The paper identifies France’s structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence, and reviews signs of potential gains from a deregulation of the services sector. It is expected that completing deregulation in the services sector would benefit the entire French economy, by boosting productivity and exports. Econometric results have estimated the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.


The paper identifies France’s structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence, and reviews signs of potential gains from a deregulation of the services sector. It is expected that completing deregulation in the services sector would benefit the entire French economy, by boosting productivity and exports. Econometric results have estimated the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.

French Banks: Business Model and Financial Stability1

This note (i) provides an overview of the domestic context of the French banking sector; (ii) reviews developments leading to the 2007 to 2008 financial crisis; (iii) discusses challenges to French banks’ business model during the Eurozone crisis; and (iv) discusses its adaptation with a view to assess vulnerabilities and risks to financial stability.

A. The Domestic Context

1. French households allocate most of their wealth in life insurance and banking products. Life insurance and banking products, mainly deposits, accounted for about 43 and 53 percent, respectively, of the €2.5 trillion in financial assets held by household at end-2011, with the balance invested in mutual funds (Table 1). Tax exemptions for life insurance and regulated deposits help explain the composition of households’ financial assets2.

Table 1.

France: Household Financial Wealth

article image
Source: Banque de France

BNPP, Societe Generale, Credit Agricole, BPCE, Banque Postale, Credit Mutuel

2. A few financial “supermarkets” intermediate about 75 percent of the domestic wealth. At end-2011, six large bank-insurance groups (BNP Paribas, (BNP), Société Générale, BPCE, Banque Postale, Crédit Agricole, and Crédit Mutuel) collected about 96 percent of French households’ deposits and other banking products, 54 percent of their life insurance products, and 70 percent of their placements in mutual funds (Table 1). The bancassurance groups typically have full ownership of insurance companies and use their banking arms’ distribution channels to earn fee income from the selling of insurance products. Banks also earn fee income through their commercialization of mutual funds (OPCVM).


Groups’ share of French household wealth

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A001

3. Within the bancassurance industry, cooperative banks rely more on retail deposits than the other banks. The three largest cooperative banks, Crédit Agricole Group, Crédit Mutuel, and BPCE, collect 56 percent of total retail deposits through their larger branch networks. Regulated bank deposits (mostly Livret A et Bleu), which account for about 9 percent of households’ financial wealth, are mainly deposited in cooperative banks.1 At end- 2010, Banque Postale, Caisse d’Epargne and Crédit Mutuel held 80 percent of such products. Until 2009, regulation allowed only these groups to collect Livret A deposits, the most popular type of regulated savings. Since then, all banks can offer such deposits. Cooperative banks also have a dominant share of the domestic loan market (59 percent of total in 2009), especially mortgages (72 percent of the total). Except for Crédit Agricole, the cooperative banks have not expanded their operations internationally. In addition, corporate and investment banking (CIB) operations in cooperative banks are as not as important as in BNP and Société Générale.

4. Two of the largest French banks have large CIB operations, especially in fixed income currency and commodities (FICC) and equity derivatives. The CIB split shows a reliance on FICC (32 and 26 percent of investment banking (IB) revenues for Société Générale and BNP) but also a strong presence in equity derivatives business which accounts for 32 and 18 percent of Société General and BNP IB revenues, respectively. The two banks are ranked first and second globally in several equity over-the-counter (OTC) derivatives products. These two banks are members of the largest 14 derivatives dealers group (G14) and as such are among the most globally interconnected banks. They are important players in other types of derivatives products, including interest rate andexotic equity (variance and volatility swaps). The CIB split also shows a reliance on eurodenominated debt and capital markets segment as well as financing especially relationships with corporate such as syndicated loans.

B. A Global Expansion Halted by the 2007 to 2008 Crisis

5. The French banking sector grew rapidly in the pre-crisis period in line with those in the US and other European countries. Total banking assets of the four largest banks grew rapidly to about 2.7x GDP just before the financial crisis from 1.5x in 2000. French banks have much larger balance sheets than most European peers and are among the largest in the world. Assets of the largest bank, BNP (BNP), were comparable to France’s GDP at about €2 trillion at end-2010.

