It’s no wonder that many are concerned about the exposure French banks have to the Euro crisis – and the exposure that their counterparties have to it as a result.
Jamie Dimon has said that new regulations aimed at preventing another crisis favour Euro banks.
And now, a new article in the Wall Street Journal explains why they really might — and why it’s a big deal.
The WSJ article says that top French bank officials fought hard against new capital requirements, and it suggests that sometimes, French bank officials were able to meaningfully impact some of the discussions about the new bank capital requirements that banks will have to comply with by 2013.
One example of their influence is evident in a recommendation that the Basel committee phase the capital rules in gradually — after the French Bank committee insisted on a fresh “impact study” to assess the negative economic impact of the rules.
In other countries, regulators operate more independently from bank officials, says the WSJ:
French banks often helped authorities devise key policies—in contrast to countries like the U.S., U.K., Switzerland and Spain that forced banks to raise tens of billions in new capital and to restructure.
Another country not on the WSJ’s list of countries where executives do not help impact policies is Germany. In fact a recent report said that Josef Ackermann, CEO of Deutsche Bank, was a key figure in discussions to fight against the rumoured 50% writedown that banks would have to take on sovereign debt in the event of a non-credit event resolution of the Greek debt crisis. Ackermann also said that Euro banks would not survive if they were required to write-down their Greek debt holdings to market values.
Not surprisingly, this seems to have sparked some concern, particularly in countries where bank officials do not have such influence on the implementation of regulations.
This is worrisome because while bank officials in other countries might be frustrated for competitive reasons, they might also be concerned because they have exposure to the French banks influenced the discussions.
When the Basel Committee published its final set of rules, and they said that the capital rules would not have to be fully implemented until the end of the 2010 decade, according to the WSJ –
U.S. regulators and outside critics warned that allowing so much time meant banks could be vulnerable if another crisis popped up in the meantime.
So although Dimon has gotten a lot of attention for his fight against capital requirements, it is now evident that he is not the only one who has fought very hard against them. (He might however be the only one whose efforts have proved fruitless.)
Photo: BNP Paribas
After the French Banking Federation wrote in spring 2010, “Excessive capital and liquidity requirements would bring the economic recovery to a screeching halt,” in protest on behalf of France’s five biggest banks, the CEO of BNP Paribas, took it to another level, according to the WSJ.Mr. Prot, the BNP CEO, took to privately badmouthing the Basel Committee’s chairman, Nout Wellink, then governor of the Dutch central bank. Mr. Prot questioned whether Mr. Wellink had the credibility to be crafting international banking regulations given the ills of some Dutch lenders.
Such a remark by Mr. Prot “would disqualify him as a prudent banker,” Mr. Wellink said in an email. He also said, “French banks indeed resisted higher capital requirements and were very much against” a proposed liquidity rule.
Another French bank exec from the Bank of France later warned in Basel Committee discussions that “cutting off lending at a time of economic uncertainty,” might choke the recovery at a critical time.
Now it’s clear that French banks are more exposed to the Euro crisis than other countries’ are, and in fact, banks in France are the #1 most exposed, according to stress tests.
And their exposure — plus the fact that French bank execs influenced the regulators’ discussions — might present a conflict of interest that not only appears to have damaged policial and bank relations at a critical time, as European leaders grapple with how to resolve the Greek debt crisis, but also might present a further problem.
Namely, now that questions have been raised about the stability of French banks in the event of a Greek default or significant debt write-down, they too have been raised about the stability of lenders to French banks, including Morgan Stanley, whose French bank exposure made significant news recently. Basically, their influence on discussions not only might have damaged the confidence in the stability of French banks – but all entities with significant counterparty exposure as well.
As the WSJ writes ominously –
French bankers, government officials and central bankers all made the same argument: “If a big country goes down, we all go down.”
And here’s something that might explain why there is damaged confidence: Yet another big fight that took place between top Euro officials, this time during discussions about the stress tests, which of course ultimately revealed that French banks have the most exposure to the Greek crisis. The WSJ writes –
The biggest battle surrounded whether the tests should examine how banks would fare if struggling euro-zone countries defaulted on their debts. French negotiators, along with German and European Central Bank officials, insisted that the tests not contemplate such a scenario, these people said.
Even though stress tests revealed exposure, they did not show Dexia failing, which it did, effectively rendering them, as well as the fact that neither did they show any French banks failing, meaningless.
Calling further attention to the need for a more urgent resolution, two top IMF leaders, Dominique Strauss-Kahn and Christine Lagarde, both warned recently about Euro banks needing urgent recapitalization. Lagarde warned about urgent Euro bank recapitalization literally in August. And in his first TV interview with his wife’s friend Claire Chazal on France’s TF1 channel in September, the former IMF chief spoke to 64% of viewers who were tuning in to hear his thoughts on the Eurocrisis (only 35% listened to hear about his sex scandal). According to the WSJ, he said words to the effect of – European governments and banks could no longer delay solving the sovereign-debt crisis. “The problem with Europeans… is that they often act either too little or too late, or too little and too late.“
Now that he’s been scandalized, DSK reportedly has a new column in Reuters coming out about exactly that — the uncertain future of Europe.