Twenty years ago, the French banking industry was still extremely regulated and divided; the French State was still very much in control. However, for a variety of reasons it has undergone substantial changes ever since, particularly in the course of the last few years.
First, the banking law of 1984, which placed all banks whatever their status under the same set of rules, was the starting point of a succession of moves that effectively abolished credit specialisation, and which led to the deregulation of the banking system. As of 1999, the savings banks (Caisse d'épargne) assumed the status of co-operative banks, now on a par with Crédit Agricole, and in 2002, mutual banks became members of the French Banking Association (Fédération
bancaire française or FBF). As a consequence of credit liberalisation, all
these institutions entered into competition on their domestic market, under
equal terms, with practically no restriction at all.
Indeed, since the introduction in 1989 of a solvency ratio (Cooke ratio), the globalisation of financial services within Europe, which took place between 1993 and 1999, at the initiative of the European Commission, and the creation of the European single currency at the beginning of 2002, French banks have been faced with growing competition from foreign banks.
Furthermore, in 1987, under the Chirac government, several major banks were privatised including Société Générale, Crédit Commercial de France, Paribas and Suez; a year later Caisse Nationale de Crédit Agricole became a mutual bank. After a pause, the privatisation process resumed in 1993 with the privatisation of BNP, and of Crédit Lyonnais in 1999. This denationalisation process came to an end with the privatisation of Banque Hervet in 2001, and with the sale of the State's 10% share in Crédit Lyonnais in 2002.
Finally, newly privatised banks had to face a most troubled economic trend. During the nineties, several major crises developed throughout the world. The French economy met with a substantial recession in 1993, while Asia faced a major financial crisis in 1998 and the property market was also seriously disrupted during that period. Consequently, the major financial crisis, which reached its peak in 1997-1998, hit Crédit Foncier, Crédit Lyonnais, CIC and Société Marseillaise de Crédit particularly severely.
Banks had to face strong competition which resulted in substantial changes in the industry, all the more so since overdue reforms had also been delayed as a consequence of state-control. Large-scale acquisitions and takeovers took place, concluding in a full-scale reorganisation of the banking sector in France:
- In 1996, Crédit local de France merged with Crédit Communal de Belgique and gave birth to a new entity: Dexia, a Belgian company, while Crédit Agricole, a mutual society, took over Indosuez;
- In 1997, Société Générale purchased Crédit du Nord from Paribas, while Crédit National bought Banque Française du Commerce Extérieur (BFCE), giving birth to Natexis;
- In 1998, Banques Populaires took over Natexis, and in April of the same year, Crédit Mutuel took control of Union Européenne du CIC;
- Since its privatisation BNP had developed a strategy of external growth, and in 1999 launched a takeover bid on both Société Générale and Paribas; after a sixth month-battle it concluded in May 2000 only with the merger of BNP and Paribas.
- In June 2000, CCF, which several investment trusts had previously tried to acquire, was finally taken over on a friendly basis by the British group HSBC, while Banque Hervet, which had been sold in 2001 to CCF, became part of the same group.
Overall, however, the banking sector concentration has made quick progress: in 1984, there were 1556 banks in France, a 50% decrease in the number of banking institutions operating at the turn of the century. In 1999, there were only 1000 left. Moreover, the current move to reorganise the banking system has not come to an end, as shown by the competition between Crédit Agricole and BNP Paribas to take control of Crédit Lyonnais, which finally resulted in the merger of Crédit Agricole and Crédit Lyonnais in 2003, and also merger projects under consideration among Banques Populaires and Caisses de Crédit Agricole.
Meanwhile, French banks, which still ranked in 1997 between 101st and 240th in the world profitability league tables, had made substantial progress by the end of the crisis. Due to their strength in retail banking, they found themselves more able to keep up a proper level of profitability than a number of foreign banks, despite the increasing risks. Globally, they have successfully weathered the desintermediaton process in the last decade, and should benefit from the new reintermediation trend, following the recent collapse of the stock markets.
French banks must still improve their profitability if they wish to resist foreign competition properly. At the same, time under European rules and constraints they will have to abandon some of their traditional practices, such as free check servicing, to offset the absence of any interest-bearing sight accounts. Finally, French banks will have to adjust to new conditions resulting from the competition of new market players, offering new services through the Internet, so far granted exclusively to traditional banks. French banks need to adjust quickly and develop new channels to distribute their products, even though it seems that the old relationship between the customer and his branch manager has not yet come to an end. However, they have already been able to meet similar challenges successfully in the past.
Source: Alain Plessis