French Banks: Le Crédit Crunch in France
Thursday 02 October 2008
With the world financial system in turmoil, no country is immune from the crisis, but France seems a safer bet than most.
The dirigiste and protectionist nature of the French State may be derided by free marketeers, but with the decomposition of world capital markets, the centrally planned nature of French society could well become the new model capitalism of the future.
Whilst other governments around the globe run to the aid of national banks in trouble, there is an air of cautious optimism in France that French banks will weather the storm far better than most, and may well be in a strong position to reinforce their position in the international marketplace.
Although President Sarkozy this week ordered that France should come to the help of the Franco/Belgian bank Dexia, supporting the Belgium government with a loan to the bank of €3 billion, this was not a bank with any retail activities in France. As it also secured France around one-third of the equity in the bank in a fire sale, there may also have been more to the deal than just stemming the banking crisis!
So, what are the factors that should reassure savers in France that the French banking system is made of sterner stuff than other banks in Europe and the US? There are four main reasons why you should have a bit more confidence in them.
First, because of the broadly based nature of the activities of the French banks. Whilst there are banks in the US and the UK that focus exclusively on investment banking or home loans, (activities which have caused the present difficulties), in France banking operations are more diversified and less reliant on investment operations, with retail banking accounting for around two-thirds of the business activities of the French banks.
That is why the French banking model is often referred to as the banque universelle à la française: French banks undertake investment banking, but they do not do so exclusively and most of it is also focussed in Europe and Asia, rather than the exposed and strife torn US.
Second, because the lending practices of French banks are based firmly on a tough test of ability to pay before a loan can be agreed. If you are seeking a mortgage in France, you will only be able to get one where you have a stable income record, and where the loan does not exceed 80% of the value/price of the property.
Even should you be able to meet these criteria, repayments cannot exceed 33% of total revenues. French banks do not lend on the basis of the value of the property, but as a proportion of your income.
Accordingly, if a bank has any doubt about the security of your income, then they are likely to toughen the terms of the offer, or simply refuse the offer of a loan.
This occurs notably with those on fixed term employment contracts, a new business, or those who obtain any of their income from letting property.
Neither are you able to get away with self-certification of income as has been the case in the UK. You will need to supply a salary slip, business accounts and tax returns in order to provide proof of your income.
Try getting an unsecured business loan and you will find it just as tough!
All of this means that unlike most Anglo-Saxon countries there really is no sub-prime market for mortgage lending. Whilst some French banks have invested in the sub-prime mortgage market in the US, their level of exposure appears to have been comparatively modest, and the losses already factored into balance sheets.
Thirdly, unlike Anglo-Saxon countries there is no large market for variable interest rate mortgages. Most French mortgages are granted on a fixed interest basis, with the borrower also required to take out mandatory life insurance to cover repayment of the mortgage.
This means that most French households are shielded from any large increase in interest rates, and with rates in France historically lower than in the UK and US, repayments are kept under control. Provided the level of unemployment can be kept under reasonable control, households should have no fear of mortgage debt outstripping ability to pay.
Finally, like all banks across Europe, France has a system of guarantee for personal savings in the event of bankruptcy of a French bank. The ceiling figure is set at €70,000 per person, per bank. This means that a couple have a guarantee of €140,000 on a joint savings account with a bank.
Any foreign bank with a subsidiary in France is also required to deposit sufficient funds with the Fonds de Garantie des Dépôts, a government controlled body that provides the indemnity and which holds balances of around €2 billion.
There are separate funds that guarantee shares and life insurance held with a bank. Accordingly, you can hold up to €210,000 in cash, shares and life insurance with a bank, and be covered by the guarantee. If the sums were held jointly, then the total guarantee would be €420,000 per bank.
If you happen to bank with the French post office, through La Banque Postale, then your savings are even more secure, as the bank is publicly owned.
As if this were not enough, President Sarkozy recently assured households that, in the (highly unlikely) event of the collapse of the banking system, no-one would lose a single euro of their savings, an assurance later repeated by his Prime Minister and Minister of Finance. You can either take that with a pinch of salt, or regard it as a cast-iron guarantee, but it is a statement the French public are unlikely to let him forget!
All in all then, you can expect to be reasonably sheltered from the storm if you hold savings in France. Credit is going to get tighter, it may also become more expensive, and life might just get a bit tougher, but your savings are safer than they might be anywhere else.
For property buyers the crisis brings with it good and bad news. Whilst the lack of credit in the market place is inevitably going to cause prices to drop, the cost of capital is also likely to rise, offsetting potential gains achieved from lower prices. The real winners are going to be cash buyers.