This Selected Issues paper reviews developments in health care spending in France and discusses the recent measures to improve the functioning of the system and contain costs. It argues that by addressing many of the issues that had bedeviled past reforms, the new measures offer a reasonable hope of containing France’s health expenditures. The paper presents a brief review of the institutional background and of past trends in health care spending and also offers an analysis of the major forces behind the recent and projected growth in expenditure.


This Selected Issues paper reviews developments in health care spending in France and discusses the recent measures to improve the functioning of the system and contain costs. It argues that by addressing many of the issues that had bedeviled past reforms, the new measures offer a reasonable hope of containing France’s health expenditures. The paper presents a brief review of the institutional background and of past trends in health care spending and also offers an analysis of the major forces behind the recent and projected growth in expenditure.

IV. Recent Problems and Current Policy Issues in the Banking Sector1

Executive Summary

During the past four years the banking sector in France has experienced serious stresses, the main features of which were a crisis in real estate lending and problems with credit to small and medium-sized enterprises, in a broader setting of protracted weakness in the economy. By 1994, nine percent of total bank loans (equivalent to seven percent of GDP) were non-performing. The total cost to banks of their real estate portfolio problems alone is estimated to have amounted to some F 200 billion—an amount equal to two-thirds of the original value of loans to developers.

These problems paralleled developments in a number of other industrial countries, with a rapid expansion in real estate lending in the wake of banking deregulation, and subsequently a sharp decline in asset values. Moreover, banking margins declined progressively with the impact of deregulation and greater capital mobility, against the background of the single banking market in Europe.

The impact of these common trends was compounded, in France, by additional factors. First, the real estate cycle was intensified by the removal of restrictions on the commercial real estate market soon after banking deregulation. Second, new bankruptcy laws in 1985 reduced the seniority of bank claims to help ailing firms, but spurred defaults on small business loans in the recession. Third, financial liberalization in the 1980s was incomplete—with numerous large banks remaining in the hands of the Government, and an uneven playing field in which some institutions continued to benefit from residual funding privileges. Finally, these developments took place against a European background of lower growth and higher real interest rates in money and capital markets.

Problems were experienced widely across the financial sector, including banks owned—or whose management was appointed—by the State, most notably Crédit Lyonnais. This latter case was exceptional in the combination of very large losses and the call on public funds; but some key weaknesses that caused these losses, including poor internal control systems and other failures of governance, were not confined to this case or to the state-owned sector.

Overall, prudential supervision has proved effective in enforcing adequate provisioning for non-performing loans and helping to preserve public confidence in the financial sector In the worst affected institutions, the approach has typically been to segregate the problem loans in separate entities where they can be worked out over time by parent companies or bank shareholders Because no large private bank failed and banking insurance is not financed by the public sector, there was no bail-out of private banks with public money. By contrast, the cost of restructuring government-owned banks has been substantial; while the accounting treatment has deferred most recorded fiscal costs, these may well amount to some 2 percentage points of GDP. It is notable, however, that the problems in major banks were not allowed to derail the monetary policy pursued by the authorities.

The banking system as a whole now appears to have largely weathered the real estate crisis. In 1995, with many bad loans written off in previous years, new loan loss-provisioning by commercial banks declined to 1 percent of the stock of loans outstanding. Real estate prices are generally considered to have bottomed out, and investors (including foreign investors) have begun to buy property loan portfolios. The bankruptcy law was amended in 1994 in ways that help to protect creditors, and thus encourage a prudent resumption of lending to sound companies. Nonetheless, experience elsewhere suggests that in the near term the need for banks to rebuild balance sheets may hold back lending, in favor of investment in government securities. While large corporations are currently very liquid, this may restrain the contribution of small and medium-sized enterprises to the economic recovery. At the same time, the sluggishness of the corporate sector’s demand for credit has been a major factor in the recent downward trend in bank loans.

A number of measures have been taken or are under consideration to strengthen market and regulatory discipline. The Government is proceeding with the privatization of banks, beginning with Crédit Industriel et Commercial and Société Marseillaise de Crédit. The authorities are also preparing changes to strengthen the mandate of the Commission Bancaire in order to ensure that it can monitor risks more fully and insist on information systems that will permit better internal and external controls—thus improving banks’ own controls, as well as their reporting to supervisors. (The implementing regulations for the European Union Directive on Investment Services are expected to be a main vehicle for these reforms.) The authorities are also considering whether other steps should be taken to strengthen the systems of checks and balances in banks at a strategic level (e.g., through requiring banks to have effective audit committees). Finally, a strengthening of accounting and disclosure standards is also under consideration.

These priorities appear fully warranted to reduce the likelihood of future problems and to counter the moral hazard resulting from official intervention It is particularly important to accelerate privatization, preceded where necessary by essential restructuring, this will help eliminate a culture, with its inevitable conflicts of interest, in which the State has been the shareholder and regulator of the banks, as well as the owner of many of their major clients It is also crucial to strengthen the mandate of the Commission Bancaire in supervising internal control systems, and to enhance accounting and disclosure standards.

In addition to these actions, it would appear important to remove any obstacles to a reduction of staffing costs in banks Legislative changes may be needed to facilitate this and to allow more flexible work arrangements (which are inhibited by a 1937 decree governing work practices in commercial banks) It would also be desirable to finish leveling the playing field in the banking sector by removing residual privileges affecting funding and the remuneration of capital. Other market-based changes will likely be needed over the next few years. The equity base of the banking system, while meeting international prudential standards, is rather limited, and profitability is not strong. Mergers are an obvious route to achieve consolidation; and it would also be desirable to see a move away from the present system of widespread and fragmented cross-shareholdings, which tend to make valuation of banks difficult and may inhibit the attraction of capital from outside the domestic financial sector.

The reforms currently in preparation and under consideration by the authorities, together with steps to improve flexibility in managing labor costs, would build on the strengths of the French financial sector in technology, payments systems, and the management of advanced financial products. Banks would thus be well-placed to support economic growth and to meet the competitive pressures that will likely intensify in the financial sector in Europe, as EMU unfolds, and indeed throughout the global financial market.

A. Introduction

This paper reviews the stresses experienced in the banking sector in France during the past four years, the main features of which were a crisis in real estate lending and lesser problems with credit to small and medium-sized enterprises, in a broader setting of protracted weakness in the economy and high real interest rates. It discusses the sources and scope of the problems, their impact on the economy and the public finances, and reforms in the areas of governance and regulation. The paper is organized as follows. Section B outlines key features of the banking system and the regulatory framework. Section C sets out the economic background to the crisis and discusses the main problems that emerged. Section D reviews the actions taken by the authorities in recent years. Section E examines market pressures for change in the sector, some macroeconomic implications of the recent problems, and reforms in governance and regulation recently adopted or currently envisaged by the authorities.

B. Structure, Performance, and Regulation of the Banking Sector

Structure and performance

Historically, financial intermediation in France was effected through three groups of institutions: commercial banks; specialized, government-backed credit institutions which did not receive deposits and were oriented toward financing such activities as housing and industry; and deposit institutions such as mutual banks that lent mainly to these specialized financial institutions. These three groups still remain recognizable, although since 1984 most barriers have been broken down. In all, 1,445 financial institutions—including 547 banks—are currently subject to the Banking Law (for detail see Appendix I).2 However, a large proportion of these institutions is controlled by about twenty groups (Table 1). Five major banks hold more than two-thirds of the deposits and two-fifths of the assets of the private sector (see Tables 2 and 3). Foreign investment in French banks has been significant (Table 4).

Table 1.

France: Credit Institutions by Type and Class of Ownership

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Source: Comité des Etablissements de Crédit et des Entreprises d’Investissements.
Table 2.

France: Concentration in the Banking Sector

(In percent)

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Source: Banque de France.
Table 3.

France: The Largest Banks, 1994

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Sources: Commission Bancaire (1994), The Banker (July 1996). The Bankers’ Almanac (1996). and Institutional Investor (1996)

The takeover of Banque Indosuez (307 billion assets. 12 1 thousand employees) in 1996 is likely to expand the market share of Crédit Agricole.

1995 figures.

Table 4.

France: Net Foreign Direct Investment in the Banking Sector

(In billions of francs)

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Source: Association Française des Banques (AFB).

Several banks were privatized in the mid-1980s, a few years after the nationalization of banks. Nevertheless, until 1993 the Government continued to own two of the largest banks (Crédit Lyonnais and BNP) and the three largest insurance companies (which in turn owned many banks). Even after the privatization of BNP and the insurance groups UAP and AGF in the last three years, the assets of state banks still amount to about one-fifth of total assets in the banking sector Mutual and savings banks are not owned by the Government, although the latter (i e. the Caisses d’Epargne) are under partial control of the State and of representatives of local bodies. The State also engages in near-banking activities through, inter alia, the Post Office, the Caisse des Dépôts et Consignations (CDC), and the Trésor.

Profitability in the banking sector has been low by international standards (Tables 5 and 6). The return on capital in the 1990s has been below 2 percent for commercial banks (with some notable exceptions), and around 5 percent for mutual and savings banks. Net interest revenues, which in the 1970s were among the highest in Europe, have fallen as margins declined with disintermediation. Service fees still make only a modest contribution to earnings, despite a rapid increase in derivative operations and other exchange trading since the 1980s. Operating costs have grown at a moderate pace since the mid-1980s, but are large relative to income; while staff costs are low relative to total assets, again they are high relative to income (Table 7). Employment in the sector grew rapidly in the 1970s following a first wave of liberalization, which led to an increase in the number of branches and heavy recruitment (Chan 1 and Table 8); many of the clerical employees hired during those years, who account for a large part of the workforce, are considered to lack skills that are increasingly required in the industry.

Table 5.

