable to foreign predators. Significantly, they are seeking their own remedies instead of relying on the French government. Bouton has contacted British insurer CGU PLC, a friendly core shareholder that recently more than doubled its stake in SG to 6.9%. His primary aim: to strengthen cooperation and keep CGU as a possible white knight. Pebereau is mulling broadening BNP's cooperation pact with Germany's Dresdner Bank--possibly by raising the present 1% shareholdings they have in each other to 10%.

Those moves are designed tO stave off foreign marauders. But by cozying up to CGU and Dresdner, SG and BNP are opening the doors to French involvement in big cross-border financial mergers. France has long been seen as the biggest obstacle to Continentwide restructuring--and not just in banking. By unleashing market forces at home, Trichet has made it much tougher for the French authorities to stifle such momentous deals. Investors should thaNk him: His failed gambit creates new horizons for the markets.

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