France: Financial Sector Assessment Program—Technical Notes—Stress Testing Methodology and Results; Integration into Global Financial Markets; and Public Intervention in Financial Markets—Obstacles to Monetary Transmission

These Technical Notes on France explain integration of global financial markets. The stress tests for the France Financial Sector Assessment Program (FSAP) were designed to yield as comprehensive and detailed a picture as possible within the constraints of the approach. Retail activity by foreign banks in France is small, but significant. The financial landscape in France remains characterized by a large number of idiosyncrasies that affect monetary transmission. Macroeconometric models point to a smaller reaction to monetary policy in France than in other large euro-area economies.


These Technical Notes on France explain integration of global financial markets. The stress tests for the France Financial Sector Assessment Program (FSAP) were designed to yield as comprehensive and detailed a picture as possible within the constraints of the approach. Retail activity by foreign banks in France is small, but significant. The financial landscape in France remains characterized by a large number of idiosyncrasies that affect monetary transmission. Macroeconometric models point to a smaller reaction to monetary policy in France than in other large euro-area economies.

III. Public Intervention in Financial Markets: Obstacles to Monetary Transmission

A. Introduction60

110. The liberalization of France’s financial sector since the second half of the 1980s should have improved the transmission of monetary policy to the real economy. However, the financial landscape in France remains characterized by a large number of idiosyncrasies—many of which caused by government policies—that affect monetary transmission. This paper aims at providing a comprehensive overview of these idiosyncrasies and their likely or potential impact on the transmission of monetary policy. It is not exhaustive, however, as the investigation of a wide range of specific features necessarily limits the set of available analytical tools. A general equilibrium analysis, for example, did not seem feasible.

111. The empirical analysis focuses on two particular aspects of monetary transmission: the transmission from policy interest rates to the interest rates faced by economic agents and an analysis of the interest rate sensitivity of household consumption. The first aspect was chosen because government interventions play a direct role in this crucial link in the transmission mechanism, the second because the literature suggests that French consumption is relatively insensitive to monetary policy. Although government interventions in financial intermediation impact resource allocation in ways that are often closely interrelated with the transmission of monetary policy, the focus here is on aspects of the latter.

112. Section II anchors the paper in the literature on cross-country heterogeneity of monetary transmission in the euro-area with a view to assessing, at the aggregate level, the relative strength and functioning of the transmission channels in France. Section III reviews the relevant French idiosyncrasies that we were able to identify, and discusses their potential effects on monetary transmission, following a deductive approach. Section IV econometrically quantifies the interest rate transmission and the effect of interest rates on private consumption. Section V concludes and discusses options for reform.

B. Literature Overview

113. The literature usually identifies four main channels in the transmission mechanism of monetary policy (for example, Mishkin (1995); Kamin, Turner and Van’t Dack (1998); and Kuttner and Mosser (2002)): the interest rate channel, the exchange rate channel, the asset price channel, and the credit channel (Table 20).

Table 20.

France: Theoretical Monetary Policy Mechanisms—Illustration in the Case of Monetary Policy Loosening

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Source: IMF staff.
  • The interest rate channel is the key mechanism underpinning counter-cyclical monetary policy. It comprises two distinct effects:

    • A contractionary (expansionary) monetary policy modifies the relative price of current and future goods and services, inducing economic agents to postpone (advance) consumption and investment, provided they do not face liquidity constraints. This is the substitution effect.

    • The income effect refers to the changes monetary policy generates in the disposable income of households. These changes have a sign that is dependent on the household sector’s net position: lower interest rates increase the available income of net borrowers and reduce that of net savers. Depending on the aggregate characteristics of a country’s economic agents (net savers or borrowers), this income effect can on aggregate be positive or negative.

  • The exchange rate channel is caused by the modification a change in monetary policy brings about in the relative rates of return between domestic and foreign currency denominated assets. In a context of flexible exchange rates and an open capital account, a loosening of monetary policy tends to put downward pressure on the domestic currency. This in turn alters the relative price of domestic and foreign goods and services, stimulating exports and activity. However, to some extent the exchange rate effect could be mitigated by developments in other asset markets. For example, lower interest rates could push up equity prices and improve the attractiveness of FDI, thus triggering capital inflows that tend to push the exchange rate up.

  • The asset price channel refers to two distinct effects. First, changes in monetary policy tend to have an impact on equity prices and thus on the ratio of the market value of firms to the replacement cost of their capital stock (Tobin’s Q). This in turn determines the incentives for firms to invest using the proceeds of equity issuance. Second, through its impact on the valuation of assets, monetary policy also has an effect on the intertemporal savings plans of households: higher asset prices make them feel wealthier and less in need of additional savings (wealth effect).

  • The credit channel emphasizes the impact of monetary policy changes on asymmetric information in bank lending. With higher interest rates, the value of collateral used to secure borrowing and the net present value of expected future cash flows are revised downwards, and as banks perceive the financial health of certain agents relying more on borrowing––principally small and medium enterprises––as deteriorating, they tend to be more reluctant to lend to them.

114. The literature sometimes identifies additional channels. One of the most important among these is the expectations channel,61 which refers to the effect that monetary policy announcements and actions have on economic agents’ decisions by influencing their expectations. This channel is not discussed in detail here, because it is less obvious how national idiosyncrasies could affect its functioning, other than through mechanisms which affect the other channels as well.

115. To empirically evaluate the aggregate impact of monetary policy on the real economy and the relative weights of the various transmission channels, the literature offers two different methodologies: macroeconometric models and structural VAR models. Using these two tools, various studies have compared the impact of monetary policy across euro-area countries:

  • Macroeconometric models point to a somewhat smaller reaction to monetary policy in France than in other large euro-area economies (Table 21). Van Els and others (2001), using national central bank models under common assumptions and forward-looking behavior throughout the euro area, find that French economic growth is reduced by 0.28 percentage points after a 100 basis point hike that is sustained for two years. In the euro area as a whole, growth is reduced by 0.38 percentage points. Germany, Italy and Spain all exhibit a larger reaction, the effect in the two latter countries being more than twice that in France. However, the lags with which monetary variables impact the real economy are relatively similar, with the maximum impact generally reached after two years. Differences in specification in the national models may explain part of the differences in results, though McAdam and Morgan (2001) reach a similar conclusion using the multinational NIGEM model. National models used by the French authorities also yield comparable results, even though they do not take into account links between euro-area economies (Baghli and others (2003)).

  • Structural VARs suggest a relatively higher sensitivity of the French economy, but raise cross-country comparability issues (Table 22). Mojon and Peersman (2001) find the impact on GDP of a one standard deviation monetary policy shock in France to be close to the euro-area average. In fact, the large estimated confidence bands they find do not allow them to conclude that the aggregate effects of monetary policy are significantly different between countries. However, by construction, the link between the interest rate variations and the magnitude of the monetary policy shock estimated in the VAR is not straightforward and differs from country to country. Therefore, on the basis of these VAR exercises, it is difficult to compare sensitivity to monetary policy under the (now prevailing) constraint that changes in policy interest rates are the same in all countries. Only Bouscharain and others (1999) specify their shock so as to generate the same interest rate variation in every country, and find the French economy to be the most reactive among the five European countries in the study, including the United Kingdom.

Table 21.

France: Maximum Effects of Monetary Policy Shocks on Output: Cross-Country Comparisons From Macroeconometric Models Available in the Literature 1/

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The number of years after which the maximum effects of the shock materialize are indicated in parenthesis.

Table 22.

France: Maximum Effects of Monetary Policy Shocks on Output: Cross-Country Comparisons from VAR Models Available in the Literature

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Size of the shock in basis points.

116. In all models, the exchange rate effect dominates in the short run, domestic channels becomes more important in the medium run, and the main impact is on investment rather than on consumption, which reacts little and slowly. Mc Adam and Morgan (2001) estimate that, out of a total impact of –0.31 percent an interest rate increase has on activity after two years, the impact on the cost of capital accounts for –0.10 percent, while the direct interest effect on consumption explains a mere –0.03 percent, the rest stemming from a combination of income, wealth and exchange rate effects. In the same vein, Peersman and Smets (2001) find the magnitude of the effect on investment to be three times as large as the magnitude of the effect on GDP. A similar conclusion is drawn by Angeloni and others (2003c), who also show that this result contrasts sharply with the one for the U.S. economy, where household consumption and investment in residential real estate are important factors.