France: Profitability of Major International Banks in 1994 and 1995

(In percent of total assets)

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Source: Bank for International Settlements (BIS), 1996.

Data for Japan are partly based on estimates.

Table 6.

France: Selected Indicators of Performance of Banks

(As percent of assets excluding interbank deposits)

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Source: OECD. 1995
Table 7.

France: Bank Restructuring: Employment and Staff Costs

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Source: BIS.

In deposit-taking institutions; for Japan, excluding various types of credit cooperative; for Canada, excluding trust and loan companies (employment in 1995, 25,000); for Australia, finance and insurance industry.

For Belgium, the Netherlands and Switzerland, all banks; for other countries, commercial banks (OECD definitions).

For France, 1985; for Australia, the Netherlands and Sweden, 1984; for Spain, 1981.

For Italy, Australia, Norway and Spain, 1995.

For France and Belgium, 1981-82; for Canada, 1982.

From peak to most recent observation where applicable.

Employment data excluding credit unions: 1994, 1,732; percentage change, -14 percentage points.

For employment, Western Germany only. (Data for the whole of Germany: 1994, 728.)


Table 8.

France: Branch Networks and Workforce of Banks

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Sources: BIS, Carrel-Billiar (1995).

Against this background, profitability was seriously affected by loan loss experience in the early 1990s (Table 9). The ratio of nonperforming loans to gross loans in the banking sector increased from 4.5 percent in the 1980s to about 9 percent in 1994. The coverage of such loans by provisions declined from about 60 percent to less than 50 percent, despite large new provisions made in the period. In 1995, following a period during which heavy write-offs had been made, new provisions declined and provision coverage rose slightly. Liquidity has not been a problem in the sector: assets maturing within one month continue to be well above minimum requirements. Despite a significant increase during the period up to 1993, Tier 1 capital (i.e., essentially equity funding) for several of the major banks is around 5 percent of their risk-weighted assets—in conformity with Basle requirements, but again low by comparison with many industrial countries. In the case of commercial banks, Tier 2 capital (such as subordinated debt) accounts for about one-third of total capital.

Table 9.

France: Performance of French Banks

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Source: Commission Bancaire and Salomon Brothers

This aggregate is comparable to “Tier 1” capital under the Basle guidelines.

Liquid (one month or less) assets as a percentage of liquid liabilities.

Net of defeasance structures.

Salomon Brothers, January 1996.

Regulation and supervision

The Banking Law of 1984 (as revised) provides the legal basis for banking activity, regulation, and supervision, and complies fully with European Union directives and regulations A single set of prudential rules applies to all banks and hence lends support to market integration However, some institutions performing near-banking activity are exempt from the Law3 The Minister of Finance chairs the Comite de la Réglementation Bancaire et Financiere, which sets regulations The main supervisory body, the Commission Bancaire, is chaired by the Governor of the Banque de France, since the Banque de France became independent in 1994, the Governor is appointed by the Government for six years and cannot be removed. There are a number of other councils relevant to formulation of banking policy, on which both the Ministry and the Banque de France are also represented (Appendix I).

The authorities have a broad set of instruments to address problems, albeit with some weaknesses in the area of internal control systems (discussed in Section E below). The Commission Bancaire has powers to take corrective action when it detects banking practices that are inconsistent with the regulations.4 The approach to resolving banking problems stresses market principles, but has some features inherited from the time when government intervention was much stronger. Article 52 empowers the Governor of the Banque de France—as Chairman of the Commission Bancaire—to invite shareholders to recapitalize a bank that does not satisfy capital adequacy ratios or where the overall situation of the bank is deemed to make this necessary. Consistently with the principles of limited liability enjoyed by corporations, shareholders are free to decline the invitation; thus, this approach depends on the persuasiveness of the Banque de France, and its effectiveness reflects in part the concentration of ownership and close links within the financial community.5 This article also permits the Governor to call upon the banks to provide emergency loans. Upon the failure of a bank, deposit insurance is arranged by banks through their associations—the Association Française des Banques (AFB) in the case of commercial banks—with resources collected as needed (see Appendix I). Historically, this system has proved efficient, achieving a quick reimbursement of deposits.

C. Recent Banking Problems

Economic background

The historically rigid structure of French banking, with its heavy dependence on government guidance and funding, started to change in the late 1960s and early 1970s, when a liberalization of bank lending rates and branching led to a rapid expansion of the financial system, in particular deposit institutions. Liberalization lost impetus in the late 1970s, but was rekindled with sweeping reforms in the financial market framework in 1984 (Box 1). These reforms formalized the concept of universal banks—thus opening new markets to the commercial banks—and granted greater freedom to other deposit-taking institutions, increasing their ability to compete with commercial banks across a broad range of activities. They also led to the introduction of many new financial instruments and vehicles, including commercial paper, mutual funds, and exchange-traded derivative products. However, these changes took place shortly after the banking sector was nationalized: there was thus a tension between, on the one hand, a less directly regulated and increasingly sophisticated financial market, and, on the other, incentives and constraints (for example, on capital raising) that would not to be typical for private sector banks.

Competition for credit, financial innovation, and the elimination of exchange controls sparked a process of disintermediation and an increase in the remuneration of savings that is still underway. A main response of the large commercial banks to these changes was a rapid expansion of lending, including to the real estate sector (Chart 2), and an increase in participations in industrial firms; but these strategies proved fragile when the economic boom faded in the early 1990s.


FRANCE: Employment in the Banking Sector (AFB Banks)

(In Thousands)

Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A004

Source: Banque de France.

FRANCE: Growth and Real Interest Rates in Europe

(In Percent)

Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A004

Source: IMF. World Economic Outlook

The performance of the banking system has been affected in several ways since 1992 by developments in the economy, which took place against a European background of lower growth and higher real interest rates in money and capital markets (Charts 2 and 3), as well as disinflation in the real estate market (which was, however, also part of a more global trend). First, bank lending leveled off, and during the period 1993–95 the stock of bank loans declined in real terms.6 Second, there was a sharp rise in the number of bankruptcies, especially among small and medium-sized firms (Box 2). Third, the banking system was seriously affected by the protracted decline of real estate values. Finally, developments in interest rates, including episodes of increases in short-term interest rates in defense of the franc, affected in particular the position of those banks whose financial situation was already precarious.


FRANCE: Selected Economic Indicators

Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A004

Sources: IMF. International Financial Statistics: WEFA: and staff calculations

More generally, the banking sector may have been affected by an increase in funding costs when short-term interest rates were raised, despite the increasing indexation of loans to market rates instead of to the prime rate, which has followed market developments only sluggishly. However, the effect on the banking system of increases in short-term interest rates has varied over time as banks have re-arranged their balance sheets In the late 1980s, spread income in the banking system as a whole appears to have benefited, on balance, from increases in short-term rates. While it has been argued that this situation may have reversed in the early 1990s,7 recent studies by the Banque de France indicate that, overall, banks were again net beneficiaries of increases in short-term rates by 1994 as a result of the scale of their fixed rate liabilities.8 However, during brief periods the yield curve was inverted as short-term interest rates were raised to defend the exchange rate. In the context of increased downward pressure on lending rates., this situation may have brought to light difficulties in some banks, to the extent they were unable to pass these rates on to end-users of funds in the real economy by adjusting the prime rate. It should also be noted that—as discussed below and in Box 3—the funding structure of commercial banks results in these institutions being more vulnerable than other banking groups to increases in interest rates.

Key Features of Liberalization of the Banking Sector in France

An initial program of financial liberalization in 1967 aborted following repeated difficulties in restraining credit at times of strong demand, due to inadequate institutional reforms. A second, phased reform was undertaken in 1984–90, and benefitted from a number of lessons that emerged from the earlier episode, as well as from experience elsewhere:

  • Domestic reforms included the removal of bank lending ceilings, the development of liquid markets in short- and long-term debt, a restructuring of the securities industry, and the encouragement of an active derivative products market.

  • Taxation changes played a role in stimulating securitization, including the development of certificates of deposit and commercial paper markets after 1985. The pace of disintermediation was exceptionally rapid—by the late-1980s intermediation in France had already fallen to 60 percent of credit flows, from 80 percent in the late 1970s.

  • The dismantling of exchange controls was phased in line with domestic deregulation until the last restrictions on personal transactions were lifted in 1990; changes in taxation of savings aimed at reducing the risk of large capital outflows tended to increase the cost of funding for banks.

  • Banking regulations were revamped, and supervision was strengthened.

  • Some major financial groups among those nationalized in 1982 were privatized (e.g., Société Générale, Paribas, and Suez), although government-owned institutions kept important minority shareholdings in some of them.

  • The macroeconomic framework from 1984 onward was conducive to economic and financial stability: medium-term fiscal consolidation, and operation of the exchange rate as a nominal anchor, were already in place when financial liberalization was initiated. The second half of the 1980s was also characterized by a rapid decline in consumer price inflation, an acceleration of economic growth, and positive real interest rates.

Lending to Small Enterprises

Small enterprises were particularly badly affected by the slowdown of the economy in the early 1990s: about twice as many bankruptcies were filed in 1993 as in 1989. Job destruction was also quite significant (exceeding 160,000 positions in 1993) and was particularly felt by small firms in the industrial sector, in which dismissal rates tripled in 1989–93. The increase in bankruptcies of small firms affected commercial banks severely for a number of reasons. First, in the portfolio of these banks this class of loans amounts to more than ¾ of all loans to enterprises. Second, the bankruptcy law of 1985 extended the customary precedence for claims from labor in the case a failed firm (which is common to many countries) to most new claims by suppliers and other creditors. Third, the period of reorganization following a filing for bankruptcy often extended for a lengthy period, increasing the time during which original loans were not serviced, and burdening the firm with new debt when the firm had no realistic prospects for resuming normal activities (CNC, 1995 notes that despite the significant increase in the number of filings, the proportion of firms being liquidated only decreased marginally—about 2 percent—vis-à-vis previous cycles). Finally, given these protracted reorganization periods, when firms eventually failed very little of the original value of the loan could be recovered, even in cases where guarantees given at the time the loan was granted originally appeared adequate.

