Tale of Two Countries

 

Take a walk down the main street of just about any city or town almost anywhere in the world, and if there any hundred or so year old buildings left then most likely they are (or were) banks. Banks were solidly built with elegant stone work, tall pillars, high decorative ceilings and brass fittings — all most pleasing to the eye. They were built that way to instil confidence in the public. Like a peacock’s tail is to its mate, the most solid-looking, awe-inspiring bank were most likely to win the confidence and trust of people and their money.

It still works today. Tall, shiny, sexy buildings stand erect in downtown cores attracting customers and politicians who covet not only the architecture but the white-collar, service-sector jobs that banks create. The trouble is, that while big banks can be very alluring, experience from New York to Dubai, shows that not all that glitters is gold (as I am sure some pea-hens would tell you if they could).

Having had that thought and after discovering how highly interdependent (read leveraged) with the global economy the French banking system has become (much more than he had expected), Hume wondered how the French banking system compared with the German one. So he delved into one of his favourite data sets — the BIS Consolidated Banking Statistics — to see how the French had come to rise above his prior expectation.
France’s banking system, with assets of about 300% of its GDP in 2010 (up from 200% in 2004), is now much larger and has grown much faster than its German counterpart (bank assets of roughly 150% of GDP in 2010 compared with roughly 120% in 2004). It accomplished this feat mostly by intermediating funds from one place in the world to another.

Between 2005 and 2008, external claims that French banks had on the rest of the world grew 150% compared with just 50% for German banks before contracting in 2009 along with the rest of the world’s banks (Chart 1). The growth of external lending by French banks was 25% during the 12 months through to June 2008, just as the extent of the US subprime crisis was being realised. This compared with 9% growth for Germany (9% for European banks in general and 9% of all the banks that report to the BIS). So as the global financial market was coming to grips with what was shaping up to be a global financial hurricane, French banks were expanding their global book at a staggering rate.

Source: Bank for International Settlements

 

To achieve that fantastic growth, French banks seem to have made some unfortunate decisions during those 12 months (Chart 2). French lending to Greece, Portugal, Hungary, Spain and Italy all grew at rates of 40% or more; much faster than the 25 percent growth in French foreign lending in general and must faster than lending by German, European or the sum of all BIS banks. Only to Ireland did German lending outpace France. French banks even increased lending to the US during that time, when banks in other countries were scaling back. On the other hand, during that period German banks extended lending to markets that have turned out to be good bets (Australia, Canada and New Zealand) at a faster pace than French banks. French banks did make some good calls – their lending to Japan expanded at 60%, while lending by other countries to Japan was growing weakly.

Source: Bank for International Settlements

So what do we make of all of this. Well, Torrens is a litte worried. He doesn’t know much about the world of high finance but, at some point, some of these French banks might find that they gambled and lost. So who will pay? If the French tax payer is asked to do that, then it would no doubt hit the government’s balance sheet hard, leaving Sarkozy’s commitment to preserve France’s AAA credit rating in tatters. But the alternative would be to allow, what appears to be, a systemically important banking system to fail.

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