117. Although evidence is mixed, consumption in France could be even less reactive to changes in monetary conditions than it is in other euro-area countries. While van Els and others (2001) find that monetary policy’s impact on consumption in France is stronger than the euro-area average, they note that this is a new result, which had not been found during a previous exercise in 1995 (BIS, 1995).62 They also find that the income effect has become less important and suggest that the financial liberalization of the late 1980s could explain why the substitution effect became significant only recently. Conversely, France is, with Spain and Germany, one of the countries where the empirical evidence of wealth effects was too weak for such effects to be incorporated in the national central bank models. In the VARs estimated by Bouscharain and others (1999), the aggregate effect is larger for France, but the reactivity of private consumption is, with Germany, the lowest of the sample.

C. Transmission of Monetary Policy in the Context of France’s Idiosyncrasies

118. This section identifies structural and institutional features of the French economy and financial sector that could impact on the transmission mechanism of monetary policy and cause deviations from its functioning in the rest of the euro-area. In doing so, it pays particular attention to the financial context that French households face, as well as to factors that are within the authorities’ control. For a detailed description of these idiosyncrasies, see Appendices II and III.

119. To determine the potential relevance of French idiosyncrasies for the transmission mechanism of monetary policy, we use the schematic presentation of Kuttner and Mosser (2002), modified to reflect the situation in the euro-area/French context (Figure 21). The main modification consists of a separation of intermediated interest rates (deposit and lending rates) from nonintermediated ones. This seems necessary to identify the impact of administered interest rates and some other idiosyncrasies that tend to affect intermediated rates only.

Figure 21.
Figure 21.

France: Overview of the Transmission Mechanism of Monetary Policy in the Euro-Area Context

Citation: IMF Staff Country Reports 2005, 185; 10.5089/9781451813630.002.A003

Source: Kuttner and Mosser (2002), with IMF staff modifications.

120. Government interventions in the financial system likely affect the transmission mechanism of monetary policy in many different ways. However, such interventions are not the only idiosyncrasies that are likely to be relevant in determining the eventual impact of a monetary policy shock. The arrows labeled with capital letters in Figure 1 mark the channels where we think French idiosyncrasies could affect the transmission of monetary policy. Table 23 lists the specific idiosyncrasies we consider relevant for each of these channels. In our view, the most prominent cases of government interventions interfering with the transmission mechanism (the core effects of which are marked with bold Xs in Table 23) are (i) the fact that administered interest rates, the ni-ni 63, and the usury legislation, to a significant extent and at least in the short run, interrupt the transmission from euro-area market rates to nominal deposit and lending rates (Channel A in Figure 21); and (ii) the impact of a wide range of government interventions on the interest rate sensitivity of consumption and investment (Channel L and, to a lesser extent, Channel K). This suspected government impact appears to be in line with the findings in the literature discussed in Section II.

Table 23.

Overview of Potential Relevance of a Range of Idiosyncrasies for the Different (Partial) Channels of Transmission

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Source: IMF staff.

121. The impact of euro-area market interest rates on nominal lending and deposit rates in France (Channel A) is affected by anything that directly influences the pricing of bank loans and deposits, notably the administered savings schemes, the ni-ni and the usury legislation, as well as by factors that affect the pricing power of financial institutions, such as the competitive situation in the financial system and the presence of publicly owned or other institutions that do not behave as profit-maximizers. In this context, it is worth recalling that, until recently, France’s cooperative banks were seen as being insufficiently profit-oriented.

122. The way euro area interest rates affect French asset prices (Channel B) depends on the ability of economic agents, including financial institutions, to quickly adjust their asset portfolios in function of changing market conditions. Hence, idiosyncrasies that tend to lead to asset portfolios being insensitive to market conditions (e.g., centralization of deposits and presence of public financial institutions in the market), to high transaction costs or long delays in executing transactions in asset markets (e.g., some features of the housing and mortgage markets) or, more generally, to rigidity in asset portfolios (such as certain administered savings schemes, the tax advantages accorded to life insurance products, tax advantages steering investments toward long-term holdings of certain types of assets, and earmarking of assets) will slow down the adjustment of asset prices.

123. The way banks’ loan supply, in quantitative terms, reacts directly to changes in bank reserves and money market conditions (Channels C and D), depends on the structural characteristics of the financial system, the structure of banks’ balance sheets and the relevance of money market rates for banks’ cost of funding. The less competitive and market oriented a system, and the less it is affected by money market rates, the less responsive it is likely to be. As a result, the presence of public financial institutions, the centralization of deposits, and government interventions affecting their cost of funding (such as the ni-ni and the administered interest rates), are likely to diminish its responsiveness.

124. When domestic deposit and lending rates do not move in line with market and policy interest rates, monetary policy’s influence over the exchange rate could be affected (Channel E). For example, a decline in market rates that is not accompanied by a decline in deposit rates will not give depositors much incentive to reallocate their deposits toward foreign exchange. However, since the advent of the euro, the scope for this effect has become limited.

125. Since French financial markets are closely integrated with those of the rest of the euro area, market interest rates in France should adjust fully and without significant delay to euro market interest rates (Channel F). However, divergences are still conceivable in smaller market segments dominated by domestic players, or where market distortions exist. For example, the CDC’s size and preference to invest in specific kinds of French securities has reportedly led to anomalies in the pricing of those securities. It is also possible that tax discrimination in favor of a specific type of securities leads to deviations from market rates.

126. If bank lending and deposit rates deviate from market rates, asset pricing will be affected (Channel G). However, any idiosyncrasies that influence the substitutability between bank deposits and other assets or economic agents’ ability to finance the purchase of assets with bank loans, is likely to also affect the relevance of this channel. The same idiosyncrasies that affect Channel B are likely to play here, with the addition of the usury legislation.

127. Under the first leg of the monetarist channel (Channel H), monetary operations modify the stock of (base) money relative to the stocks of other assets and hence the marginal utility of money compared to that of other assets (Meltzer, 1995). This triggers portfolio adjustments as economic agents seek to re-establish equality of marginal utilities, which in turn generates relative asset price changes, including changes in interest rates. While the focus is somewhat different, the idiosyncrasies at work are largely the same as for Channels B and G.

128. In the broad credit channel, changes in asset values alter the amount of available collateral (Channel I), which in turn alters economic agents’ ability to borrow (Channel J). Idiosyncrasies that could affect the functioning of this channel are mainly related to the balance sheet structure of economic agents, including financial institutions. These include: the structure of households’ portfolios; the rate of homeownership; the importance of assets that are difficult to use as collateral (e.g., life insurance policies); and the degree of leverage in economic agents’ balance sheets. With aggregate household leverage low in France, asset price variations do not have a disproportionate impact on economic agents’ free assets. Idiosyncrasies affecting the second leg of the channel are those that determine the relevance of available collateral in lending decisions and in the loan supply. These include housing and mortgage market characteristics (e.g., the unavailability of cash-out home equity loans), structural and behavioral features of the banking system (e.g., level of competition, lending policies, and [loan] product innovation), the role of public financial institutions, the centralization of deposits, and the low leverage of households.

129. In the final leg(s) of the interest rate channel (Channels K and L), changes in the real rate of interest and real user cost of capital affect consumption and investment decisions. Idiosyncrasies that “lock in” interest rates and savings and investment decisions—as some administered savings schemes, life insurance policies, and special tax regimes do—will reduce the functioning of this channel. The interest rate sensitivity of savings and investment decisions also depends on the importance of interest rates relative to the other costs of financial transactions (e.g., fixed fees charged by banks, notary fees, or taxes imposed on financial transactions), hence the importance of factors such as housing and mortgage market features and the competitive situation in the banking system. This sensitivity further depends on the balance sheet structure of economic agents, which determines the relative importance of income and substitution effects and, in the case of financial institutions, the (marginal) profitability of lending. Finally, factors that reduce the flexibility of the loan supply (to respond to interest rate-driven changes in demand)—such as the centralization of deposits, earmarking of noncentralized deposits, and the balance sheet structure of the financial system—may impede the functioning of the interest rate channel.

130. The way changes in the exchange rate affect aggregate demand (Channel M) depends in large part on the openness of the economy. In the case of euro-area members, what matters in the first round is the openness toward the non-euro–area world. France’s relatively low openness can be expected to make this channel less important than in the rest of the euro area.