Market estimates of the losses arising from loans to small businesses are on the order of F 75 billion (since 1992 the Commission Bancaire has not provided a breakdown of bank provisions against non-sovereign risks). According to the Commission, because of these losses banks were extremely careful in extending new loans to small enterprises in 1994–95. Indeed, in the last two years banks have tried instead to give greater weight to factoring activities, which are deemed to be safer than normal lending. Following a further fall in the outstanding stock of loans to small enterprises in 1995, a modest recovery was observed in the spring of 1996, perhaps foreshadowing a strengthening in the sector if economic growth picks up as projected in the second half of the year.

The authorities have devoted considerable efforts to alleviating the difficulties faced by small enterprises since the supply of credit began to contract. Four major approaches have been adopted. First, since 1993 the Government has increased the amount of funds available to insure loans (granted by private banks) to small enterprises through the mechanism of SOFARIS. Second, the bankruptcy law was reformed in 1994, leading to a strengthening the seniority of original bank loans and providing for a greater role of creditors in shaping the pace and direction of the reorganization process. Third, the Commission Bancaire and the Conseil National du Crédit have proposed several market-oriented measures permitting a better credit “scoring” of firms, thus favoring a pricing of loans which takes individual firms’ risks into account more adequately than current methods (which are based chiefly on the size of the borrowing firm) and the constitution of (tax-deductible) reserves at the moment credits are granted. Finally, the new Government created a small-business bank (BPME), by recapitalizing and expanding the specialized institution CEPME, and merging it with SOFARIS.

On balance, it appears likely that the negative impact of monetary conditions on the performance of the banking sector as a whole mainly came indirectly, through developments in the real economy and in asset markets, rather through the impact of interest rates on their funding costs. It is notable, finally, that the problems in the banking sector were not allowed to derail the monetary policy pursued by the authorities, which was oriented toward price stability.

As a result of the stresses in the banking system in the early 1990s, nonperforming loans soared and profitability worsened sharply. Problems were especially serious in banks lacking effective internal controls and a system of check and balances at the strategic level—which appears to have been the case of several government-owned banks and, to varying degrees, of some large privatized institutions (Mutual banks, by contrast, appear to have avoided the most risky exposures.)

The real estate cycle and bank lending

The major bank lending problems in France flowed from involvement in real estate financing. As in Japan and the United Kingdom, real estate development was accompanied by “asset inflation” (a sharp increase in asset prices relative to consumer prices) in combination with a rapid expansion of banking loans collateralized with these assets.9 In France, the cycle mainly affected commercial real estate—in particular offices in large and prestigious buildings—and was accentuated by commercial banks’ concern to expand in new markets (where specialized institutions wished to preserve their own market shares).10 Moreover, buildings were viewed as good collateral, regardless of possible fluctuations in their market value. Finally, there was a perception that demand for offices would grow steadily apace with the expansion of the service sector, and in 1985 the Government eliminated the 25 year-old regulation requiring developers of large office projects to show that they had sufficient committed tenants or buyers before starting construction.

Savings Instruments: General Features and Collection Privileges

Funding and loan distribution privileges are a heritage of the time when financial activities in France were rigidly divided in three sectors, with specialized lending institutions—mainly publicly owned and operated—being responsible for channeling the resources originating from regulated savings collected by deposit institutions. Since 1984, deposit institutions (e.g., Crédit Mutuel, the Caisses d’Epargne, and the Post Office), while holding the privilege of offering several regulated contractual saving instruments, gained the ability to offer new free-market saving instruments, such as mutual funds. This freedom permitted them to take full advantage of the large number of branches they had opened in the 1970s, and provided them with the opportunity to offer a large menu of complementary instruments to their clients. For instance, when market interest rates were high, clients could move towards mutual funds; when interest rates fell, clients could return to regulated instruments whose rates were stickier. Offering regulated instruments also provided a cushion to those institutions, because the Government remunerates the collection of regulated savings by paying banks a fixed percentage of deposits collected.

These and other privileges inherited from the past have often been considered controversial. However, the Government has been more inclined to extend privileges to a larger group of beneficiaries than to eliminate them. For instance, over the years the Government has allowed commercial banks to offer tax-favored accounts aimed at financing industrial activities (CODEVIs), as well as a number of contractual saving instruments (Pel, PEA, etc.). More recently, all banks were entitled to collect the so-called Livret Jeune (tax-exempt savings accounts for young people) and to distribute the “zero-interest” housing loans. Both instruments benefit from government subsidies, while being attractive to banks: resources from the Livret Jeune are not tied to a specific activity—in contrast with those originating at the Livrets A, which are channeled to CDC to finance housing construction, while the amount of zero-interest loans are limited to 20 percent of the value of the house—the rest being usually financed by the distributing institution.

From the perspective of savers, the relative importance of regulated savings instruments vis-à-vis market-rate instruments such as mutual funds has varied in the last 10 years, depending on the level of interest rates and tax incentives (mutual funds experienced a rapid expansion in the late 1980s and early 1990s. total resources amounted m December 1995 to F 2.5 trillion (or about three times the volume of Livret A deposits).

From the perspective of banks, mutual funds have played an important role, because their contribution to the funding of financial institutions exceeds F 1 trillion, largely via the purchase of long-term securities and CDs issued by banks (CNC, 1993) and chiefly substituting for deposits (the share of deposits fell from 71 percent in 1980 to half of that by 1993-Plihon, 1995). Of course, these resources are more expensive than sight deposits, with net margins from loans funded with mutual funds estimated to be of only half of those funded with conventional deposits (CNC, 1993) Nonetheless, depending on operating costs and service fees, mutual funds can still provide funds at a lower cost than the interbank market Commercial banks, which manage about one-third of total assets in mutual funds have thus been aggressive in the market The claim that savings banks which distributes the Livret A) and Credit Mutuel (which distribute the equivalent Livret Bleu) benefit from synergy in marketing mutual funds to “captive clients” needs to be weighed against the fact that these institutions actually manage less than 10 percent of total assets in mutual funds.

The stock of credit to real estate developers increased by more than one-and-a-half times in 1988–90, reaching some F 300 billion in 1992.11 Until 1990, the increase in prices and rents of commercial real estate dwarfed the cumulative service cost of bank loans. The average price of offices (new and old) almost doubled in 1986–90 (Table 10), compared with a rise of 12 percent in consumer prices.12 A sharp reversal followed, however: real estate prices halved in the course of 1990–94.13 The downswing in the real estate cycle resulted in serious stresses in the banking sector, as was the case also in a number of other countries (Table 11).

Table 10.

FRANCE: Purchase Price of Offices


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Sources: Jones Lang Wootton (in BIS, 1993); Renaud (1995); and Leparmentier (1995).
Table 11.

FRANCE: Costs of Public Rescue Operations Relating to Financial Institutions 1/

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Source: OECD (1995).

The figures are based on official or widely accepted estimations and do not include more uncertain estimates relating to banking problems in France and Spain Costs are estimated as perceived at the time of the capital injections and do not take account of any re-evaluations.

Cumulative cost in billions of U.S. dollars at 1992 exchange rate.

GDP in 1992.

Figure comprises present value estimates of resolutions conducted by the FSLIC and the RTC (US$180 billion) and lower-bound of estimates of Bank Insurance Fund losses (US$15 billion) Sources CBO (1994) and IMF (1993).

Capital injections.

In the second half of 1995 real estate prices began to stabilize, and in early 1996 the price of new buildings increased slightly. There was a surge in sales of nonperforming loans. These developments suggest that the downsizing of the real estate cycle has tailed off. The absorption of space in the Paris region is expected to be achieved largely at the expense of old offices: it is unlikely that the 250 thousand new jobs required to occupy all vacant offices will be created in the near future.14 Responding to this trend, the Government has supported the conversion of offices into apartments, and put in place a number of fiscal and regulatory measures reducing the supply of, and increasing demand for, new space.15

It took some time after the peak of the cycle for banks and the authorities to become persuaded that real estate prices were not on the eve of a rebound. By late 1993, however, a number of write-offs supported by parent companies or major shareholders started to take place. Although no estimates are available from the Commission Bancaire or other official sources, the overall cost of the real estate downturn to financial institutions is estimated at F 200 billion (3 percent of GDP, see Table 12); this includes both the capital losses and the carrying cost of the loans.16 The narrowness of the market made it difficult to attempt a large-scale sell-off of nonperforming loans in 1993–95; recently, however, banks (and insurance companies) have succeeded in selling sizeable portfolios, albeit at a substantial discount.17

Table 12.

FRANCE: Real Estate Loans (at end-1995), Nonperforming Loans (NPL), and Banks’Assets

(In billions of francs)

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Source: Immo Press, Annual Reports, and staff estimates

Real estate losses were spread across a number of sizable banks, including banks belonging to large and diversified insurance companies, rather than being concentrated in specialized institutions. This spreading of risks explains why a wave of liquidations was averted; however, a handful of state-owned institutions specialized in real estate had to be heavily restructured, and in the case of Crédit Lyonnais other serious problems were substantially aggravated by a very weak real estate portfolio, prompting the Government to rescue the bank.

