So Reuters reports that France may or may not be urging a €300bn European Tarp. Très mysterieux.
Especially given that French banks, relative to their British and American brethren competitors, are generally believed to be doing rather well. Indeed, they were called “solid” and “well-capitalised” by an ECB council member earlier this week, with fewer toxic assets on their balance sheet than US counterparts. While French President Nicolas Sarkozy said last week the country’s banks seemed “in position to overcome current difficulties.”
Of course much has changed over the past few days that might have encouraged the French to consider a bailout. The credit crisis has reached European shores with Dexia getting a €6.4bn capital injection yesterday and Fortis rescued over the weekend. JP Morgan said recently it expects €28.4bn of pretax writedowns among European banks in the second-half of this year.
Even so, UBS analysts issued this 88-page note on French banks yesterday:
The crisis in the banking sector has raised doubts about the viability of various business models, but has served to affirm the universal banking model practised by French banks. We regard their capital positions as either relatively comfortable or, in the case of BNP Paribas, supported by strong cash flow generation and minimal exposure to risk assets. At the same time, their diversified funding streams should stand them in good stead going forward.
In terms of funding, French banks have structurally lower loan-to-deposit ratios than the Eurobanks average, which reduces their reliance on wholesale funding. Clearly, term funding of any type will remain challenging for all banks in the near future, but beyond that, the French banks’ diverse sources of funding are a key structural differentiator.
Chart 2: Eurobanks’ loan-to-deposit
At the same time, mortgage securitisation in France is underdeveloped, as evidenced by ABS issuance levels which are a fraction of those in other major European countries. Consequently, French banks are better protected from any tightening of central bank collateral eligibility rules.
Of course, UBS is but one source of opinion. However, a cursory glance at analyst ratings on Bloomberg shows a higher proportion of buy and hold recommendations on banks like Credit Agricole and Societe Generale (not so much Natixis) than sells. Not a perfect measure of course but quick and easy.
So why the purported rush France? Capital Chronicle has this explanation:
Being behind the curve has been a legitimate criticism levelled at regulators and legislators in the United States. It is entirely plausible that this idea is more forward planning than specific set-up. Which does not imply an inexplicable altruism. France is surrounded by neighbours with banks in various states of acute distress and with whom their own have many commercial ties. There is little point hoping these troubles will respect the national frontiers of the (more) prudent - for in this crisis no economy is an island. Pre-emptiveness is self interest.
Related links
EU is divided on crisis measures - WSJ
AIG and an overlevered Europe - FT Alphaville