6. Financial innovation was the main driver of asset growth. Most of the asset growth was driven by banks’ holdings of marketable securities and other short-term investments and financed mainly by short-term wholesale borrowings. As a sign of greater engagement in securities markets, Natixis was created through the merger of the investment banking units of two cooperative banks, which traditionally focused on the French retail market. Off-balance sheet assets also grew rapidly during the pre-crisis period, in part owing to the expansion of French banks’ derivatives business. Asset growth was halted by the financial crisis in mid-2007 and subsequently reversed. Gross data from the BIS show that by 2007, French banks had increased their net foreign positions (assets minus liabilities) aggressively to about €800 billion, more than UK banks but less than German banks1

7. A few pre-crisis large international bank acquisitions also increased the size of French banks’ assets. In particular, in 2006, Crédit Agricole Group acquired its Greek subsidiary (Emporiki) and BNP acquired its Italian subsidiary (Banca Nazionale del Lavoro). The international retail mix of French banks shows a large presence in Europe, and Italy in particular. In 2010, retail operations in Italy accounted for about half and 30 percent of total international retail business for Crédit Agricole and BNP, respectively; Greece accounted for about a quarter of Crédit Agricole’s international operations; while retail operations in Belgium, Luxembourg, and the US reached 31 and 22 percent, respectively, for BNP. Société Générale’s operations in the Czech Republic alone account for 23 percent of its international footprint, followed by Russia which accounts for 18 percent of international business.


Consolidated Claims of French Banks on Rest of the World

(In million of USD)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A001

Source: BIS Table 9E, Consolidated Foreign Claims & other Potential Exposure on an Ultimate Risk Basis, March 2011

8. French banks’ rapid global expansion was comparable to other European banks. As other European global banks, French banks funded themselves in the US through the wholesale market to invest in the US through the wholesale market in order to minimize their funding costs and, on the asset side, they invested in US mortgage backed securities and structured products, fueling the shadow banking.1 Three factors may explain the expansion of European and French banks. The first is that banks used securitization to circumvent the risk weights required under Basel I (Basel II was implemented in Europe only starting in January 2007). It is noteworthy that the magnitude of the increase in assets did not translate into a similar rise in risk-weighted assets for banks, and as a consequence banks were able to expand without having to increase their capital as rapidly. The second argument is that the advent of the Euro was a catalyst for increased cross-border banking (within the euro zone). Finally, the prevailing low interest rate environment gave incentives for banks to engage in a search for yield.


French Banks Pre Tax Profits

(EUR bn)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A001

Source Bloomberg

9. Asset growth generated higher but more volatile profitability. Banks’ return on equity (ROE) reached double-digit levels fueled by trading profits. ROEs were the highest for the French banks with higher exposures to capital markets. Median ROE increased to 16.0 percent in 2006 with Société Générale and BNP earning returns on equity (ROEs) of 20 and 17.5 percent, respectively compared to 13 percent for the cooperative and mutual banks, (Crédit Agricole and BPCE).

10. The French financial system was resilient to the 2007 to 2008 crisis. Despite large losses, most banks were able to maintain positive net profits, thanks to solid earnings from traditional domestic retail banking and asset gathering, which offset losses in other business lines.

11. Public support to the banking system was significantly less than in the UK and the US. Public support included (i) setting up the Société de Financement de l’Économie Française (SFEF) with government-guaranteed bonds equivalent to €77 billion (about 4 percent of GDP), which were on-lend to banks in proportion to market shares; (ii) setting up the Société de Prise de Participations de l’État (SPPE) for bank recapitalization purposes which injected about €20 billion into the six largest French banks in the form of subordinated debt securities and preferred shares; and (iii) supporting the creation of the BPCE group from the merger of Groupe Caisse d’Épargne and Groupe Banque Populaire, with a €5 billion capital injection by SPPE.1 The French governments also participated (with the governments of Belgium and Luxembourg) in a €6.4 billion recapitalization of the Dexia Group.


Credit to Non-Financial Private Sector

(y o y percent change)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A001

source: Herer Analytics ECM; and IMF staff’ calculations.

12. In the aftermath of the crisis, French banks started a gradual process of balance sheet adjustment while preserving credit supply. After sharp losses during the crisis, most banks started managing legacy assets as a run-off business to reduce their total exposures.2 Credit growth remained resilient and has rebounded from a sharp drop in 2009.

C. The Eurozone Crisis: An Increasingly Challenging Operating Environment

13. French banks face a more challenging operating environment. Key changes in their operating environment include: (i) intense market stress, especially since summer 2011 in a volatile euro area environment; (ii) new banking regulations to improve the quantity and quality of capital and liquidity following the 2008 crisis; (iii) new policy measures targeted to globally systemically important financial institutions (G-SIFIs), and more recently (iv) a banking reform proposed by the government.