Banks where the state was involved in ownership or management

The problems of Crédit Lyonnais became visible in the course of 1992–1994 as the bank began to report major losses. These losses resulted fundamentally from risky loans and investments, and insufficient equity capital to sustain a growth strategy adopted in the late 1980s, which tripled the size of the bank between 1989 and 1991—privatizations had been suspended in 1988, and this source of additional capital was thus foreclosed. As with other French banks, the single largest source of problems lay in real estate losses—which, with inadequate internal controls, amounted to F 23.4 billion at the end of 1993. A subsidiary of the bank also financed the purchase of a U.S. film studio, resulting in losses of F 16.5 billion in 1993. In addition, the bank purchased financial firms through a company bought from the state-owned Thomson S.A., in an operation originally aimed at strengthening the capital base of Crédit Lyonnais; as a result of inadequate risk management and weak controls, losses on derivatives and high-yield bonds in these companies reached some F 8 billion. Finally, losses arose on the bank’s shareholdings in some state-owned companies, which became unprofitable in the early 1990s; these participations were acquired through share exchanges—again, to boost the bank’s equity without recourse to private capital.

The problems of Crédit Foncier surfaced in late 1995 and stemmed from attempts to diversify its real estate activities, in anticipation of the loss of its privileges in distributing subsidized housing loans; the bank thus entered the commercial real estate market at its peak. Crédit Foncier is a private bank, owned by individuals and institutions; however, its Governor and Vice Governors have been appointed by the State since 1851, as provided in the Articles of Association of the bank as a counterpart to the state guarantee on a portion of its liabilities (see Appendix I).18 These links were reflected in market perceptions that the Government, in a broad sense at least, stood behind the bank: its non-guaranteed securities historically carried only a small premium over government paper.19 With an outstanding stock of bonds in excess of F 200 billion. Crédit Foncier is the second largest issuer of bonds in France. The majority of its loan portfolio comprises subsidized housing loans carrying a guarantee from the state and funded mainly through bond issues. Following the elimination of government funding for the subsidized housing loans, the bank experienced some difficulties in rolling over its debt in late 1995, despite the fact that profits, albeit on a modest scale, had been posted in previous semesters. At that time the publicly-owned institution CDC offered a credit line of F 20 billion to Crédit Foncier. In April 1996, the management announced a consolidation of the accounts of more than 170 subsidiaries (which had sprung up in the early 1990s), and disclosed a substantial increase in nonperforming loans. Management also decided at once to provision very heavily against those nonperforming loans, and to revalue downward other assets owned by the bank.20 These measures appear to have reflected, in part, a conclusion that spreading the losses over time was not advisable because the main source of income of the bank—i.e., subsidized loans—was set to shrink in coming years. The volume of bad loans is sizable (some F 15 billion), albeit much lower than at Crédit Lyonnais.

Other institutions that faced major problems included the government-owned Banque Hervet (whose real estate losses exceeded its capital) and Société Marseillaise de Crédit (which also required recapitalization to cover nonperforming loans to small firms), as well as specialized institutions which incurred heavy losses in the real estate sector, such as the Comptoir des Entrepreneurs (CdE).21 CEPME, a specialized institution devoted to lending to small business, and several regional development banks, also experienced substantial losses.

The fact that some of the most serious banking problems occurred in institutions owned by the state, or where the state appointed the management, must be seen as indications of weaknesses in public governance that go somewhat beyond specific factors, such as particular managers and lending decisions. The potentially conflicting roles of the state as owner and regulator of lending institutions, and as shareholder of some key corporate customers, may have contributed to a culture in which strategic errors were difficult to check Also, the mandate of supervisors in key areas relating to governance was deficient. Significant measures to improve governance and strengthen the mandate of the supervisors are currently being implemented or under consideration (see Section E below).

Lending margins and funding privileges

Commercial banks have attributed the decline in banking margins, and resulting pressures on profitability, in part to privileges enjoyed by saving and mutual banks in collecting regulated savings. These issues have gained much prominence as these capital-rich and profitable banks started to compete in markets previously dominated by the commercial banks (Table 13) However, it is notable that deregulation and elimination of exchange controls, in France and world-wide, have tended to increase competition and decrease the role of traditional bank intermediaries—thus putting pressure on bank margins and profits even in absence of distortions.

Table 13.

FRANCE: Selected Performance Indicators of Financial Institutions

(In percent)

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Sources: Commission Bancaire; and AFB.

In thousands of francs per year.

The lending margins of the commercial banks halved between 1988 and 1993, when they amounted to only 1.6 percent of total assets excluding interbank loans (Table 14). The reduction in margins of mutual and saving banks has been much less severe. Information on lending rates does not, however, suggest that mutual and savings banks lent at lower rates than commercial banks, at least through 1994 (Table 15): lending rates at commercial banks were lower than those at savings and mutual banks in 1993—and increasingly so in 1994. More broadly, lending rates do not appear to have been the main source of the narrowing of margins. The margins of large and small loans over Treasury bill rates were not significantly lower in 1994–95 than in 1990 (see Chart 4).22

Table 14.

FRANCE: Performance Indicators by Type of Bank

(In percentage of assets excluding interbank deposits)

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Source: OECD, 1995.

In percent of total assets of credit institutions, excluding interbank loans.

Table 15.

FRANCE: Funding and Lending Indicators

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Source: Commission Bancaire (Analyse Comparative, 1994)

For commercial (Com.), mutual (Mut.), and savings banks (Sav.).

In percent of total assets or liabilities, respectively.


FRANCE: Short-Term Interest Rates and Lending Margins 1/

(In Percent)

Citation: IMF Staff Country Reports 1997, 019; 10.5089/9781451813395.002.A004

Source: Banque de France1/ Measured in relation to the yield of 3-month T bills.

The secular trend toward narrower margins in recent years thus appears in part to have reflected increases in funding costs. Indeed, following deregulation of financial markets, the importance of sight deposits decreased in favor of a number of liquid savings instruments such as mutual funds. This trend was far from unique to France, although initially fiscal incentives increased the appeal of securitized savings instruments vis-à-vis deposits. It has, however, affected the funding costs of commercial banks particularly, since they became still more dependent on interbank loans and CDs. Mutual banks—in part because of their large network of branches—can rely more on sight deposits and low-cost savings instruments. On average commercial banks’ funding costs have been higher than those of mutual and savings banks. One way for commercial bank groups to lower their net cost of funds and increase fee income would be through an increase in the share of mutual funds in their mix of funds; indeed they appear to be inclined to bid aggressively for a larger stake in this market.

The issue of residual funding privileges in the banking market nonetheless needs to be considered It has been argued (i) that the Post Office and savings banks have benefited from a rent element in the fee they receive for administering regulated saving accounts (Livrets A);23 (ii) that they have benefited from this monopoly through an ability to sell other financial products including mutual funds to “captive” clients (Box 3); and (iii) that the Post Office has cross-subsidized near-banking activities from the Government’s payments for provision of its mail services (the published accounts of the Post Office do not separate the costs of these two activities). The AFB has recently announced that, if the Livret A privileges were extended to commercial banks, they would charge the Government a lower fee than that received currently by the savings banks. The savings banks and the Post Office, however, consider that these fees would be insufficient to cover their operating costs.24

D. Response of the Authorities

The response of the authorities to the banking problems of the past four years has included several different strands: prudential and regulatory measures taken by the Commission Bancaire, including when necessary the restructuring or closure of institutions; actions taken by the State as a shareholder of banks; measures to alleviate possible effects of financial fragility on credit to small and medium-sized enterprises (Box 2); and, finally, actions to address the concerns of commercial banks about competitive inequalities.

Response to problems in banks

Since 1993, when banks and the authorities realized that the real estate slump would not be short-lived, the enforcement of prudential rules by the authorities has been effective in bringing about higher levels of provisions for nonperforming loans, which has helped to preserve the overall soundness of the system. In the case of real estate loans this approach required very close scrutiny of banks. Defeasance structures were set up to isolate loans, and the Commission Bancaire monitored closely the transfer of nonperforming assets to these structures to ensure that remaining risks were effectively isolated from banks.

A number of banks were also subject to intervention by the Commission Bancaire due to violations of prudential regulations, and required to undertake more extensive restructuring programs (Table 16). Emphasis was generally laid on measures that placed the financial burden of bank restructuring on the owners and major creditors. In cases where the authorities believed that long-term viability could be restored within a reasonable time period, the banks were required to downsize their operations; recapitalization while maintaining the existing size of the bank was explicitly excluded. This approach to restructuring contributed to the avoidance of any substantial cost to the public finances in these banks, and appears not to have adversely affected public confidence.

Table 16.

FRANCE: Bank Restructurings


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Source: Commission Bancaire, and staff estimates

In billions of francs. December 1994.

Actions are listed in the chronological order they were taken.

Staff estimate (no official accounts for 1994).

BAC is the Banque d’Arbitrage et de Credit. BEF1 is the Banque d’Entreprises Financieres et Industrielles, a subsidiary of BAC.

Aggregates all regional development banks.

The response to problems in banks owned by the State, or where the State appointed the management, has not been essentially different. However, losses in the banks owned by the State inevitably affect the public finances directly or indirectly, while the size of Crédit Lyonnais—and the prominence of Crédit Foncier in the securities market—meant that any major problem with these institutions could have become a source of systemic risks. Hence, as shareholder or appointer of the management of these banks, as well as ultimate guarantor of financial market stability, the Government provided them with extensive support.

The situation at Crédit Lyonnais became of concern to the authorities as early as mid-1991, due to the strategy pursued by the bank. Issues of concern to the authorities were pursued in the on-site examinations of the Commission Bancaire. Subsequently, in September 1992, the Minister of Finance wrote to the chief executive of Crédit Lyonnais concerning the situation of the bank. New management was appointed to the Bank in November 1993, and in March 1994 a first restructuring plan was implemented, including a state guarantee of F 18.4 billion on a portfolio of F 43 billion of nonperforming loans transferred to a defeasance structure, and an injection of F 4.9 billion in new capital by the state Following a reassessment of the value of assets, and of the large losses realized in 1993, the Chairman of the Commission Bancaire notified the Government in autumn 1994 that the capital of the bank was insufficient to cover its losses and that a rescue plan was necessary. A much broader restructuring plan was thus announced in early 1995 (see Box 4). It was approved by the European Commission in July of that year after the Government decided on a downsizing plan, involving inter alia a 35 percent reduction in the activities of the bank outside France and its privatization before the year 2000 (for details see SM/95/266)25 In October 1995, the restructuring plan was approved by the National Assembly.

