The French like to denounce American capitalism and mock its excesses and instability, especially in the financial sector. The last financial crisis – the sub-primes, in 2008 – came indeed from the United States, and such an event seems unthinkable in France, so proud of its “universal banks” and its regulatory instances. Nevertheless, when one looks at the data from the large banks on both sides of the Atlantic, it becomes clear that the most risk is actually with France.
First of all, we know that the two economies have much different weights, since the United States’ GDP is 7.5 times that of France, even though their four main banks are of the same size! The balance sheets of JP Morgan, Bank of America, Wells Fargo and Citigroup total 8,671 billion dollars, while those of BNP Paribas, BPCE-Natixis, Crédit Agricole and Société Générale total 8,330 billion dollars (these numbers are from Jean-Pierre Chevallier’s blog). This means that the four largest American banks represent 44.5% of USA’s GDP, whereas the four largest French banks represent three times France’s GDP! The consequences are clear: should a serious banking crisis occur, Paris wouldn’t be able to deal with it.
But, really, how are those banks capitalized? In other words, what is the systemic risk? And, second of all, here’s the thing: French banks have much less equity than their American sisters. The four large French banks use an average 25.53% leverage (from 21.92% with Crédit Agricole to 31.41% with Société Générale), which means that for every euro they have in cash, they are liable for 25.53 euro. This ratio is absolutely insane: if they were to lose but 1/25 of their balance sheet, or 4%, this would consume all of their equity and put them in technical default. Lehman Brothers’ leverage at the time it failed, September 15, 2008, was of the same magnitude (31). Today with American banks, the leverage is less than half of it (11.63), which is much less imprudent, even though there is still risk, obviously.
And, lastly, markets, of course, are well aware of this reality and they are hitting where it hurts: market capitalisation of the four large American banks is at $1.08 Trillion, whereas French banks’ market cap is six times less - $180 billion – even though they are of the same size, as a reminder.
It is quite ironic that it is the French banks, now, that represent all the evil and the excesses that French leaders have been blaming on the USA’s “ultra-liberalism”. But the real culprit, here, is not liberalism... it is “crony capitalism”, where bankers are tightly linked with political leaders, to the point of their becoming blind to the risks.
In case of a serious banking crisis, as we’ve stated before, the government wouldn’t have the means to be able to cope with it. Consequently, it has already put some dispositions in place: bail-ins via bank accounts, with the BRRD directive, and life insurance payment freezing, with the Sapin Law 2. Or, in other words, make depositors pay. When this cataclysm becomes reality, someone will find some pretext to blame it on “American financial capitalism”...
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.