Increased Market Stress Since August 2011

14. French banks raise large amounts of short-term wholesale funding to complement their customer deposits. At end-2011, deposits from customers stood at about 32 percent of total liabilities for the largest banks as they relied heavily on wholesale funding, including interbank funding and US money market funds. French mutual funds are also a source of funding for banks, and a channel through which corporate treasury savings are invested in bank securities. As a result of their reliance on wholesale funding, banks’ loan-to-deposit ratios are high and averaged 129 percent at end-2011.

15. In August 2011, difficulties in rolling over US dollar funding from US money market mutual funds signaled key changes in French banks operating environment. French banks which borrowed short-term US dollar funds from US prime money market funds (MMFs) had to suddenly roll over US$240 billion in very difficult market conditions as US MMFs sharply reduced both the size and maturity of their exposures. Funding costs increased, and share prices fell sharply (Table 2). Banks faced a more challenging operating environment as:

Table 2.

France: Daily Movements of Selected Financial Indicators

article image
Sources: Bloomberg; and staff calculations.
  • Wholesale funding risk increased significantly following the near closure of the US dollar funding market;

  • The operating environment for earnings generation became more challenging with reduced profitability of CIB activities and increased market pressure to cover the cost of capital of such business lines;

  • Market concerns also covered French banks’ lower relative capital adequacy and liquidity positions as compared to peer banks and at the same time the cost of raising equity capital rose sharply;

  • The euro zone crisis led to higher and, at times, indiscriminate risk aversion for banks that were most heavily exposed to Greece and the other high spread euro area countries exposure, notably French banks;

  • At the same time, domestic macroeconomic growth slowed down, reducing prospects for higher loan growth.

Basel III Regulatory Changes

16. The 2007 to 2008 financial crisis revealed shortcomings in the quality and quantity of bank capital and liquidity globally, leading to new rules.1 The Basel III framework includes changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including new rules on capital deductions, and changes to the eligibility criteria for Tier 1 and total capital; changes in calculating risk-weighted assets (RWA) resulting from changes to the definition of capital, securitization, trading book and counterparty credit risk requirements; the capital conservation buffer; the leverage ratio; and two liquidity standards (liquidity coverage ratio-LCR-and net stable funding ratio-NSFR). In addition, Basel 2.5 regulations require banks to hold greater capital against the market risks they run in their trading operations.

17. French banks have made significant progress in meeting the new capital requirements. Market pressure has put the bar at a level higher than the minimum solvency ratio required by regulators. Reports from bank analysts suggest that market participants require a higher Basel 3 CET1 ratio of 9-10 percent for the largest French banks. French banks intend to meet CET1 target of 9 percent or more by end-2013 through retained earnings and deleveraging in CIB and non-core businesses.2

18. Market participants’ attention is now turning to liquidity rules, which are yet to be finalized. French banks have significantly reduced their US dollar funding needs since 2011 and have diversified their funding base further. At mid-year, their 2012 funding program was 121 percent completed and liquid assets covered 109 percent of short-term wholesale funding needs. However, there is little public information available regarding their LCR and NSFR. Some market participants indicate they use the existing LCR formula, in spite of significant uncertainty regarding the final methodology to calculate regulatory ratios. Such market estimates indicate that French banks’ LCR are below the European average. Options to improve liquidity ratios include increasing the share of liquid assets and eligible collateral in the balance sheet while structural funding can be improved by shifting towards more stable sources of funding such as retail deposits and more long-term wholesale funding, as well as reducing assets.

Policy Framework for G-SIFIs

19. The four largest French banks are globally systemically important banks according to the FSB framework for G-SIFIs. The G-SIFI list compiled by the FSB includes BPCE, BNP Paribas, CA Group, and Société Générale (see FSB, 2011). The assessment methodology for G-SIBs seeks to measure the impact that a failure of a bank can have on the global financial system and wider economy, and is based on a set of indicators. The five (equally weighted) indicators reflect (i) the size of banks; (ii) their interconnectedness; (iii) the lack of readily available substitutes for the services they provide; (iv) their global cross-jurisdictional activity; and (v) their complexity (see BIS, 2011).

20. The largest French banks will have to meet requirements of the policy framework for G-SIB. These include having recovery and resolution plans (RRPs) by end-2012 and additional capital requirements. The additional loss absorbency requirements will begin to apply from 2016 (initially to those banks identified in November 2014 as globally systemically important).

Banking Reform

21. Ongoing reforms include a number of measures with potential impact on banks’ business models.3 The measures include:

  1. Doubling the ceiling on the Livret A and guarantee a remuneration rate above inflation: the government increased the ceiling by 25 percent in August 2012 to €19,125 and an additional increase of 25 percent is envisaged by end-2012.