131. Under the second leg of the monetarist channel (Channel N), changes in relative prices on the asset markets spill over to the output markets, because the price of existing assets has changed relative to their production cost and through the impact of unanticipated inflation on output (Meltzer, 1995). As a result, any factor affecting the flexibility with which asset portfolios can be reallocated across financial and real asset markets and any factor affecting the ability of output to respond to these portfolio reallocations (including the structure and openness of the economy), will have an impact on this transmission channel.

132. The impact of the supply (in quantitative terms) of bank loans on aggregate demand (Channel O), will vary with the degree to which economic agents are dependent on bank financing and with the degree to which credit provision is supply-driven. The balance sheet structure of nonbank economic agents, the degree of disintermediation, and some structural features of the financial system, such as competition and constraints that steer the loan supply in a given direction (for example in the use of PEL resources only for mortgage-related operations), are potentially germane for this channel.

133. The relevance of wealth for consumption (Channel P) depends on the correct perception of wealth, on the importance of wealth relative to income, on the relative and absolute importance of different kinds of assets in households’ portfolios, and on the degree to which wealth can easily be converted into consumption, through asset sales or borrowing. As a result, potentially relevant idiosyncrasies for this channel are those which steer investments toward products of which the value is less easily observable (e.g., tax advantages favoring life insurance products) and housing and mortgage market features.

134. Across channels, the eventual impact of monetary policy-induced changes in consumption, investment and net exports on aggregate demand will depend on the relative importance of these items in aggregate demand. In other words, the structure of GDP will affect the functioning of all channels. On the supply side, the structure of an economy’s production is also relevant in determining the aggregate impact of a number of channels, because of differences in sensitivity between sectors. For example, industry is typically more capital intensive than services and hence more sensitive to changes in interest rates.

D. Econometric Analysis of Interest Rate Transmission and Consumption

135. The above analysis and the review of the literature point to interest rate transmission and its effect on aggregate demand, in particular consumption, as two areas where administratively set interest rates play a large role. Furthermore, the two most important administratively set interest rates have in the past deviated significantly and during sustained periods from the policy rate (Figure 22). In this section, we find that market credit rates are sensitive to administered rates, as the latter influence the cost of banks’ resources. Half of the opening of the spread between the consumption credit rate and the policy rate between 2000 Q3 and 2003 Q3 could be explained by the lack of adjustment of the Livret A rate, a key administered savings scheme, to the easing of monetary policy rates. In line with other studies, we find consumption to be more sensitive to income effects than to substitution effects. A static computation suggests that over the last three years, up to 3¼ percentage points of potential consumption growth appears to have been forgone because of the slow adjustment of consumption credit rates.

Figure 22.
Figure 22.

Policy Rate, Livret A Rate, and PEL Rate

(In percent)

Citation: IMF Staff Country Reports 2005, 185; 10.5089/9781451813630.002.A003

Sources: Banque de France,; IMF, IFS and staff calculations.

136. As always, a number of caveats apply to the present exercise. First, the data—kindly provided by the Banque de France—only go back to the beginning of the 1990s, and their frequency is quarterly. Hence, the econometric analysis is constrained by a relatively low number of observations. Second, no weighted average series of deposit rates was available, which imposed use of the policy rate as a proxy in the analysis of consumption.64 Finally, the French economy and financial system have changed tremendously over our sample period, as a result of liberalization and privatization, multiple reforms of administered savings schemes and other government interventions, a structural reduction in inflation, and the advent of EMU. These structural changes inevitably create an additional degree of uncertainty regarding the validity of our results and their relevance in the present and future contexts.

Interest rate transmission from policy rate to retail rates

Short-term credit interest rates

137. Most of the short-term bank credit rates in the dataset are sensitive to the spread between the policy rate and the main administered interest rate, likely reflecting the impact of the administered savings schemes on the cost of banks’ resources. To evaluate the size of this impact and more generally the nature of interest rate transmission, we proceeded in three steps:

  • First, we test the impact of the administered interest rates (through the Livret A rate) on six credit market rates,65 using a long-term relationship with the following specification:

    • rcredit = α rpolicy + β(rLiver A – rpolicy)

  • We use the spread between the policy rate and the Livret A rate, rather than levels of both, to minimize multicolinearity. We find that the Livret A rate plays a role for all rates except the rate on small loans to consumers (Appendix VI). Banks adjust their market rates to any change in the policy rate, but this adjustment is mitigated when the Livret A rate does not adjust in parallel. The effect of administered rates on the cost of banks’ resources is twofold. On the one hand, administered rates directly determine the cost of those administered deposits that remain within the banks, such as most of the deposits collected in CODE VI accounts. On the other hand, nonadministered deposits have to compete with the administered ones and this limits banks’ freedom in setting nonadministered deposit rates.

  • Second, following Mojon (2001), we estimate in one step the full dynamics of the interest rate transmission, using error-correction models. For consumption credit rates, we find the long-term coefficient to be less than one in some cases and greater than one in others. For rates on credit to enterprises, it is in all cases closer to 2 than to 1. While those results should be taken with caution, they could signal different degrees of competition in the consumer and business (in particular SMEs) segments. The estimated equations are detailed in Appendix VII.

  • Third, using these estimates, we simulate the reaction of the six short-term credit rates in our dataset to a 100 basis point hike in the policy rate, with different assumptions regarding the subsequent adjustment of the Livret A rate: (1) no change; (2) adjustment by 50 basis points with a 6–month delay, mimicking the post-August 2003 system; (3) full adjustment with a six-month delay; and (4) full and instantaneous adjustment.

138. The simulations confirm that lack of full and instantaneous adjustment of the Livret A rate hampers monetary transmission (Tables 24 and 25). While the effect on small consumer loans is limited, for all other credit rates, full and immediate adjustment leads to a stronger interest rate response than under the current post-August 2003 system. For consumer credits, interest rates react by an additional 26 to 44 basis points after one year and 31 to 79 basis points after two years. For credits to enterprises, the responsiveness is much higher with ranges from 75 to 121 basis points after one year and 89 to 129 basis points after two years.

Table 24.

France: Impact on Short-Term Consumer Credit Interest Rates of Shocks to the Policy Rate

(In percentage points)

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Source: IMF staff calculations.
Table 25.

France: Impact on Short-Term Enterprise Credit Interest Rate of Shocks to the Policy Rate

(In percentage points)

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Source: IMF staff calculations.

139. The absence of full adjustment of the Livret A rate to the policy rate explains more than half of the increase in the spread between the consumption credit rate and the policy rate over the last two years.66 The spreads between the aggregate consumption credit rate and the policy rate, and between the Livret A rate and the policy rate have widened over the last three years (Figures 23 and 24). Using the above econometric analysis and simulation, we find that the rise in the spread between the Livret A rate and the policy rate explains 143 basis points of the 236 basis point increase in the spread between the consumption rate and the policy rate between 2000Q3 and 2003Q3 (Table 26). A large part of the widening of the spread is, however, due to other factors.

Figure 23.
Figure 23.

France: Spread Between Consumption Credit Rate and Policy Rate

(In percent)

Citation: IMF Staff Country Reports 2005, 185; 10.5089/9781451813630.002.A003

Sources: Banque de France; IMF, IFS and staff calculations.
Figure 24.
Figure 24.

France: 4. Spread Between Livret A and Policy Rate

(In percent)

Citation: IMF Staff Country Reports 2005, 185; 10.5089/9781451813630.002.A003

Sources: Banque de France; IMF, IFS; and IMF staff calculations
Table 26.

Contributions of Policy Rate and Spread Between Livret A Rate and Policy Rate to the Spread Between Consumption Rate and Policy Rate

(In basis points)

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Source: IMF staff calculations.

Medium- and long-term credit interest rates

140. None of the long-term credit rates appears sensitive to administered saving rates. The full dynamics of the long-term rates is provided in Appendix VII. Tests within long-term relationships show that mortgage loans are not influenced by the rate on the mortgage-related savings accounts (PEL),67 nor is the rate for Medium- and long-term loans to enterprises influenced by the Livret A rate. In contrast, they consistently exhibit a high degree of correlation with the long-term market rate, proxied by the 10–year government bond rate (Appendix VIII). The PEL rate only has a marginal impact on the short-term dynamics of mortgage rates.