Since late 1995, the defeasance agency CDR has invited bids for assets, and has sold assets with a face value of about F 30 billion (i.e., about one-fifth of its portfolio), generating receipts of about F 20 billion. Part of these receipts were used to service or repay liabilities that turned out to be attached to several of the assets transferred from Crédit Lyonnais in 1995. These liabilities are considered by the authorities to be covered by F 60 billion of performing assets (were this assessment to prove too sanguine, then, of course, the final cost to the State of the rescue package would be commensurately increased). Meanwhile, Crédit Lyonnais continued its policy of divestment abroad (including the reduction of activities in Europe, and the complete sale of its subsidiaries in Latin America), and has announced the dismissal of 5,000 employees (about 10 percent of its workforce in France) by the end of 1997, bringing the total number of dismissals under the restructuring plans to some 10,000.26

The Crédit Lyonnais Restructuring

Crédit Lyonnais began with on-balance sheet nonperforming loans (NPL) (resulting in an operating loss for the bank). The situation was alleviated by a transfer of the NPL to a newly-created agency, CDR. Assume that CDR “pays” for the purchase of the NPL with cash (with a condition attached). CDR in turn receives the cash from a further agency EPFR in the form of a loan. EPFR is able to advance this loan only because Crédit Lyonnais, the ultimate beneficiary of this loan, agrees to pass on the money to EPFR, again in a form of a loan which in this case is guaranteed by the state. The result of the operation is that CL is relieved of its NPLs; on its balance sheet nonperforming assets are replaced by performing assets (with a state guarantee). EPFR on the other hand has assumed a liability to Crédit Lyonnais and is thus obligated to pay interest on the loan. On the asset side, EPFR has a loan outstanding to CDR of doubtful quality: CDR took out the loan on the understanding that debt service is linked to its ability to liquidate the NPL. (It is assumed here that CDR has other assets and liabilities of F 60 billion.) In the meantime, CDR incurs costs to set up operations, pays salaries to employees, rents premises, etc., as well as normal costs associated with the business of loan collection. It is thus obvious that the risks are borne entirely by EPFR (the state).

Simplified Bank Restructuring Scheme for Crédit Lyonnais

(In billions of francs)

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As shown below, income and expenditure streams are also changed as a result. Before the operation, on this section of its balance sheet, CL had no income earning assets. After the operation it was to receive a 7 percent annual interest payment in the first year, and 85 percent of market rates afterwards, from EPFR (the latter rate was subsequently adjusted upward to market rates). Regarding CDR, revenues depend on loan collection and asset sales. EPFR has contractual interest costs, but its revenue prospects are tied to CDR’s success. In its first year, CDR posted losses amounting to about 21 billion francs despite receipts of about F 20 billion.

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The management of CDR has stated that about one third of its assets is likely to be sold without major losses; 44 percent of total assets are quite doubtful and may produce little revenue, and about 20 percent have yet to be evaluated.

While Crédit Lyonnais achieved a small profit in 1995 and the first half of 1996, it has experienced difficulties in attracting and keeping new clients, and its low ratings have affected the terms of its access to wholesale financial markets. In addition, the contractual interest on its loan to the intermediary agency in the defeasance structure (EPFR) declined in line with the fall in interest rates (notwithstanding the fact that part of this loan has been swapped and securitized to lock the interest rate and cut net funding requirements). As a short-term measure, the Government decided in September 1996 to inject an additional F 3.9 billion into Crédit Lyonnais, and this was approved by the European Commission. Subsequently, the Government increased the interest rate on the loan to EPFR to be fully equivalent to market rates for both 1995 and 1996, resulting in rates of 7.45 percent and 5.84 percent, respectively; this adjustment was approved by the European Commission also. It is clear that additional measures will be required to permit the bank to recover: this would appear to imply inevitably a more aggressive downsizing of activities in France. The Ministry of Finance has recently underscored its commitment to privatizing Crédit Lyonnais.

In 1995, the Cour des Comptes (the general auditing and financial review office of the state) published a detailed analysis of the problems at Crédit Lyonnais. The analysis placed less emphasis on the type of lending that led to the losses than on some of the underlying principles involved. It concluded that Crédit Lyonnais had lacked the capital, competence, organizational structure, and sophistication to engage in such a growth strategy. Top management was considered to have received extremely poor information. However, the report also placed some of the responsibility on the Commission Bancaire, suggesting that problems had emerged as early as 1989, and should have prompted a swifter response The Commission Bancaire (in a statement issued when the Cour des Comptes presented its report) has argued that no sign of deterioration in the risk policy of the bank, or any indication of abnormal developments in its activities, appeared before 1991. The Commission Bancaire has also noted that it was the first public authority concerned with surveillance of the activities of state-owned banks to discover and signal the difficulties at Crédit Lyonnais, when reviewing the accounts of the bank in 1992, it had insisted on significant provisions on top of those envisaged by the management of the bank, and discouraged further expansion of some subsidiaries, but these early warnings were ignored by senior management and the expansionary policy continued until 1993.

In the case of Crédit Foncier, following the provisioning in early 1996, the capital to assets ratio of the bank was below the minimum required levels. The Ministry of Finance set time limits for a solution to be found: a first deadline lapsed at the end of July; a second deadline was set for the end of October 1996. Annual accounts for 1995 were approved by a general assembly in late June; given that all bad loans were generously provisioned, and that the remaining portfolio continued to generate income, the bank is projected to make a profit in 1996. No public funds were directly injected into Crédit Foncier.

In late July CDC—acting essentially as an agent of the Government—offered to buy all outstanding shares in Crédit Foncier at the price of F 70 per share. (Since April the value of the share had oscillated between F 30 and F 40; and recent independent valuations of the bank’s assets had placed the value of its shares between F 60 and F 100—still well below the average price of about F 300 in 1993–94.) With 37.5 million shares outstanding, the proposed purchase of two-thirds of the capital was estimated to cost F 1.7 billion. (Such payments do not constitute a direct subsidy to the bank and may therefore not be subject to investigation by the European Commission). While the restructuring plan required CDC to purchase two-thirds of the voting stock, in the event more than 90 percent of the shares were tendered, implying a cost of some F 2.4 billion. Under the plan, a new institution is to be created. The bank’s performing assets (mainly PAPs) are to be transferred to the existing Crédit Immobilier de France (CIF), while the newly-created Caisse Nationale du Crédit Foncier is to take over all shares purchased by CDC and manage the nonperforming assets and associated liabilities. The merger is likely to entail a large reduction in the current workforce of 3,600 (earlier plans had called for a trimming of one quarter of the staff); CIF is committed to retain about 1,500 workers to operate branches transferred, and the state is attempting to find positions for the other workers The rescue plan has been developed by the Ministry of Finance, departing from the established tradition of working out restructuring operations under the guidance of the Commission Bancaire. The banking supervision agency is not involved because Crédit Foncier will cease to exist; CDC is not subject to the banking law, and hence not subject to banking supervision. The plan will need to be approved by the Parliament.

The Government has recapitalized several other state-owned banks These include two small banks on the privatization list (Banque Hervet and Société Marseillaise de Credit), where the injections totaled some F 2 billion Comptoir des Entrepreneurs (owned by the public and several public-owned financial institutions, some of which did not agree to participate in the write-offs of the bank) received support from the state (including guarantees) amounting to F 17 billion.

Some other banks belonging to publicly-owned insurance companies were also recapitalized in part by the transfer of shares of privatized enterprises still owned by the Government Finally, Banque du BTP was recapitalized in an amount of F 0 8 billion by, among other shareholders. Crédit Lyonnais and Crédit Foncier, before pan of its portfolio was sold to Crédit Coopératif (minority shareholders—mainly large private construction firms—declined to inject more capital).

Competition policy

In response to the narrowing of margins observed in 1995, the Governor of the Banque de France issued a severe warning against this practice, and asked banks to report any loans granted at rates below the yield of government bonds to the Commission Bancaire. Indeed, the French authorities have viewed the recent narrowing of margins as a serious threat to the long-run viability of banks (in apparent contrast to their reaction to the narrowing of margins observed in 1992). They have rejected arguments based on the internalization of both costs and benefits relating to individual clients, which could be viewed as justifying an apparent cross-subsidization between activities: the CNC has argued that in light of the inadequate management accounting systems in French banks, it was unlikely that losses made in such lending were recouped elsewhere. While there may be dangers in very narrow lending margins, the effectiveness of measures such as these—as with interest rate ceilings—is always open to question, in particular when banks provide a wide gamut of financial and administrative services to corporate clients for which they are free to charge any fees. Ultimately, of course, it is for the management of banks to take individual pricing decisions.

As regards conditions of competition among different types of banks, the Government has been sensitive to the case presented by the AFB. Recently, two important monopolies were weakened (see Box 3). In addition, the Government has been sympathetic to the idea of reducing taxes levied on banks’1 labor costs (currently at 12 percent), and to the system of lending consortia proposed by the AFB.27 An earlier measure led to the integration of the pension schemes of the sector into the national system of supplementary pensions (thus diluting the heavy future pension liabilities of the sector).

