The Soundness of the Financial System: A Review of France’s Banking Performance
The financial stability of a country is crucial to its economic resilience. In this article, we will examine the performance of the French banking system during the 2007-09 global financial crisis and its response to the crisis.
The Financial Crisis and Policy Response
Despite facing significant losses, the French banking system was able to maintain net profits due to strong earnings from traditional domestic retail banking.
Key Measures Taken by Authorities
- Recapitalization of Dexia Group: €6.4 billion was injected into the company to stabilize its finances.
- Establishment of Société de Financemen t de l’Économie Française (SFEF): Up to €265 billion was made available for refinancing operations, helping to maintain liquidity in the market.
- Setting up of Société de Prise de Participations de l’État (SPPE): This entity was established to facilitate bank recapitalization, with a budget of up to €40 billion.
- Merger of Groupe Caisse d’Épargne and Groupe Banque Populaire: A capital injection of €5 billion by SPPE helped to stabilize the merged entity.
Gradual Balance Sheet Adjustment
French banks began to dispose of legacy assets and preserve credit supply, gradually adjusting their balance sheets in response to the crisis.
Potential Risks
Despite the efforts made during the crisis, potential risks remain for the French banking system.
Market Pressures Resumed in 2011
The intensification of the European sovereign debt crisis led to increased market scrutiny of French banks.
Large Exposures to High-Yield Euro Area Countries
At the end of 2011, French banks had significant exposures to high-yield euro area countries, with $677 billion attributed to these economies. Close to $400 billion of this amount was owed to Italy.
Continued Reliance on Wholesale Funding
Capital levels were somewhat below European averages, highlighting a continued reliance on wholesale funding.
Bank Equity Prices Fell and CDS Spreads Widened
Senior unsecured markets closed, and dollar funding evaporated, leading to a decline in bank equity prices and an increase in credit default swap (CDS) spreads.