141. Variable mortgage rates are found to be correlated with long-term market rates, with a speed of adjustment that is marginally higher than that for fixed mortgage rates.68 However, since changes in variable rates affect the stocks of outstanding loans, whereas changes in fixed rates only affect new flows, even with the same or similar adjustment dynamics, one would expect the former to be of higher relevance to the transmission of monetary policy than the latter. But in the case of France, the majority of mortgage loans are contracted at fixed rates, rendering the fixed-rate dynamics relatively more important and the economy overall relatively less sensitive to changes in monetary policy. Since 1998, the difference between variable and fixed mortgage rates has consistently been less than 100 basis points, which could potentially signal that the market does not properly price variable mortgage rates (Cherbonnier and Payet (2004)).


142. Household consumption does not appear to be significantly sensitive to the level of the policy interest rate but the spread between the latter and the consumption credit rate matters. To assess the implications of the low response from the monetary policy rate to interest rates on consumption credit, we estimated a long-term consumption equation, using quarterly data from 1990 to 2003 and real disposable income, the real policy interest rate and the spread between the consumption credit rate and policy rate as explanatory variables. In the absence of a good data series on aggregate deposit rates, we use the policy rate to ensure that the income effect generated by interest rate changes is captured. The consumption credit rate constructed as indicated above is used to capture the substitution effect. The consumer price index is used to convert the nominal interest rate and disposable income data to real series. Our preferred estimation is the following (Equation (1) in Table 27):69


Estimation Period: 1991:01 2003:02

Table 27.

France: Estimation of the Long-Term Consumption Equation Using Phillips-Loretan Nonlinear Estimator

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The coefficients on this explanatory variable should be read as the percentage point change in consumption resulting from a one percentage point increase in the explanatory variable. * = Significant at 5 percent level.

Source: IMF staff calculations.

The estimation results indicate that the level of the policy rate is not significant,70 but that interest rates have significance through the spread. In the case where all rates move simultaneously, consumption is not affected, which could be interpreted as income and substitution effects offsetting each other. In the opposite extreme case in which the consumption credit rate does not adjust at all to a change in the monetary policy rate, the impact of a relaxation of monetary policy is a dampening of consumption. In this case, the income effect is negative, as households earn less from their assets, but borrowing remains equally expensive, which prevents the substitution effect from playing in full. In reality, the transmission from the policy rate to the consumption credit rate is not perfect and immediate. This suggests that in practice, the overall impact of a relaxation of monetary policy on consumption in France tends to be slightly negative, as the substitution effect does not fully compensate the income effect.71

143. The absence of full interest rate transmission during the recent monetary loosening likely affected the strength of consumption. The widening of the spread between the consumption credit rate and the policy rate that occurred during 2000-03 (Figure 23) prevented households from fully taking advantage of the decline in policy rates. The long-term estimated equation even suggests that because banks’ credit rates did not adjust fully to the monetary loosening, about 3¼ percentage points of potential consumption growth could have been forgone over the last two to three years.

144. The Livret A rate does not appear to directly influence consumption. When added to the regression, the coefficient of its spread with the policy rate is not significant (Equations (2) and (5) in Table 27). However, it is worth noting that the same spread comes up significantly positive when the equation is estimated over the 1980–2003 sample period (Equation (6) in Table 27). During the 1980s, the Livret A rate was significantly below the policy rate and often negative in real terms. It was also somewhat less variable than the policy rate. As a result, a widening spread can reflect an increase in inflation or more generally a deteriorating macroeconomic context requiring a tightening of monetary policy, which negatively affects households’ willingness to consume. In addition, as discussed before, a widening spread during the 1980s was often associated with a decline in the real value of financial wealth, which tended to trigger a “make-up” increase in the savings rate.

E. Concluding Remarks and Options for Reform

145. The econometric evidence presented in this study suggests that the existence of administered rates exerts a significant influence on some bank credit rates, slowing down the transmission and weighing on the eventual impact of changes in monetary policy. These results argue for an instantaneous adjustment of the Livret A rate and other administered rates to changes in the ECB rates. The current formula, introduced in August 2003, which adjusts the Livret A rate to policy rate changes every six months, and potentially only by half, is helpful but still hampers monetary policy transmission.

146. Nonetheless, slow and partial adjustment of administered rates explains only part of the sluggishness of monetary transmission. From this perspective, consideration should be given to reassessing a range of other government interventions and policies. In particular, the requirement to provide checks free of charge as a quid pro quo for zero interest-bearing checking accounts (ni-ni policy), and the inertia in setting both deposit and credit PEL rates could bias some prices charged by banks. Furthermore, the PEL’s locking-in of interest rates on future loans and savings blunts the impact of monetary policy. Consideration could therefore be given to the elimination of the ni-ni rule, to a more rapid—preferably automatic—adjustment of the PEL rates to changes in the monetary environment and in long-term market rates, and to eliminating or reducing absolute interest rate commitments in new PEL contracts, for example by defining commitments relative to market rates at the time a loan is taken up. The usury legislation should also be reassessed, especially since in its current form, it could interfere with the transmission mechanism in case of rapid changes in policy interest rates. A better functioning of the mortgage market should be aimed at, potentially with the introduction of home equity loans and reforms of the system of mortgage liens. Finally, a strong competition policy is needed to safeguard the functioning of market forces in the financial sector.

APPENDIX II Idiosyncrasies in the French Financial Landscape

147. In this appendix, we discuss the idiosyncrasies of the French financial system and economy that could affect the transmission mechanism of monetary policy. A first section focuses on public intervention in the financial sector. In doing so, we follow the structure of the sector’s balance sheet. Hence, we will first discuss the main government interventions on the liability (deposit) side of the system’s balance sheet (i.e., administered savings schemes, the tax treatment of savings products, the ni-ni, and the usury legislation), and subsequently those on the asset side (i.e., centralization of deposits, restrictions on the use of some administered deposits, and the tax treatment of investments). In Section B, we shift our attention to structural issues in the French financial sector, namely the structure of the banking system’s balance sheet, the competitive situation within the system and the role of the remaining public financial institutions. Section C explores some particularities of French asset markets, in particular the housing and equity markets. Finally, Section D assesses the relevance of some structural features of the French economy.

Public intervention in the financial sector

148. One of the most striking features of the French financial system is the extent to which the government still intervenes in the collection, management and allocation of the country’s savings. On the liability side of the financial system, the most important interventions are administered savings schemes, differential tax treatment of savings products, the ni-ni requirement,72 and the usury legislation. On the asset side, government intervention is less pervasive, but still significant. It consists of the centralization of deposits to be invested by a state-owned entity, restrictions on the use of funds collected through some administered savings schemes, and differential tax treatment of investments. The continued presence of two sizable government-owned financial institutions (La Poste and the Caisse des Dépôts et Consignations) also gives the government a foothold in financial intermediation.

Administered savings

149. Administered savings schemes are savings products designed wholly or in part by the government, which determines (a number of) its features and, in most cases, its (minimum) remuneration. These government-designed features define the administered savings products along seven main dimensions: (i) eligibility requirements; (ii) determination of the remuneration; (iii) tax treatment; (iv) quantitative deposit limits; (v) withdrawal rules; (vi) distribution channels; and (vii) the destination and/or purpose of the collected funds. An overview of all administrative savings products, defined along these seven dimensions, is provided in Appendix II.

150. Administered savings schemes are very popular. They encompass half of all resident bank deposits in France, for an amount in excess of a third of GDP (Table 28). The most popular schemes are—in volume terms—the housing savings scheme (Plan d’Épargne-Logement or PEL) and—in number—the Livret A. The Livret A rate serves in many ways as the “base rate” for the administered savings products: the Codevi and livret bleu are remunerated at the same level, the floor on the remuneration of the livret jeune is the Livret A rate, and other rates are generally adjusted in line with changes in the Livret A rate.

Table 28.

Composition of Resident Client Deposits at Monetary Financial Institutions and La Poste, December 2003

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Sources : Banque de France and IMF staff calculations

151. Until recently, the Livret A rate was in practice set by the government.73 As noted by Nasse and Noyer (2003), this politicization of changes in interest rates and especially the unpopularity of downward adjustments led to hysteresis in the administered interest rates. In July 2003, it was announced that henceforth, the rate of remuneration would be set automatically at the average of the inflation rate and the ECB’s short-term interest rate, plus 25 basis points. Adjustments are planned to take place every six months, starting on August 1, 2004. The Banque de France has been charged with implementing this new arrangement, but is empowered to deviate from the formula under exceptional circumstances. In particular, the Banque de France is expected to keep the Livret A rate positive in real terms at all times.