E. Current Policy Issues

While the banking system in France appears to have largely weathered the real estate crisis, the general profitability of the sector is not strong, and it faces the continuing intense pressures of competition that characterize the industry world-wide. Competition will certainly intensify in the years ahead, especially with the advent of European Monetary Union, which is bound to prompt financial institutions to take fuller advantage of the European single-market regulations introduced since 1993.28

A first broad question is how the sector may respond to these challenges, including the estimated F 20 billion required to adjust payment systems to operate with the single currency, and the potential loss of about one quarter of the overall income currently generated by foreign exchange business. In particular, it is important to assess whether official policies inhibit actions that are needed to improve flexibility, profitability, and capitalization. A second issue is the extent to which problems in the sector may affect monetary and fiscal policy, and economic activity. Finally, a crucial question is whether the reforms that are being ushered in or considered by the authorities in the areas of governance and supervision are appropriate and adequate to minimize the chance of renewed problems and to counter moral hazard flowing from official intervention.

Medium-term market pressures

French commercial banks will need to go through substantial changes in the next few years: some such changes are already underway, but more actions will be needed to accelerate cost-cutting and consolidation in the industry, while additional equity investment in banks will likely be called for from outside the domestic financial services sector. Most French banks, including mutual and savings banks, will also need to enhance their management accounting systems and reduce the size of their labor force, while increasing its flexibility, in order to reduce their operating costs (see Appendix II). These are areas in which the remnants of the structure that prevailed in the 1970s have acted as major obstacles to overhauling the sector, and these are discussed below. If French banks overcome these challenges and strengthen their capital base, they will be well-placed to benefit from their technical expertise in areas such as the management of advanced financial products, and from the infrastructure put in place by both banks and the Government in the last decade (e.g., in the payments system and the interbank market).

The rigid cost structure of French banks’ in part reflects the pervasive lack of flexibility of the labor market. Although wages and employment in the banking sector have not increased very rapidly in recent years, labor costs have increasingly appeared high relative to revenues, and are likely to become more so in view of technological progress in the industry world-wide.29 More pressingly, the downsizing of a number of banks appears essential to improve their profitability in the short run, but dismissal costs are a major obstacle in this regard. Under the general labor laws governing collective lay-offs (e.g., the “Loi Aubry”), such lay-offs are granted only if the firm is facing economic hardship and a large number of options have already been considered, or upon the payment of very large compensation. Without changes in current restrictions, a rapid downsizing of the industry would be extremely expensive (see Appendix II). For instance, a 10 percent cut in the workforce of 400,000 persons (on top of the 3 percent a year decline due to attrition) could cost the sector some F 30 billion (or roughly the equivalent of the provisions for bad loans made in 1995).30 In addition, a 1937 decree concerning work practices specifically in the commercial banking sector seriously limits the flexibility of banks to shift to more flexible work hours. Thus, from a policy standpoint, effectively addressing the problem of labor costs in the banking sector implies a broader initiative to deal with rigidities in the labor market.

The equity base of most commercial banks is rather limited and profitability is low. Some consolidation is required: while this could take various forms, the imbalance between well-capitalized banks and others with lower capital suggests that mutual banks (as well as foreign investors) may play an increasingly important role in ownership.31 However, this consolidation may be hindered by some features of the ownership structure of commercial banks, especially the widespread cross-holdings with other financial institutions, the reliance on complex structures permitting full account for regulatory purposes of the capital of partially-owned subsidiaries (in accordance with Basle guidelines and EU directives), and the wide recourse to subordinated debt (Table 17 and Box 5). The cross-holdings of shares, in particular, impede the valuation of institutions by potential investors—buying a share in one bank actually means being exposed to risks in the activities of several banks.

Table 17.

FRANCE: Ownership Structure and Cross-Shareholdings of Selected Financial Institutions

(In percent)

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Sources: ICBA; Agefr; Nouvel Economiste; and annual reports.

Before takeover.

Macroeconomic issues

It is difficult to gauge the direct consequences of the recent problems in the banking sector for economic activity. Because the most severe manifestations of the real estate cycle were concentrated in commercial property, the direct wealth effects on households may have been relatively modest (especially outside the Paris area); and since loan portfolio problems were spread across a range of institutions, systemic risks were lessened. Moreover, with loan demand weak, the effect on credit availability of subsequent adjustment in banks’ balance sheets has probably not been significant so far. In the period ahead, however, the need of banks to rebuild their balance sheets may affect the transmission of monetary policy, particularly given the current setting of low short-term interest rates and an upward-sloping yield curve. In particular, if banks have a relatively weak capital base, the positive slope in the yield curve may result in their choosing to invest in government securities instead of extending credit, because by so doing they can achieve a positive spread without increasing their minimum capital requirements, except for some adjustments for interest rate risks.32 Although it is not clear that such a phenomenon is developing in France to the extent documented for the United States in the early 1990s (e.g., Keeton, 1994), the increase in bank holdings of government securities since mid-1995 has been noticeable. If indeed banks prove unusually reluctant to expand credit in the period ahead, this may not be a serious problem for many large enterprises, which have ample liquidity, but could restrain the expansion of small and medium-sized firms, which are much more reliant on bank credit.

With regard to the fiscal impact of the recent problems, the direct, recorded costs of restructuring banks have to date been limited mainly to the recapitalization of small public banks, often in the context of their privatization. As noted above, and in contrast to experience elsewhere, the authorities did not have to bail out private banks, in part because deposit insurance is guaranteed by banks themselves, and shareholder institutions have generally been ready to support the banks they owned. Indirect costs have comprised mainly the transfer of assets belonging to the state (e.g., minority shareholdings in privatized companies) and support from government-owned financial institutions, such as CDC (see Section D). Much larger fiscal costs, however, loom ahead, because the Government itself will bear the burden of the residual claims arising from the defeasance structure set up in the case of Credit Lyonnais and other institutions.

Cross-Shareholdings and Other Aspects of Capital Structure in the Banking Sector

Large cross-shareholdings, although proving effective in providing a certain institutional stability to the sector following the privatization of the main banks, can weaken corporate governance—especially in the case of institutions where the weight of major shareholders is more or less even. In contrast to bona fide consolidations, or explicit alliances, cross-holdings may reduce the effective diversification of financial institutions without increasing their synergies or helping the definition of clear strategic goals. Cross-holdings may also result in a problem with one bank having an impact on a number of other banks. This tends to increase the fragility of the system, in addition to make the valuation of an individual banks very difficult. Cross-holdings can also lead to a growing discrepancy between voting power and invested capital (cross-holdings between banks are netted out of their capital for regulatory purposes, but can support important voting blocks). To this extent, they could inhibit the entrance of new capital, which—through new investment and competition for management talent—may increase the efficiency of firms and thus strengthen the banking sector (see Hubbard and Palia (1995) and Jensen and Murphy (1990) for a discussion of this hypothesis in the U.S.). The authorities consider, however, that the large cross-shareholdings in France do not impede competition or prevent mergers, noting in this connection the recent takeover of Banque Indosuez by Crédit Agricole.

The joint ownership of banks by several institutions can raise problems of coordination, by comparison with wholly-owned subsidiaries; when the owned bank faces difficulties, institutions may not feel obligated to respond to an invitation to recapitalize the bank. The authorities have established procedures designed to overcome these difficulties: the Conseil des Etablisements de Crédit has dealt with the problem of the absence of a major shareholder by asking the largest of the minority shareholders (or the leading financial institution among them) to provide a “comfort” letter to the Chairman of the Commission Bancaire recognizing its commitment to support the bank if the latter faces difficulties, and the Chairman can also take the course of using Section 52 of the Banking Act to ask other shareholders to contribute support (This approach is described in Section B of this paper, and is discussed below in Section E) Finally, specific codes of conduct and professional rules apply to investors in, and managers of, credit institutions.

The practice of recording the full capital of partially-owned (but fully-controlled) subsidiaries in the capital base of the parent company, is expressly provided for under international and EU standards. If such participations or turn out to be unprofitable, of course, the short-term gain to the capital base through this leveraged operation can be eroded (as was the case at Crédit Lyonnais) For regulatory purposes, the authorities require banks to deduct from the capital base of the parent company instruments associated with such partial ownership, which is a stringent approach.

Reliance on subordinated debt instruments tends to reduce the flexibility, of banks, since servicing this debt reduces the resources available to be distributed as dividends and failure to pay interest on them does constitute a default. In addition, although the risk premium on subordinated debt could be viewed as a signal that bankers receive from the market, empirical evidence in the case of U S banks indicates “that the potential for market discipline to effectively and constructively augment regulatory controls via these instruments is weak” Avery, et al. (1988) Until recently about 40 percent of the total capital base of the major commercial banks in France comprised subordinated debt The ratio of equity to total capital of these banks needs to be seen in the context of the relatively low overall capital to total assets ratio exhibited by French commercial banks, but it is above international minima and does not compare significantly unfavorably with that of banks in other industrial countries Moreover, including all categones of banks, the sector has a relatively low reliance on subordinated debt by comparison with other industrial countries.

Currently, the financial structures created for handling the sale of “bad” assets of Crédit Lyonnais fall outside the scope of the general government accounts. Therefore, until the Government transfers funds to EPFR (Box 4), the rescue of the Crédit Lyonnais will have no effect on the government accounts. Indeed, if transfers to the defeasance intermediary EPFR are funded by the sale of government assets (e.g., from privatization) they will still have no direct impact on the fiscal deficit. Nevertheless, the total losses accumulated in EPFR are likely to amount to F 80–90 billion (well above the initial estimate of F 50 billion incorporated in the 1995 rescue plan). Taking into account the losses arising from CdE, and likely at Crédit Foncier, the medium-term fiscal cost arising from past losses could be on the order of 1½ percentage points of GDP. The total cost of restructuring these institutions will include, in addition, the expenses arising from downsizing—in particular dismissal costs. Although hard to quantify, it appears that a radical cut in the workforce of those banks could add more than F 10 billion to the overall costs.33

The impact of these additional government liabilities on economic activity is again hard to measure. Costs potentially amounting to about 2 percent of GDP need to be seen in the context of other nonconsolidated liabilities of the government (which are put in some estimates at F 1–1½ trillion). Moreover, to the extent that these costs do not impose liquidity constraints on households, their adverse effect is smaller than that of a collapse of the housing market or of savings institutions; nonetheless, taxpayers may well be sensitive to the potential fiscal impact.