  2. Establishing a state bank (Banque Publique d’Investissement) to finance small and medium enterprises (SMEs) and innovation;

  3. A financial transaction tax of 0.2 percent on purchases of equity shares of large companies and “naked” CDS contracts came in force on August 1, 2012;

  4. A 15 percent surtax on banks’ corporate tax;

  5. The separation of retail and “speculative” business lines;

  6. The banning of “toxic” financial products and stock options; and

  7. Prohibition of bank operations in offshore tax havens.

22. The envisaged separation of retail and “speculative” will not lead to an overhaul of French banks’ business model. The authorities have indicated that banks will be required, by July 2015, to create subsidiaries to ring-fence businesses from “market activities that are not directly dedicated to the financing of the economy,” including proprietary trading, investment in hedge funds, and private equity funds. However, under the draft proposal, French bank will continue their market making businesses. The French reform is scheduled to be implemented in advance of the envisaged European Commission process related to the Liikanen Group proposals. The key difference between the two proposals is the treatment of market making. While the Liikanen report mandates this business to be conducted by the trading subsidiary outside the retail ring-fence, the French proposal would bring it back inside.

D. Adapting to the New Environment

23. French banks are universal banks earning a diversified mix of revenues. Net interest income accounts for about half of total revenues for the four largest groups. Through asset liability management strategies, French banks have been able to benefit from the long-term stability of low paying domestic retail deposits. In addition, banks earn a quarter of their revenues through fees and commissions. These relatively stable sources of income complement the more volatile revenues from trading and other income.


French bank’ main sources of revenues

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A001

24. French banks have adapted their business model in response to challenges they have faced. The 2007 to 2008 and euro zone financial crises have shown the limits of their global expansion. As a result, French banks have reduced some segments such as specialized financial services and CIB that are more expensive in capital or funding and have become less profitable. Banks have avoided selling “non-core” assets at fire sales price and used retained earnings to improve their solvency. They have also withdrawn from their international retail activities in Greece. Key questions going forward are (i) how capital intensive are the remaining business lines? (ii) how expensive are business lines in terms of funding? and (iii) how profitable are business lines?

25. Current strategies are on the right direction. French banks are actively implementing a strategy which includes:

  • Increasing liquidity and reducing their dependence on short-term wholesale funding, including through deposit raising, diversifying funding sources, and deleveraging;

  • Raising solvency ratios mainly by plowing back some or even all of retained earnings;

  • Maintaining profitability in French retail and asset gathering activities and reorienting their business model to reduce activities that are relatively more expensive in terms of capital and funding or less profitable;

  • Provisioning against high spread euro area countries exposure and reducing exposures including through sales.

26. Deleveraging plans are well advanced for French banks. Both Crédit Agricole and Société Générale sold their Greek subsidiaries (Emporiki and Geniki, respectively) in October 2012. Reduction of capital intensive CIB activities has allowed banks to reduce their risk weighted assets (RWA). As of June 2012, BNP completed 90 percent of its €79 billion RWA reduction target and Crédit Agricole reached 97 percent of its €35 billion target. In addition, Société Générale achieved about 57 percent of its €30 billion CIB reduction target. BPCE and Crédit Agricole announced that they met about 75 percent of their funding needs target of €25-35 billion and 50 billion, respectively. Data for the three largest banks show that liquidity and funding buffers cover 100 percent or more of funding needs. Nonetheless, banks’ assumptions are less stringent than the Basel III liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).

27. The adaptation of the business plan has not so far had a significant impact on the financing of the domestic economy. Credit growth to nonfinancial corporate slowed down to 1.9 percent (yoy) in October 2012 from 4.6 percent in January 2012 driven mainly by short-term unsecured loans for cash flow management (crédits de trésorerie). Mortgage financing remains healthy at 3.6 percent in October (6.8 percent in January 2012). From a longer term perspective, credit growth which was briefly negative at end-2009 has recovered since then albeit to about half its pre-2008 crisis level.

28. Lending surveys confirm banks’ willingness to lend domestically. Results from the October bank survey indicate that (i) corporate lending standards remained unchanged and (ii) corporate demand slowed down. In the case of consumer credit and mortgages, lending criteria for consumer credit remain relatively unchanged. Demand for housing decreased while demand for consumer credit remained stable.