152. The planned semi-annual semi-automatic adjustments in the rate of the Livret A will reduce the duration and magnitude of deviations from market rates, but not eliminate them. Under the new system, a lag of between 2 and 3 months and 8 and 9 months will remain before a change in the ECB’s policy rates is reflected in the Livret A rate. The reasons are the 6-month intervals between rate adjustments and the fact that the new rate will be decided some time before the adjustment date, based on earlier observations. More importantly, inflation remains as an important variable in the formula, and may become the sole determinant of the Livret A rate when the ECB’s policy rate becomes negative in real terms, potentially hampering the ECB’s efforts to boost the economy in downturns. Under normal circumstances, the presence of inflation in the formula may lead to divergences between the Livret A rate and policy rates, which could be more significant the more backward-looking the chosen inflation indicator is.

153. The Plan d’Epargne Logement (PEL), the largest administered savings scheme in terms of volume (representing one fifth of total bank deposits), is a long-term savings scheme that offers tax advantages if maintained for at least four years, a potential interest rate subsidy, and the right to a mortgage loan at a predetermined rate (Appendix II). It tends to reduce and alter households’ sensitivity to interest rates for several reasons. First, a PEL requires a depositor to save a contractually specified minimum amount every month, reducing the flexibility of depositors’ savings behavior. Second, the deposit interest rate and the lending rate74 are locked in for the duration of the plan at the time the PEL is set up, at the then going rate established by the government. As a result, for PEL holders, the interest rate at which they can save, or the rate at which they can take out a mortgage loan (be it of a restricted amount), does not alter with changes in policy and market interest rates. Furthermore, the risks of changes in interest rates become asymmetrical for households: in case of higher interest rates, they can maximize their borrowing under the plan. In case of falling interest rates, they can maximize their savings in a high-interest rate PEL, but forego the loan. For banks, the risks are asymmetrical in an opposite way. For them, the PEL consists of a set of long-term options they sell to their customers, of which they need to manage the (asymmetrical) risks. The December 2002 reform of the PEL, which eliminated the interest-rate subsidy for plans that do not result in a loan, has significantly reduced its attractiveness as a savings instrument, and hence new inflows in the scheme. However, the large existing stock of PEL deposits, and the long-term nature of the scheme, guarantee that the PEL will remain a very important item in banks’ and households’ balance sheets for years to come.

The ni-ni requirement

154. The ni-ni requirement, in the context of the French financial sector, refers to the provision that banks can neither remunerate demand deposits75 nor charge for providing checkbooks to their clients. In practice, competitive and client pressure has pushed banks to implement the rule by foregoing any charge for the use of checks.

155. As a result of the ni-ni, and the tendency of French households to nevertheless maintain high levels of demand deposits,76 the majority of the nonadministered deposits in the banking system is excluded from any potential remuneration. Hence, the combination of the ni-ni and the administered savings schemes means that more than 80 percent of deposits is insensitive to changes in market and policy rates, at least in the short run.

156. The ni-ni affects the transmission mechanism of monetary policy in several ways. It renders economic agents’ income and cash flows, as well as the cost of banks’ resources, less sensitive to changes in interest rates. In addition, it alters the way monetary policy influences the resources available to the banking system. Normally, a tightening of monetary policy increases the opportunity cost of maintaining cash balances. As a result, the higher interest rates will induce economic agents to economize more on their cash balances and instead maintain higher bank deposits. Currency in circulation will decline, and base money will be transformed from currency in circulation into bank reserves (which, however, may have fallen initially as a result of the original monetary policy action). The ni-ni could interfere with this mechanism, because it ensures that economic agents do not face a trade-off between cash and demand deposits in terms of lost remuneration. As a result, the choice between the two is unaffected by changes in interest rates. Instead, economic agents face a trade-off between holding cash or demand deposits on the one hand, and holding less liquid bank deposits or money market instruments on the other. But if a change in interest rate encourages them to shift between demand deposits and other bank deposits, this does not affect the composition of base money. Currency in circulation, total bank deposits, and bank reserves all remain unchanged. However, if reserve requirements are different between different kinds of bank deposits, then there may be an effect on the banks’ free reserves (as opposed to the monetary base). However, in the euro-area context, the risk of that happening is reduced by the fact that all deposits with a maturity up to two years are subject to a uniform reserve requirement.

Tax treatment of savings products

157. Savings products tend to be subject to different tax regimes. In general, the authorities have tried to put in place tax incentives that favor long-term savings instruments, such as life insurance policies,77 the PEL, the Plan d’Epargne en Actions (PEA), the Plan d’Epargne Populaire (PEP), the new Plan d’Epargne-Retraite (PERP), and others. All these products are characterized by the fact that they only qualify for favorable tax treatment if maintained for a long minimum period, usually between 4 and 8 years. The tax treatment of life insurance products has been especially favorable, leading French households to keep a significantly larger proportion of their wealth in such products than households in other countries (see below).

158. Life insurance policies can offer a guaranteed return, can be linked to the overall returns on the asset portfolio of the insurance company, or can be closely linked to the performance of specific assets in which the policyholder has chosen to invest (unit-linked policies), usually mutual funds investing in stocks, bonds or some combination of the two. Unit-linked policies represented 18 percent of life insurance policies in 2003. Overall, life insurance assets were invested mostly in fixed-income instruments (75 percent), with equity (22 percent) and real estate (3 percent) being of lesser importance. To benefit from favorable tax treatment, the life insurance policies typically have to be invested for over eight years.

159. The tax system’s favorable treatment of life insurance products likely reduces the short-term impact of changes in the monetary policy stance on households’ savings behavior and perception of wealth, because of the characteristics of life insurance policies. First, many life insurance contracts specify a minimum level of periodic savings that needs to be added to the policy. This, in combination with the practice among some insurers to charge all costs of a policy up front, has a tendency of locking in households’ savings behavior by making changes prohibitively expensive. Households thus have a reduced ability to change their savings behavior in response to changing market conditions. However, to some extent, it is possible to borrow against a life insurance contract, which provides an option to change savings behavior while adhering to the contract. Second, the link between interest rates and asset prices on the one hand and returns on life insurance policies on the other, is less tight than it is for alternative investments such as bonds, stocks or bank deposits. The reasons are the existence of performance guarantees, the delay with which financial market developments are reflected in the performance of a life insurance policy, and the fact that insurance companies can use their hidden reserves to smoothen returns on insurance policies. On the other hand, unit-linked life insurance policies are becoming increasingly important, and many of these now simply consist of a portfolio of mutual funds, the value of which policyholders can follow on a daily basis. Finally, because of the required minimum 8-year maturity of life insurance products, holders of insurance policies have a reduced ability to adjust their portfolios in response to financial market developments, as they must stay within the contractually specified parameters of the life insurance contract. This could affect the speed and degree of adjustment of asset markets in France to changes in the monetary policy stance.

160. The latter argument applies more generally to all tax schemes promoting long-term investments. By penalizing early withdrawals, these schemes tend to introduce an additional degree of rigidity in households portfolios. As a result, households have a lower ability to adjust in function of changing circumstances, for example, a change in monetary policy. This may in turn affect asset price adjustments, wealth effects, and the speed with which changes in savings behavior occur.

The usury legislation

161. The French financial system is subject to a usury legislation that caps the interest rate financial institutions can charge on any loan to an individual or on an overdraft provided to a company, at four thirds of the average rate observed in the relevant loan category. For that purpose, the Banque de France monitors rates in the market, and calculates on a quarterly basis the average rate observed in each category. Application of the four thirds ratio then provides the usury rate for the next quarter. Hence, the system is backward-looking.

162. At only four thirds of observed rates, the usury rate is a binding constraint in many cases. Especially at very low levels of market interest rates, as observed now, it does not allow an adequate pricing of risk. Moreover, because of its backward-looking nature, it becomes more binding whenever monetary policy tightens, because it can take 6 months or more—especially in case of a rapid tightening of monetary policy—before a change in policy and market interest rates is fully reflected in the usury rate. As a result, the usury rate could either reinforce or blunt the impact of monetary policy, depending on the circumstances and on banks’ behavior. If banks refuse to lend whenever they cannot price risk adequately, they should reduce their lending to more risky borrowers whenever a monetary tightening reduces their scope to charge a risk premium. On the other hand, if banks tend to lend even if they cannot fully charge a risky borrower for the risk he represents, monetary policy would be blunted because in a tightening phase, lending rates (to risky borrowers) would only fully adjust to the higher policy rates with a delay in the order of magnitude of 3–7 months. The effect of the usury rate is also asymmetrical. In case of a loosening of monetary policy, there should not be a delay in the downward adjustment of interest rates.