Governance, supervision, and regulation

The major challenge for the regulatory authorities has been the orderly management of the recent banking problems, to avoid jeopardizing public confidence With this aim achieved, lessons are now being drawn from these problems—particularly with regard to governance issues, and the handling of these through the regulatory and supervisory framework. Specifically, attention is focussing on aspects of bank governance, including the adequacy of internal control systems, and the existence of checks and balances to the abuse of executive power—areas where the Commission Bancaire has lacked sufficient enforcement powers.


While all the episodes in institutions with serious losses have specific features, all point strongly to a lack adequate of internal controls. They also illustrate how difficult it can be to recapitalize a bank with many minority shareholders, and how the effect of a bank on one sector of the economy can induce the Government to support the full cost of recapitalizing such an institution.

The case of Crédit Lyonnais, in particular, brought to light weaknesses in the corporate governance structure of the bank, including notably its internal control system. The state as shareholder was not regularly informed by management of the full extent of the bank’s risk exposure. In this and several other cases, activities in subsidiaries were not adequately reported to management or the supervisors, or covered in the published accounts.

The authorities are committed to privatizing all banks that remain under state ownership over the next few years, which should strengthen governance, improve efficiency, and attract new capital to the sector. Privatization is also crucial because it will end the conflicts of interest inherent in the different roles of the State vis-à-vis the banks. A landmark in the privatization program will be the outcome of the efforts to privatize the Crédit Industriel et Commercial.

Governance and management problems are not limited, however, to the realm of state banks. The banking association has responded to initiatives of business groups (e.g., the Conseil National du Patronat Français, CNPF) in the area of governance by developing a set of guidelines for corporate governance. Recently, a draft code to improve corporate governance generally was prepared for the Government by members of the National Assembly.

Changes that would strengthen corporate structures and standards of public disclosure have thus been under active discussion, and there is a need to move to decisions in these areas (see also the discussion under banking supervision below). In terms of corporate structure, an important mechanism to improve the checks and balances at the highest decision levels in banks would be the appointment of Board-level audit committees. Such committees, in addition to reviewing current operations, can be empowered to examine the main strategic decisions taken by bank management. The mandatory introduction of effective audit committees, if it were to be considered necessary by the authorities, would require changes in the law: no such legislation has been presented, and the idea has faced some resistance among bankers; but the National Assembly has studied the advisability of moving in this direction. Such committees could help ensure—and reinforce the effect of—the improvements in management and control systems discussed below.

Greater emphasis on public disclosure is also necessary In March 1995, the Governor of the Banque de France, as Chairman of the Commission Bancaire, wrote to the AFB to urge bankers to improve the quality of their published accounts in line with the highest international standards. A primary focus of this initiative was the coverage of market risk (especially in derivative products); but the letter also reiterated an earlier proposal to publish mid-year statements, and stressed the need for a more homogeneous treatment among banks of the profit and loss account and of balance sheet capital In February 1996, a group of major auditing firms also jointly urged banks to strengthen the principles for loan valuation and provisioning (including less discretion in the use of the general reserve for banking risks and a more rigorous treatment of interest due but unreceived on doubtful debts), to make fuller statements of exposure to market risks and to real estate (disclosing valuation methods used for real estate); to present a geographic and product-based analysis of operating profits; and to provide more adequate information on internal risk control systems. The drive for increased transparency and disclosure appears a very high priority, and new accounting standards may need to be promulgated to enforce this.

Finally, the elimination of privileges would contribute to a more level playing field, and eliminate an element that is distracting attention from more fundamental issues. In particular, it would appear that the Livret A has somewhat outlived its raison d’être. Although in the short-term it represents an attractive savings instrument to households, the choice of market instruments (including pension instruments) is continuing to expand, while there is no longer the acute shortage of housing that prevailed when the passbooks were introduced. Moreover, with new technology for making payments, the use of these accounts as quasi-checking accounts by less affluent people is likely to decrease. More generally, it appears preferable to phase out privileges rather than to extend them to wider groups of institutions. Similarly, it would appear logical, where banking activities are conducted in near-banking institutions, to bring these activities under essentially the same system of regulation and supervision as such activities in the banks.

Prudential supervision and regulation

The French system of banking supervision is in conformity with international standards (EU directives and Basle agreements), and in general is rigorously applied. The main area in which strengthening is under consideration, and is needed, relates to banks’ internal controls and management information systems, which are fundamental to assist the rapid detection of incipient problems by banks themselves and by supervisors. Although banks provide periodic reports to the Commission Bancaire, and the Commission Bancaire makes frequent on-site inspections, it is not possible to detect problems sufficiently quickly in the areas of exchange and interest rate risk, and the experience of the past few years illustrates the need for more adequate information on credit exposures, including in subsidiary companies.

Currently, a regulation is under consideration (in conjunction with the implementation of the EU directive on financial services) which would help to assure stronger internal controls in banks and clarify the mandate of the Commission Bancaire in this area. A main object of this regulation is to improve the quality, comprehensiveness, and timeliness of information available to management with regard to credit and market risk—including notably overall interest rate risk, and the adequate incorporation of this in banks’ risk management systems Regulations under preparation are also expected to empower internal audit units to decide when to examine the accounts of entities within a banking group (for example a subsidiary or a department) at present, in some cases, they can review these accounts only by invitation of the head of the entity concerned.

As the range of banking operations expands, the authorities will need to ensure that the supervisory authority has the means to keep abreast of developments. This is likely to entail a strengthening of on-site and off-site supervision through additional enquiries into specific activities. The staff of the General Secretariat of the Commission Bancaire may need to be expanded, especially in areas of technical specialization including the surveillance of market operations. Fuller and more timely information and a clear supervisory mandate should help avoid delays in responding effectively to problems in the banking system, and ensure that supervisory warnings are heeded.

Finally, with regard to the authorities’ approach to dealing with banks in difficulties, the Banque de France has in the past succeeded more often than not in persuading owners to recapitalize problem banks, but this may not hold in the future, as was illustrated in the case of the Pallas-Stern bank. In particular, problems may arise in cases where ownership is very fragmented. Such a development is not unwelcome in itself, since the retrenchment of the state should reduce the discretionary powers of the Government, and is consistent with the principle of limited liability. However, if the system is becoming less “managed,” then risks to confidence, and indeed risks to the public purse if there is a need to counter systemic problems, can only be greater in the future. This underscores strongly the case for enhancing market discipline and strengthening the regulatory framework.

APPENDIX I: Structure of the Banking Sector

The major groups of banks

The French banking system (excluding 46 banks from EU countries which operate under a license issued by their country of origin) was composed of 547 banks at end-1995 (572 in 1993) and 829 financial companies (1,007 in 1993). In total, 1,445 institutions were subject to the banking law and subject to banking supervision by the Commission Bancaire at end-1995 (1,649 in 1993). A further decline in the number of banks is underway in 1996, due to mergers and liquidations.

Concentration in the French banking sector is somewhat higher than in other major OECD countries. For instance, the largest five banks have a market share of 41 percent (in terms of assets), while in Germany the market share of the major three banks is about 13 percent. Moreover, the largest 10 banks hold about 56 percent of total assets but 83 percent of total deposits and 63 percent of total loans.

State ownership and control

Several banks (including Société Générale, Paribas, the Suez holding, and some specialized banks) were privatized in 1986–87, a few years after the 1982 nationalization of the sector. The insurance company UAP, and the large commercial/universal bank BNP, were privatized in 1993; the insurance company AGF, was privatized in early 1996. The State still owns the majority of the shares of Crédit Lyonnais, Banque Hervet, Société Marseillaise de Crédit, and (through the insurance company GAN) Crédit Industriel et Commercial (CIC). The State has also appointed the management of Crédit Foncier, even though the bank is privately owned; the rationale for this mechanism was the bank’s quasi-monopoly on distributing home loans carrying a government guarantee.

The group Caisses d’Epargne (which comprises 35 regional non-profit savings banks) is not publicly owned. Similarly to saving banks in several European countries, the Caisses d’Epargne have a special ownership status—regional and local banks were founded with a small capital base, which is held under the “main morte”, and therefore have no owners in the corporate sense For this reason all profits are retained, which coupled with a somewhat conservative administration has led to very comfortable solvency ratios. The supervisory body (Conseil de Surveillance) of the Caisses D’Epargne includes client representatives, members of the Senate and a commissioner of the Government (from the Trésor) In addition to this central body, control is exerted by the about 2000 annual assemblies, convened at different levels within the structure of the group.

There are also a number of state-owned near-bank institutions that engage in typical banking activity but are subject to special legislation rather than the Banking Law (e.g., the Trésor, the Banque de France, the financial services of the Post Office, the Institut d’Emission des Départements d’Outre–Mer, the Institut d’Emission d’Outre-Mer, and the Caisse des Dépôts et Consignations). The banking services offered by the Post Office are focused on retail deposit-taking. The Trésor Public engages in deposit-taking (from certain professions), acts as a bank for public entities, grants loans and guarantees, and manages participations. The Caisse des Dépôts et des Consignations (CDC) acts as the central clearing bank for the savings banks and the financial services of the postal bank. The CDC engages in long term loans to local government and low income housing (both loans to individuals and to developers of low income renting units known as HLM—usually with resources from regulated savings instruments such as the Livret A). CDC also acts as manager of various financial bodies, in addition to holding a large portfolio of public debt.34

Regulatory institutions

A number of official bodies are involved in the oversight of banking developments, and their key functions are as follows.