Looking Forward, a Number of Vulnerabilities and Risks Remain:

29. In the short-term, the main system risks are: (i) a sustained closure of the wholesale funding markets including secured markets (covered bonds markets) and privately placed debt; (ii) market concerns about regulatory liquidity targets. These risks could materialize should there be spillovers from the euro zone crisis to France. French banks are also becoming more dependent on the French retail and asset gathering segments which generate more stable cash flows generation and provide a buffer against other lines’ volatility. A sharp slowdown of economic activity would increase banks’ cost of risk but from a low base.

30. In the medium term, banks face structural vulnerabilities including from (i) structurally low customer deposits over liabilities; (ii) higher leverage positions compared to their peers; (iii) large size, complexity, and interconnectedness (G-SIFIs). While French households’ financial savings are high, French banks rely heavily on wholesale funding as a number of tax incentives redirect retail savings to life insurance and mutual funds. Some deposits from regulated saving schemes also escape banks. About 43 percent of the €2.5 trillion of households’ savings find their way directly on banks’ balance sheets as French savers prefer tax-exempt life insurance products. Given their size, complexity, and interconnectedness, the Financial Sector Assessment Program (FSAP) recommendations relevant to the G-SIFI framework are particularly important. These include observance with the Basel Core Principles (BCPs) for supervision and the crisis management and bank resolution framework.1

31. Finally, a number of trends and developments may have an impact on the future financial sector landscape: The authorities are assessing the net economic benefits of tax incentives on long-term deposits which could redirect long term savings to the banking sector. In addition: (i) French banks have relatively higher operating costs than peer banks, mainly for domestic retail operations. So far, the rationalization observed in a number of countries has not yet taken place in France but could take place in the form of a reduction of branches and downsizing; (ii) banks are testing the originate-to-distribute model and co-financing loans to mid-sized corporates with insurance companies; (iii) the issuance of corporate bonds has increased for large corporations indicating some disintermediation.


  • Bachellerie A., O. de Bandt, D. Gabrielli, and L. Meneau, 2012. “L’Evolution des Placements Financiers des Ménages Français en 2011,” Bulletin de la Banque de France, No 187, 1er trimestre.

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  • BCBS, 2011, “Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement,”

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  • FSB, 2010, “Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision,” November.

  • FSB, 2011, Policy Measures to Address Systemically Important Financial Institutions.

  • IMF, 2012, Global Financial Stability Report, Box, 2.7. April.

  • McGuire, P. and G. von Peter, 2009. “The US dollar shortage in global banking,” BIS Quarterly Review, March.

  • Shin, H.S., 2012. “Global Banking Glut and Loan Risk Premium,” IMF Mundell-Fleming lecture, January.

  • Sy, A, 2011. “France: The Macrofinancial Impact of Basel III Capital Requirements,” Selected Issues Paper, IMF.


Prepared by Amadou N. R. Sy (MCM).


French household financial wealth is defined as the sum of total bank deposits, life-insurance contracts and mutual funds (OPCVM) outstanding as in Bachellerie et al. (2012). In comparison, French households financial wealth stood at EUR 3.85 trillion at end-2011. After subtracting household debt (mainly related to housing credit), French household net wealth stood at EUR 2.7 trillion.)


The remuneration rate of the Livret A is set to the maximum of the average of the three-month Euribor and Eonia, or the inflation rate plus 25 basis points. About one third percent of the Livret A raised by banks are passed to the publicly owned Caisse des Dépôts et Consignations (CDC) to finance social housing.


See McGuire and von Peter (2009). Data are for large internationally active banks headquartered in France, which include branches and subsidiaries.


All banks, except Dexia, have since repaid the state.


Legacy assets include toxic assets (monolines, CDO subprime, and U.S. RMBS and CMBS), ABS/CDOs, and LBOs. Cumulative losses through 2012 for the five largest French banks reached €34 billion.


For more on the impact of Basel III capital rules on French banks and growth, see Sy (2011).


Estimates of 2012 Basel III fully loaded CET1 ratios are 10.5 and 9.2 percent for Crédit Agricole and BNP, respectively, and 8.3 percent for Société Général. Non-core businesses include aircraft, shipping, trade and project finance.


Some market estimates that the cost of the new measures could reduce French banks’ earnings per share by 13-34 percent, with the separation of retail and “speculative” lines having a 4-20 percent impact depending on its form.


For instance, BCP assessments of CP6 on bank insurance cross-holdings and mutual groups, CP7 on risk management, CP12 on country and transfer risks, and CP14 on liquidity risks.

France: Selected Issues
Author: International Monetary Fund. European Dept.