Centralization of deposits

163. A significant share of the funds collected through administrative savings products are centralized in a national savings fund, the Fonds d’Epargne (FdE). This centralization applies to all funds collected in the Livrets A and Livrets bleu, (virtually) all other deposits collected by La Poste, and parts of the funds collected in Codevi and some other accounts. As of end-2003, €217 billion was centralized in the FdE, out of a total of about €529 billion in administered deposits and €1,073 billion in bank deposits (Table 28). The collecting institutions generally receive a remuneration to cover their collection costs, expressed as a percentage of their stock of centralized deposits of a given instrument.

164. The centralization of deposits could introduce a degree of instability in the banks’ deposit base, in function of the spread between the Livret A rate and market rates. If monetary policy is loosened, driving down market interest rates, unregulated bank deposit rates would tend to follow market rates down. However, if the Livret A rate remains unchanged, administered savings products become more attractive relative to alternative bank deposits. As a result, savers will tend to redirect their savings toward the administered savings products. As a result of centralization and of the oligopoly on the distribution of the Livret A and bleu,78 this will imply a net loss of resources for the banks. Overall, a rising spread between the Livret A rate and the policy rate will put downward pressure on banks’ resources, while a declining spread will do the opposite. This could partially undo the normal effects of monetary policy on banks’ liquidity. This effect is, to some extent, visible in Figure 25.

Figure 25.
Figure 25.

Growth of Deposits in Livrets A and Bleu and Spread Between the Livret A and Policy Rates

(In percent)

Citation: IMF Staff Country Reports 2005, 185; 10.5089/9781451813630.002.A003

Sources: Banque de France; IMF, IFS; and IMF staff calculations.

165. In practice, however, the liquidity effects have been contained because banks have sought to maintain the rates on their other deposit products at levels that are competitive with the Livret A rate. Hence, deviations between the Livret A and market rates have impacted more on banks’ cost of resources than on their liquidity. An additional factor limiting the liquidity effects is the fact that the most sophisticated and proactive savers are often the ones who have already reached the limit of their Livret A deposits.

166. The FdE is managed by a state-owned financial institution, the Caisse de Dépôt et Consignation (CDC), in function of certain public policy objectives. The most important of these is the financing of social housing projects, but funds are also invested in loans to local public authorities and some other projects (Table 29). However, half of the assets of the FdE are invested in financial markets, mainly in government securities.

Table 29.

France: Assets of Fonds d’Epargne, end-2002

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Source: CDC annual reports; and IMF staff calculations.

167. On the asset side, the management of the FdE on the basis of public policy principles is likely to reduce the sensitivity of the centralized part of the banking system to economic conditions in general and to the stance of monetary policy in particular. The demand for loans from the FdE is determined to a large extent by public (policy) needs, and is relatively insensitive to interest rates. Conversely, the supply of funds to a large extent adjusts passively to demand, as surplus funds are invested in financial markets. If, as described above, the spread between administered and market rates increases, leading to increasing inflows into the FdE, that is unlikely to lead to an increase in loans provided by the FdE. To the contrary, since social housing companies can also borrow from other sources, a high spread will tempt them to borrow elsewhere rather than from the FdE. In combination with the effects described above, this could lead to a reduction in the supply of bank credit in times of a loosening of monetary policy that is not accompanied by a reduction in the Livret A rate. The reason is that the increased spread encourages depositors to move their savings toward centralized deposits and at the demand side discourages the FdE’s borrowers from taking up new loans. As a result, an increased share of deposits is invested in euro-area financial markets instead of being used to finance loans.

Restrictions on the use of administered deposits (earmarking)

168. Most deposits collected through administered savings schemes can only be used for specific purposes. The funds centralized in the FdE can only be used for certain public policy objectives; PEL and Comptes d’Epargne-Logement (CEL) deposits can only be invested in mortgage loans, some other real estate-related assets, and energy-saving projects; and Codevi deposits can only be used for loans to small and medium sized companies. Overall, this earmarking of banks’ funds reduces the asset-side flexibility in the balance sheet of the banking system (including FdE), and it may lead to incentives that are not aligned with changes in monetary policy. For example, if monetary policy is loosened, leading to lower market rates and unregulated deposit rates, households may increase their deposits in older, higher-yielding PELs. These increased inflows could push banks to increase their mortgage lending, potentially at the expense of other loans. Hence, changes in the stance of monetary policy could conceivably lead to a redirection of lending that may, to some extent, blunt the overall impact of the change in monetary policy. This would especially be the case if the sectors favored by the earmarking rules have an inelastic demand for loans.

Differential tax treatment of investments

169. The tax system favors certain investments over others. For example, there are tax breaks for equity investments in small and medium sized enterprises, there are differences in tax treatment between bonds and shares, and often the government promotes specific investments by putting in place tailored tax breaks (for example, for buying a car).

170. Overall, these tax incentives tend to increase the cost of reallocating investments in function of changing circumstances, and hence reduce economic agents’ ability to react to adjustments in the monetary policy stance. This is especially the case when tax advantages are contingent on economic agents maintaining their investments for a prescribed period.

171. It must be noted that this is not a typically French phenomenon. Most countries attempt to promote investments in certain privileged sectors through tax incentives. In the United States, for example, the tax system strongly encourages investments in housing.

Structural features of the banking sector

Balance sheet structure

172. Given the nonremuneration of demand deposits, and the strong tax incentives favoring life insurance products over bank deposits, one would expect bank deposits in general, and demand deposits in particular, to be lower in France than would otherwise be the case. A comparison of the structure of the French banking system’s balance sheet (including the CDC), with that of its Euro-area peers, appears to confirm this (Tables 30 and 31). The tables show not only that, relative to the banking system’s balance sheet total as well as to GDP, deposits and demand deposits are a significantly less important resource in France than elsewhere. This is further exacerbated by the fact that a significant part of these reduced resources are centralized at the CDC (included here). All in all, noncentralized deposits available to the banking system amount to only 51 percent of GDP, against 91 percent in the rest of the euro-area.

Table 30.

France: Structure of French and Euro-Area Banking System Balance Sheets, end-2002

(In percent of total assets)

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Sources: ECM Monthly Bulletin; diverse Banque de France publications; CDC annual reports, and IMF staff calculations.
Table 31.

France: Structure of French and Euro-Area Banking Systems Balance Sheets, Relative to GDP, end-2002

(In percent of GDP)

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Sources: ECB Monthly Bulletin; diverse Banque de France publications; CDC; annual reports and IMF staff calculations.

In practice, however, investments in the money market come mainly from companies, not from individuals, which would suggest that the latter have a lower ability to circumvent the ni-ni.

174. The relatively low level of bank intermediation implies that any transmission channel that depends on the banking system will tend to be weaker in France than in the rest of the euro-area.

173. This relative shortage of deposits appears to be associated with an overall lower level of bank intermediation, as bank credit is also significantly less important in France than in other euro-area countries. Lending by French banks (excluding CDC) amounts to about 69 percent of GDP, as against 101 percent for the banks of the rest of the euro-area. In fact, relative to the deposits they have available, the French banking system does as well as their euro-area colleagues. The aggregate loan-to-deposit ratio in France is 1.14, slightly better but close to that in the rest of the euro-area, at 1.11. However, the French average is dragged down by the CDC’s low loan-to-deposit ratio. Excluding the CDC improves the ratio to about 1.35. Finally, the comparison also appears to indicate that money market funds are especially well developed in France, which is most likely related to the existence of the ni-ni.

Competitive situation

175. Competitive forces within the banking system, economic rationale and the quest for “national champions” have led to significant concentration in the French banking sector, which is now dominated by six large banks. Although there is no conclusive evidence that the level of competition has deteriorated, banks have been developing a number of strategies to bind their customers. Among those are aggressive pricing on mortgage loans, the sale of packages of products, and the use of the branch network and personalized service as a significant element of competition.79 In part thanks to such strategies, banks now rely on fees and commissions for a significant part of their profitability and clients face significant disincentives to changing banks. Those factors may contribute to a relatively low price flexibility and sensitivity (in particular, interest rate sensitivity) of the retail banking market, which in turn could reduce the impact of the interest rate channel of monetary policy.

