A global trend towards regulation with differences across countries
This bill follows a global trend of mastering market activities based on the principle that markets are inherently unstable and market activities inherently destabilizing. It is therefore necessary to establish a cordon sanitaire around these activities in order to better prevent a new systemic crisis and, above all, to prevent savers’ deposits and the State guarantee from absorbing the losses suffered on the markets. In France, four banks belong to the so-called systemic banks, they are fourteen in all on a European scale.
In the United States, the Volcker law advocates the prohibition of proprietary speculation and excessive investment in private equity and hedge funds. In Great Britain, the Vickers law advocates a sanctuarization of the activities of retail banks in the territory while maintaining a relative deregulation on the market activities in order to maintain a comparative advantage. Finally the Liikanen report submitted to the European Commission advocates the total separation of very risky activities, and the retail banking through the creation of ad hoc structure to isolate them.
In relation to this global context, what are the orientations and measures given by French law?
Context and challenges
The criterion of utility retained as cutting principle
Considered first of all as a clear separation between banks’ deposit and credit activities and their market activities, the ambition set out in the Bourget speech evolved into a spin-off of activities deemed not useful for the real economy, otherwise known as speculative activities. This semantic shift makes it possible not to call into question the universal banking model introduced in 1984 by the repeal of Law 45-15 of December 1945, a model that really emerged in the mid-1990s during bank reconciliations. . The French model, let us recall, is based on a mixed bank, a single legal entity that combines the two types of banking activities, deposit and credit activity and market activity. This so-called universal banking model survives the law introduced in the Senate on March 20.
The utility criterion was therefore retained as a cutting principle; the usefulness of an activity is described as any activity carried out by the bank, alone or with its client, in the interest of the same client. The rest of the activities considered as not useful will have to be affiliated. The first estimates of this separation indicate that approximately 1% of the banking activity will have to be subsidiary.
The bank retains market making because the provision of liquidity for its customers is considered useful to the economy. Speculation on commodities derived from agricultural commodities is excluded as well as High Frequency Trading which does not serve a customer (around 10-20% of operations are concerned).
The separation aspect of the law nevertheless includes three relatively restrictive measures for banks:
- Cap on the act and monthly intervention fees. The ceiling to the act being fixed at 5 euros and the monthly ceiling at 40 euros. Through this measure the State intends to reaffirm the defense of fragile customers. This measure represents a significant shortfall for the banks. Today an act is charged on average 8.5 euros and there is no monthly ceiling
- Mandatory information on activities by country. Banks will be required to produce an annual report of their activities by country in which they have subsidiaries or in which they operate. This report should describe the nature of the activities, the number of employees involved and the consolidated net banking income. This measure aims to give more transparency on possible activities carried out in tax havens.
- The more restrictive framework for granting loans to communities. Interest rate indexing of structured loans will have to comply with stricter rules to better protect communities from so-called toxic borrowing and encourage them to take “simple” loans.
While these three measures will have an impact on banking activities, they will be limited by the initial assumption of a total separation between market activities and retail banking activities. This separation boils down to a tiny subsidiary of the part of the banking activities deemed unnecessary for the economy.
A limited separation component but a strong regulation component
If the separation only gives rise to adjustments at the margin, the regulation component leads to a strengthening of the control of the public authorities over the banks.
Thus the Prudential Control Authority will evolve towards the Prudential Control and Resolution Authority. Beyond a certain threshold, French banking institutions will be forced to submit a preventive recovery plan. In the event of seizure by the Governor of the Banque de France or the General Manager of the Treasury, the ACPR may request an organizational change at the head of the bank concerned by appointing a temporary administrator. The powers of the ACPR will then be almost unlimited on the capital of the bank.
The objective here is to ensure that the rescue of a troubled bank is not done to the detriment of savers and the taxpayer.
Regulation is undoubtedly the most restrictive part for banks. And even if it is difficult to imagine reaching the ends provided for by law, these provisions reinforce the bargaining power of public authorities vis-à-vis banks.
A French regulatory framework but especially global and evolutive
The law, under discussion in the Senate since March 20, will respond to a finding made after the 2008 crisis. However, the impact of this law will be limited for French banks.
On the other hand, the Baloise provisions as well as American laws like Volcker or Dodd-Frank will come to regulate banking activities much more strictly and remain major challenges for the banks in the coming years. The law is also evolving because it provides that the Minister of the Economy may at any time expand the scope of activities to be subsidiary; in this case the separation could represent more than the 1% announced.