"BNP Grows to Biggest Bank as France Says Size Doesn't Matter"
The world’s biggest bank isn’t in the U.S., where regulators banned lenders from proprietary trading, nor in Switzerland, which is doubling capital requirements. BNP Paribas SA is in France, which is doing neither.
BNP Paribas’s assets rose 34 percent in the three years through June, reaching 2.24 trillion euros ($3.2 trillion), equal to the size of Bank of America Corp., the largest U.S. bank, and Morgan Stanley combined. The Paris-based company may also have one of the lowest capital ratios among major European banks under new Basel rules, Morgan Stanley analysts estimated.
Regulators around the world are considering how to rein in their biggest banks to avoid future bailouts without stifling an economic recovery. France, which will hold the rotating chair of the Group of 20 nations in 2011, is taking a laissez-faire approach even as concerns persist that Europe’s sovereign debt crisis may pose renewed risks to financial stability.
“The French are pretending not to see this,” said Carmen Reinhart, a senior fellow at the Washington-based Peterson Institute for International Economics and co-author of a 2009 book examining financial crises throughout history. “What policy makers are doing is delaying the inevitable. But delaying malaise is not unique to the French.”
The Basel Committee on Banking Supervision, which sets capital standards for banks worldwide, softened planned capital and liquidity requirements in September and gave lenders about a decade to comply. France and Germany led efforts to weaken regulations proposed by the committee in 2009, concerned that their banks and economies wouldn’t be able to bear the burden of tougher rules until a recovery takes hold, according to bankers, regulators and lobbyists involved in the talks.
The Basel committee agreed to increase the minimum common equity requirement to 7 percent of assets, weighted according to their risks, from 2 percent previously. Individual countries may enforce higher capital requirements for their biggest lenders.
Switzerland, which pushed for tougher rules, is moving ahead with additional restrictions to curb risks from its biggest banks. A government-appointed committee proposed last month that UBS AG and Credit Suisse Group AG, the country’s largest banks, should hold almost twice as much capital as required under the new Basel rules.
Britain may follow with similar requirements, Morgan Stanley analysts said in an Oct. 20 report, while a U.K. government commission is also examining whether the largest banks should be broken up. In the U.S., the Dodd-Frank Act, signed by President Barack Obama in July, prohibits banks such as New York-based Goldman Sachs Group Inc. from engaging in trading for their own account.
Banks’ size wasn’t the main indicator of whether they posed a risk during the financial crisis, and regulators should be wary of making rules specifically targeting size, Bank of France Governor Christian Noyer said at a press conference with French Finance Minister Christine Lagarde in Paris on Oct. 15.
“Asking for more capital isn’t necessarily more virtuous if it’s simply the counterparty to more risk,” Noyer said. “If banks in some countries have very risky profiles and regulators ask them to hold more capital, it’s their problem. Don’t conclude that everyone has to do exactly the same thing.”
France last month passed a law to increase the power of supervisors over bonuses and rating companies. Starting next year, France will also introduce a “systemic tax on big banks’ riskiest activities,” according to the finance ministry.
“I see absolutely no reason whatsoever that we should be asked any capital surcharge,” BNP Paribas Chief Executive Officer Baudouin Prot, 59, said in an interview with Bloomberg Television. “You should ask a capital surcharge from the banks whose business model, whose track record has been between bad and horrendous. And there have been a number of them, but not for BNP Paribas.”
BNP Paribas “deserves” a lower level of capital compared to most of its rivals and the bank shouldn’t seek to hold “a precise level” of common equity above the 7 percent set by the Basel committee, Chief Financial Officer Philippe Bordenave told analysts on a call today. A system with debt securities that convert to equity when a bank faces financial shocks would be “more effective than a capital surcharge” to reduce systemic risks, Bordenave said.
The bank reported a 46 percent increase in third-quarter profit today to 1.91 billion euros, beating analysts’ estimates, on consumer-banking earnings in France, Belgium and the U.S. The stock rose 3.7 percent in Paris trading.
Frederic Oudea, the CEO of Societe Generale SA, France’s No. 3 bank by assets, told a French parliament hearing yesterday that the financial crisis showed “size isn’t linked to risk.” Applying capital standards like those planned in Switzerland “makes no sense” in France, and could curb lending or make it more expensive, he said.
French presidents since Charles de Gaulle in the 1960s have protected France’s so-called national champions, firms spanning industries from energy to aircraft to drugmakers. The current president, Nicolas Sarkozy, led a 2004 state bailout of Alstom SA when he was finance minister and that same year encouraged the nation’s two biggest drugmakers to combine and create Paris- based Sanofi-Aventis SA, dissuading Switzerland’s Novartis AG from making a competing offer for Aventis SA.
When Rome-based power company Enel SpA said it wanted to bid for France’s Suez SA in 2006, the government orchestrated Suez’s merger with state-owned Gaz de France SA of Paris.
BNP Paribas spent about $43 billion on acquisitions since 2000, including the 2009 purchase of Fortis assets in Belgium and Luxembourg, data compiled by Bloomberg show, making it the biggest bank by deposits in the euro area. The number of employees has doubled to more than 200,000 since 2004.
“The French government clearly desires to defend and promote French banks’ capacity to expand abroad,” said Nicolas Veron, a senior economist at Brussels-based economics research organization Bruegel. The fact that French banks did better in the last crisis “doesn’t mean that France has no systemic-risk problems. You must think about scenarios of future risks.”
France has four banks with more than $1 trillion in assets, as many as the U.S., whose economy is five times the size. In the euro region’s four largest nations, Spain’s Banco Santander SA is the only bank aside from BNP Paribas with assets that exceed its home country’s gross domestic product.