Role of the remaining public financial institutions

176. Two state-owned financial institutions continue to play an important role in the financial system. They are the Caisse de Dépôt et Consignation (CDC) and La Poste, the post office system. The main effect of the presence of these financial institutions in the market is that, through their less commercially oriented policies, their importance and the competitive pressure they exert, they tend to reduce the overall sensitivity of the financial system to market forces.

177. Apart from managing the FdE, the CDC also collects certain legally protected deposits (€37 billion at end-2003), which it invests in a variety of loans, financial market instruments and equity investments. To process and service those deposits, the CDC has an agreement to use the regional offices of the Treasury as a branch network. The CDC also has significant own funds (€12.5 billion), which it invests similarly. These investments tend to be based not solely on commercial grounds, but also on public policy objectives. For example, the asset portfolio includes long-term investments in loans for urban renewal and public housing projects, credit to “social economy” projects, and seed capital for small and medium-sized enterprises. Overall, the equity investment policy of the CDC has recently been reoriented toward taking stakes in small and medium-sized companies that cannot find financing in the market, and nurturing those companies to growth. Recourse is also made to the CDC for certain public interventions. For example, during 2003 CDC provided a bridge loan at the request of the government, as part of the government-led package in support of Alstom. The public policy nature of investment decisions reduces the sensitivity of CDC’s asset portfolio to interest rates and the general economic environment. Hence it may reduce sensitivity to the stance of monetary policy. In addition, the CDC manages a significant part of France’s pension funds and maintains large stakes in two important financial institutions, the Caisses d’Epargne and the insurance company CNP.

178. La Poste conducts only limited banking services. It can collect most kinds of deposits, but in terms of credits, La Poste can only provide PEL or CEL-based mortgage loans and associated unregulated mortgage loans. Most of the deposits it collects (the main exception being the deposits in postal checking accounts) are centralized in the FdE and managed by the CDC. With 13,000 post offices providing financial services, it has the largest branch network in the French banking industry. And because this network is shared between the financial and mail activities, the distribution costs per distributed financial product are reduced and not clearly identifiable. La Poste also benefits from certain tax and other advantages. The main impact of the presence of La Poste in the market is that it tends to provide strong competition to other banks on specific products and has greatly contributed to the success of the administered savings products. Because almost all of the administered deposits it collects are centralized, it reinforces the impact of centralization as discussed above. As a distributor of mortgage loans, it has offered very competitive rates (dumping rates, according to some other bankers) and gained significant market share in recent years, in part because the arrangement it worked under rewarded it for the volume of loans it sold, regardless of price. The mortgage loans it sold stayed off its balance sheet (remaining on that of the FdE), and La Poste only received a fixed remuneration based on its outstanding stock of mortgage loans. As a result of its often less commercial behavior and its extensive network, the presence of La Poste in the market has reduced the flexibility of other banks to adapt to changing circumstances, including changes in the stance of monetary policy.

179. Recent reform efforts have gone in the direction of placing La Poste on a more commercial footing. On February 26, 2004, a new convention was signed between the CDC and La Poste that modified the way it was remunerated for distributing mortgage loans, effective retroactively from January 1, 2004 onwards. Under the new system, instead of a fixed commission, La Poste receives the profits on its mortgage portfolio, which however, remains on the balance sheet of the FdE. La Poste has also requested to be able to distribute mortgage loans not connected to a PEL, as well as consumer loans. The government, has in principle, agreed to the first of these requests, but on condition that the financial services of La Poste are reorganized into a separate banking entity, licensed by the CECEI, supervised by the Commission Bancaire, and subject to the same legal and regulatory framework as other banks. The new postal bank will also need to have its own accounts, separate from postal services, to increase transparency and avoid cross-subsidization. Finally, with the exception of the Livret A and deposits collected through a few other administered savings schemes, the postal bank will manage its own balance sheet, rather than passing most of the deposits it collects on to the FdE.

Idiosyncrasies related to asset markets

Housing market

180. The French housing market is characterized by a relatively low turnover and by some rigidity in financing arrangements. Typical French households tend to buy a house only once or twice in their lifetime, if at all. Home ownership rates are relatively low in France,80 perhaps to some extent because of the widespread availability of low-cost rental housing through social housing programs. An important element in the low turnover on the housing market is the transaction costs involved. A sale of real property needs to be done through a notary. The charges a notary applies to such transactions include 4.89 percent in registration rights (a tax), an honorarium of between 0.825 (on the amount of the transaction above a threshold of €16,769.40) and 5 percent (on the part of the transaction amount up to €3,049), and diverse costs of between €458 and €1,52581 (Table 32). Real estate agents typically charge a commission of 4–10 percent, depending on the size of the transaction.82

Table 32.

Typical Transaction Costs Charged by the Notary on the Sale of Existing Residential Real Estate

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Sources: Agence Nationale Pour l’Information sur le Logement website (; and IMF staff estimates.

181. In terms of financing, the French mortgage system (hypothèque) is relatively expensive and inflexible, requires extensive formalities that take time to arrange, and does not provide the lender with full security. The costs related to establishing a mortgage vary depending on the type of loan, but they typically include an honorarium for the notary of between 0.66 percent (for very large amounts) and 3.9 percent (for very small amounts), a tax of 0.61 percent (waived for some types of loans, including PEL loans), and a few hundred euros in various costs. In most cases, these costs total between 1.5 percent and 5.0 percent of the loan amount.83 If the mortgaged property is sold before two years after the end of the original loan maturity, an additional fee of between 0.5 percent and 2.0 percent is due to lift the mortgage (mainlevée d’hypothèque). A somewhat cheaper alternative is a notarized right for a lender to be paid ahead of almost all other creditors (Privilège de prêteur de deniers, or PPD). A PPD is subject to similar costs and fees as a mortgage, including the mainlevée, but it typically costs about a third less. Realizing a mortgage is time consuming, costly and not always successful. It requires a court procedure and, according to bankers, courts tend to sympathize with debtors and are reluctant to evict families from their house. The procedure routinely takes more than a year.

182. In response to the high costs and other disadvantages of mortgages and PPDs, alternative guarantee mechanisms have been developed. In many cases, banks now lend without mortgage or PPD, instead accepting a guarantee (caution) provided by a third party. While such a third party could be another person (e.g., a relative), most often it is a specialized financial company, such as Crédit Logement, a company owned by several large banks. For qualifying borrowers, these institutions guarantee the servicing of the loan, in return for an upfront fee paid by the borrower. The fee typically consists of two parts: a regular fee, and participation in the guarantee company’s reserve fund. Of the latter contribution, 75 percent is reimbursed at the end of the guarantee arrangement (regardless of whether this end comes on or ahead of schedule). Apart from significantly lower costs, the caution offers greater flexibility and other advantages. It does not penalize early repayments of loans or the sale of a property before the loan that financed it reaches maturity. It also allows a more flexible approach to a borrower’s financial difficulties. Guarantee companies advertise that in such cases, they seek the best possible solution in consultation with borrower and lender. If a sale of the property is needed to overcome these financial difficulties, guarantee companies allow a borrower to sell the property himself, rather than to resort to a forced sale through an auction, which tends to yield a lower price.

183. Apart from the mortgage or guarantee costs, mortgage loans come with a one-time processing cost charged by the lender, which is typically about 1 percent of the loan amount (frais de dossier). Borrowers are also usually required to insure their mortgage loan in cases of death or disability, at a premium of about 0.4 percent of the loan amount. In many cases, this premium is not adjusted in line with the declining principal during the lifetime of the loan.

184. Refinancing of mortgages happens in France but is significantly less frequent than in the United States. The main reason is that the level of fixed costs incurred in such an operation makes it profitable to refinance only in case of significant declines in interest rates. By law, early repayments of mortgage loans must be allowed at a penalty that can be negotiated freely between lender and borrower, subject to a cap equal to the lower of 3 percent of the amount repaid early or six months of interest.

185. As noted by the ECB (2003), only 14 percent of mortgage loans in France are at variable rates, which is in line with the situation in countries such as Belgium, Germany, and the Netherlands, but contrasts starkly with a number of other euro-area countries, most notably Spain, Italy, Luxembourg, and Ireland. Another factor putting France apart from most of the rest of the euro-area is its low level of mortgage debt, 22 percent of GDP in 2001. Within the euro-area, only Greece, Italy, and Finland scored lower.