Commission Bancaire

The Commission Bancaire is the body responsible for banking supervision (i.e., all credit institutions and, since the translation of the EU directive on financial services in July 1996, investment firms). It monitors credit institutions’ observance of laws and regulations and takes disciplinary action. The Commission Bancaire is chaired by the Governor of the Banque de France and comprises the Director of the Trésor and four members appointed by the Minister of Finance; one of the appointments is drawn from the administrative court (Conseil d’Etat) and one from the appeal court (Cour de Cassation). The General Secretariat of the Commission Bancaire carries out the day-to-day monitoring and disciplining of banks, including both on-site and off-site supervision. The staff and the resources of the General Secretariat are currently provided by the Banque de France (Article 39) The General Secretariat draws up the reporting requirements to be filed by banks. The on-site supervision reports are forwarded to the governing boards of the banks and to their auditors. The authority for sanctions rests solely with the Commission Bancaire. Appeals to its decisions are heard by the Conseil d’Etat.

Conseil National du Crédit (CNC)

The main role of this council is to study the working of the banking and financial system, particularly with respect to customer relations and payment systems issues (Article 24 of the Banking Law) The council is chaired by the Minister of Finance and includes the Director of the Trésor, as well as parliamentarians of various levels, and a wide spectrum of interested parties The Governor of the Banque de France is deputy chair.

Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI)

The committee authorizes new banks and investment firms (licensing requirements are laid down in the Banking Law as revised to reflect this translation of the EU directive on financial services). It withdraws institutions’ authorizations either at their request or when the condition of the authorization is no longer fulfilled. (As a disciplinary measure, a bank’s authorization can also be withdrawn by the Commission Bancaire.) The committee is chaired by the Governor of the Banque de France, as Chairman of the Commission Bancaire; its members are drawn from within the CNC.

Comité de la Réglementation Bancaire et Financiere (CRBF)

The committee sets specific regulations applicable to credit institutions and investment firms; it establishes regulations governing all aspects of prudential regulation of financial markets including capital requirements, branching, equity holdings by banks, joint services, and internal controls. The Committee also establishes the chart of accounts, independent audits, and rules for consolidation and disclosure, and on deposit protection. The Committee is chaired by the Minister of Finance (or a representative), with the Governor of the Banque de France (as Chair of the Banking Commission) as deputy; its members are chosen from within the CNC.

Banking insurance

Bank insurance is arranged by banks themselves, under regulations drawn up by the CRB. In the case of commercial banks, the AFB is the responsible for reimbursing depositors. Upon the occurrence of a banking failure, the AFB chooses one institution in which it opens an account from which all reimbursements are drawn. Usually, the association contacts depositors in the space of a few days after the failure is determined, and starts reimbursements well before the other liabilities of the failed bank are sorted out. After all depositors are reimbursed (up to the limit of the collective insurance, which is F 400,000 per account), AFB computes how much should be the contribution of each bank associated to the collective insurance scheme and bills them accordingly (the sharing is based on publicly known formulae). All contributions are expected to be deposited on the same day, permitting the closing of that account at that time The AFB believes that raising these resources only when they are needed is better than pre-funding a collective instrument, which it considers might weaken the discipline of participants The mutual sector has its own distinctive set of arrangements, similar to a deposit guarantee system bu with the objective of forestalling rather than correcting problems. Recently other credit institutions (e. g., financial societies) were also required to set up their own guarantee schemes.

APPENDIX II: Medium-Term Issues in the Banking Sector

Management accounting systems and service fees

There are two main approaches to attributing banks’ costs in determining institutional strategy: one is based on a line-by-line assessment of profitability, while the other takes a view based on synergy among different services provided to a client. For both approaches, in a context of increased competition, efficient management accounting systems are crucial: even if not every service is priced according to its cost, this cost has to be known with precision if the actual return of a “relationship” is to be known. In France, the development of management accounting has been hindered by the widespread use of cross-subsidies, stemming from the fact that sight deposits are not remunerated, and standard services (such as checking accounts) are usually not charged. Traditionally, costs were recouped via relatively high interest margins (which in the 1970s were among the highest in the world). Financial innovations and competition have put pressures on these margins, making the need for charging for services more acute. Improved managerial systems, of course, depend on banks and cannot be achieved by governmental fiat.35

Regarding service fees as such, while it would be inconsistent with market principles for the State to impose a schedule of fees, market pressures are resulting in the gradual introduction of fees, sometimes as new technologies are adopted (an attempt in 1978 to charge for checks failed, leaving lasting memories in the industry). New technologies are not only permitting a reduction in the excessive use of checks, but habituating customs to the idea of paying for services received (as in several other countries, electronic payment instruments generate fees in addition to being much less expensive). The introduction of the Euro may offer an opening for an overhauling of the system. Because the single currency will make clear the differences in remuneration of sight deposits across European countries, banks may take the opportunity to align their practice to those of other countries where the counterpart of remuneration of deposits is a larger reliance on service fees (see table below).

Non-French Institutions from the European Economic Area

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Source: Comité des Etablissements de Crédit.

Labor market

Labor relations in the commercial banks are largely regulated by a decree dating from 1937, which established general labor conditions, including restrictive working hours and limited geographical and functional mobility. Although in recent months unions and management in several AFB banks have agreed on initiatives aimed at increasing labor flexibility (e. g., increasing part-time, late-hour, and weekend work), working conditions are manifestly more restrictive than in the United States and the United Kingdom and provide insufficient flexibility to contribute to rapid downsizing.

Options for dismissal envisaged in the Aubry law comprise transfers of personnel to other activities, and early or partial retirement schemes. However, the scope for reducing costs through the redeployment of workers appears limited (especially at low skill levels), even if linked to higher use of part-time work.36 Recourse to early retirement schemes appears also to be constrained because they entail significant costs to the government (which has to compensate the general supplementary pension scheme for shorter contribution and larger retirement periods) and have seldom been accepted by the authorities. However, some modest schemes substituting young workers for people retiring with the minimum number of contributive years have been worked out.

Aspects of recent mergers and acquisitions

In recent months a number of mergers, acquisitions, and alliances have taken place. The merger of Crédit National (CN) and Banque Française du Commerce Exterieur (BFCE) illustrates the case of two specialized banks operating in somewhat distinct markets, which expect to increase the return on their capital by using their skills in different areas, while cutting costs where their activities overlap (a 15 percent cut in personnel is expected to increase profits by 30 percent).37 The purchase of a majority of the shares of Indosuez, whose activities center on investment and private banking (and which was facing difficulties in refinancing its liabilities in financial markets), by Crédit Agricole illustrates how an institution with a solid capital base can be instrumental in increasing the profitability of a debilitated bank (following the acquisition Moody’s increased the ratings of Indosuez’s from A2 to Aa1). It is also notable that the sale of Indosuez was preceded by a radical restructuring of the bank, which included the definition of new strategic goals (with the help of outside consultants), the appointment of new management, and the enhancement of its management accounting systems.38 The alliance of Crédit Local de France and Crédit Communal of Belgium illustrates the geographic expansion of another capital-rich French financial institution in search of a greater size to solidify its activities at the European level.39 Finally, the purchase of consumer credit company Sovac by General Electric illustrates the continued interest of foreign investors in French banking in light of the new prospects in retail banking opening in the EU.


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Prepared by C. Dziobek (MAE) and J. Levy (EU1).


This paper follows broadly the classification of institutions used by the Commission Bancaire Institutions are classified as (i) banks (i e, mainly commercial/universal banks), (ii) mutual or cooperative banks, (iii) savings banks (Caisses d’Epargne et de Prévoyance), (iv) municipal credit unions (Caisses de Crédit Municipal), (v) financial societies, and (vi) specialized financial institutions.


These are the Trésor, the Banque de France, the financial services of the Post Office, the Institut d’Emission des Départements d’Outre-Mer, the Institut d’Emission d’Outre-Mer, and the CDC.


While the staff of the Commission Bancaire makes recommendations about disciplinary actions, these have to be approved by the Commission (see Appendix 1 for the composition of the Commission).


The bankruptcy of Pallas-Stern in 1995 illustrates this issue The bank was privately owned and specialized in investment and private banking, its main owners were the oil company Elf, the insurance companies AGF, GAN, UAP, the commercial group Pinault-Printemps-Redoute, and several foreign banks. There was no agreement among the Pallas-Stern shareholders to recapitalize the bank, and the Commission Bancaire ultimately suspended the activities of the institution in mid-1995 Prompt action by the AFB enabled most depositors to be reimbursed within a few months.


For an assessment of the impact of monetary policy on credit, see Section III of this paper.


The ultimate causes of the worldwide asset inflation in the 1980s are unclear. Minsky (1982) suggests that asset inflation is a natural outgrowth of increasingly complex financial markets (new layers of intermediaries providing a de facto increase in financial liquidity—mainly to investors); most studies associate it with financial liberalization. Samiei and Schinasi (1994) study asset inflation in the United States and Japan following liberalization in the 1980s. Renaud (1995) suggests that increased liquidity in Japan led to capital outflows which added to pressures on commercial real estate in a number of industrial countries.


Private housing loans experienced less of a boom than the commercial real estate, although lending expanded in the late 1980s—the share of so-called “free” sector loans (i.e., non-official, non-subsidized) more than doubled in 1986–89, when it represented about one-third of total housing loans. House prices increased modestly over the cycle—except in Paris, where they showed steep increases, in particular in late 1990. By now, they have fallen back to their 1988–89 levels.


Official data