186. In a study comparing European mortgage markets,84 Low, Sebag-Montefiore, and Dübel (2003) find that, compared to other European countries, France’s mortgage market is characterized by:

  • low profitability (the lowest in their sample);

  • significant government involvement;

  • low loan-to-value (LTV) ratios;

  • relatively short loan terms (in part because of the requirement that people pay off their loan within their working lifetime, in combination with the expected significant prior savings);

  • good product variation in some respects;

  • limited product variation in other respects (in particular: limited availability of second mortgages and no possibility for cash-out mortgage borrowing/home equity loans);

  • mortgage lending is focused on people in their 30s and 40s;

  • relatively low transparency;

  • the existence of usury legislation;

  • branch-driven distribution; and

  • high transaction costs.

187. These features of the French housing and mortgage markets make residential real estate a relatively inflexible element in French households’ asset portfolios. The low turnover likely affects the speed of price adjustments and contributes to a perception of housing as an asset providing a service and less as an asset with a financial value, reducing wealth effects. The facts that most loans are fixed-rate and that refinancing is relatively expensive, make households’ (mortgage) interest rate costs largely insensitive to changes in market interest rates. And the high transaction costs and absence of cash-out options limit households’ ability to use what is usually their most valuable asset as a financial tool to adjust to changing financial circumstances.

Equity markets

188. Compared to other countries, French households do not hold large amounts of listed shares in their portfolio. In 2000, around the peak of the recent equity bull market, only 5 percent of households’ financial assets were directly invested in listed shares (Table 38). To some extent, this was compensated by indirect holdings through mutual funds and insurance policies, as well as by relatively high estimated holdings of unlisted shares. However, this investment profile, in combination with the lack of visibility regarding the value of unlisted shares, is likely to render French households’ perception of their balance sheet relatively insensitive to developments in equity markets. This in turn reduces the relevance of the asset price channel of monetary policy (in terms of wealth effects).

Idiosyncrasies Related to the Structure of the French Economy

Macroeconomic idiosyncrasies

189. For monetary policy to have a similar impact across euro-area countries, the national economies must be structurally similar. The literature generally finds that this is not the case, in the sense that there remain important idiosyncratic components in the economic growth dynamics of euro-area member states. Nadal de Simone (2002), for example, finds that the French economy is relatively less influenced by a common component in euro-area economic growth than most other member economies, and relatively more by idiosyncratic factors.

190. Compared to the rest of the euro area, the French economy trades less with the non-euro-area world (Table 33). This is likely to render the French economy less sensitive (in a direct way) to variations in the euro’s exchange rate, and hence it reduces the importance of the exchange rate channel in France, compared with the rest of the euro area.

Table 33.

Trade (Exports Plus Imports) with Non-Euro-Area Countries

(In percent of GDP)

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Sources: ECB; INSEE; and IMF staff calculations.

191. The structure of France’s GDP is similar to that in the rest of the euro-area, but household consumption and gross fixed capital formation (investment) are somewhat less important, mainly because government consumption is higher than elsewhere (Table 34). In theory, government consumption is the component of GDP that is least sensitive to monetary policy, while investment is most sensitive and household consumption (in countries other than France) tends to react to monetary policy as well. Overall, this implies that the composition of France’s GDP is likely to make its economy somewhat less sensitive to changes in monetary policy, compared to the rest of the euro-area.

Table 34.

Structure of Gross Domestic Product, 2001

(In percent of GDP)

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Source: Eurostat.

192. On the supply side, differences between the structure of the French economy and that of the rest of the Euro-area are also limited (Table 35). However, manufacturing, construction and trade, transport and communication are relatively less important in France, while services play a more prominent role than in the rest of the Euro-area. To the extent that the former sectors are more sensitive to interest rates (e.g., because they are more capital intensive), this could also contribute to an overall lower interest rate sensitivity of the French economy.

Table 35.

France: Structure of Gross Value Added, 2001

(In percent of total economy)

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Source: Eurostat.
Low leverage of households

193. As in other countries, French households are net creditors. However, both compared to their foreign peers (Table 36) and in absolute terms (Table 37), French households’ income and balance sheet leverage is low. As a result, the income effects of interest rates changes (once fully reflected in interest rates on assets and liabilities) tend to be stronger than in countries with higher levels of household leverage. Interest rates changes are also less likely to lead to balance sheet problems among French households. The composition of households’ assets and liabilities is comparable to that in other major continental European countries except for the greater share of wealth held in the form of insurance claims rather than direct shareholdings or asset in mutual and pension funds (Table 38).

Table 36.

France: Cross-Country Comparison of Household Debt and Financial Wealth, 2000

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Source: Babeau and Sbano (2003).
Table 37.

France: Overall Balance Sheet of the French Household Sector, end-2002 (Provisional)

(In billions of euros)

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Source: Banque de France.


Table 38.

France: Cross-Country Comparison of the Composition of Households’ Financial Assets and Liabilities, 2000

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Source: Babeau and Sbano (2003).

Table 39.

France: Overview of Administered Savings Products

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Sources: IMF (1999), CNCT (2002), (2003), (2003), Nasse and Noyer (2003)

As of December 31, 2001, in euros.

Quinzaine= standard two-week period used for the calculation of interest.

In 2003, the threshold for eligibility for an LEP was an income tax of 672 euros or less paid in 2002 on an individual’s 2001 income. This threshold is revised each year.

In addition to the ex-ante published rate of remuneration, deposits in a LEP receive an additional ex-post compensatory remuneration in case inflation is higher than the administered interest rate. When applicable, this compensatory remuneration is set by arrest issued by the MINEFI. The rate on the LEP was reduced from 4.25 percent to 3.25 percent on August 1, 2004.

For plans opened before December 12, 2002, the interest rate subsidy is unconditional and paid on a regular basis, together with the interest paid by the bank. For plans opened after that date, the interest rate subsidy is paid as a lump sum at the closing of the PEL-based mortgage loan.


Table 40.

France: Definition of Variables Used

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The most recent observations of these series are available on the Banque de France website (


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Source: IMF staff calculations.

The number of lags is determined through the maximization of the Schwarz criteria.

ADF statistic is for H0: ρ=0, presence of a unit root.


Table 42.

France: Estimation of the Long-Term Equation for Short-Term Market Credit Interest Rate Using Phillips-Loretan Nonlinear Estimator

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Source: IMF staff calculations.

APPENDIX VII Error-Correction Model for Market Credit Interest Rates

(Figures in parenthesis are t-statistics; significance at the 5-percent level is signaled with an asterisk for the short-term dynamic and the correction-error coefficient85)

Short Term Market Credit Interest Rates

With the following conventions:

rpolicy= Nominal Policy Rate

rLivA= Nominal Livret A Rate

spreadLivA= Spread Between the Livret A Rate and the Policy Rate

Rate for Consumer Loans Below €1,524


DW=1.80, SEDepVariable=0.54, SEEstimate=0.50

Estimation Period=1991:02 - 2003:03

Overdraft Rate on Consumer Accounts


DW=1.83, SEDepVariable=0.43, SEEstimate=0.34

Estimation Period=1991:03 - 2003:03

Rate for Consumer Loans Over €1,524


DW=2.15, SEDepVariable=0.34, SEEstimate=0.23

Estimation Period=1991:02 - 2003:03

Discount Rate for Enterprises


DW=2.02, SEDepVariable=0.49, SEEstimate=0.34

Estimation Period=1991:01 - 2003:03

Overdraft Rate on Company Accounts


DW=1.81, SEDepVariable=0.52, SEEstimate=0.37

Estimation Period=1991:01 - 2003:03

Rate for Other Short Term Loans to Enterprises


DW=2.11, SEDepVariable=0.65, SEEstimate=0.48

Estimation Period=1991:01 - 2003:03

Medium- and Long-Term Market Credit Interest Rates

With the following convention:

RGB = Nominal 10-Year Government Bond Rate

RPEL = Nominal Deposit Rate on PEL Contracts

Fixed Mortgage Rate


DW=1.97, SEDepVariable=0.26, SEEstimate=0.16

Estimation Period=1991:01 - 2002:03

Variable Mortgage Rate
DW=2.14, SEDepVariable=0.27, SEEstimate=0.20

Estimation Period=1991:03 - 2003:03

Rate for Medium and Long Term Loans to Enterprises


DW=1.75, SEDepVariable=0.36, SEEstimate=0.24

Estimation Period=1990:01 - 2003:03


Table 43.

France: Estimation of the Long-Term Equation for Medium- and Long-Term Market Credit Interest Rate Using Phillips-Loretan Nonlinear Estimator

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Source: IMF staff calculations.