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DE RUEHFR #0295/01 0610658
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R 020658Z MAR 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5647
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHUL/AMEMBASSY SEOUL 1659
RUEHKO/AMEMBASSY TOKYO 2934

UNCLAS SECTION 01 OF 02 PARIS 000295 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB/IFD/OMA AND EUR/WE 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PREL FR
SUBJECT:  THE CRISIS AND FRANCE'S BANKING SECTOR 
 
REFS: A) PARIS 0287 B) PARIS 0081 
 
¶1. (SBU) SUMMARY: French banks have remained generally profitable, 
despite almost USD 20 billion in subprime write-downs and credit 
losses.  The government has provided banks with capital injections 
and guarantees on credit financing to bolster market confidence and 
encourage interbank and money markets to operate normally.  It 
intervened swiftly, in conjunction with Belgian authorities, to 
rescue the Belgian-French bank Dexia with a combined 6.4 billion 
euro capital injection in late September.  More recently, it has 
worked to prevent potential solvency difficulties for two large 
mutual banks, Caisse d'Epargne and Banque Populaire, by facilitating 
their merger with multibillion euro capital injection.  Although 
France has some 400 banks, the sector is dominated by less than ten 
banking groups.  END SUMMARY. 
 
Bank "Rescue" Measures Largely Preventive 
----------------------------------------- 
¶2. (U) In October 2008 the GOF took measures aimed at bolstering 
market confidence and encouraging the interbank and money markets to 
operate normally.  A 360 billion euro bank rescue plan provided 320 
billion euros to improve bank liquidity for lending and 40 billion 
euros to improve bank reserve positions via two special entities, 
the Corporation for Financing of the French Economy ("Societe de 
Financement de l'Economie Francaise - SFEF") and the Corporation for 
State Investment ("Societe de Prise de Position de l'Etat - SPPE"). 
In 2008, the government drew on these vehicles to inject 10.5 
billion euros of quasi-capital in six banks (BNP Paribas, Societe 
Generale, Credit Agricole, Caisse d'Epargne, Credit Mutuel and 
Banque Populaire).  The government will inject a second 10.5 billion 
euro tranche in 2009.  Bank chief executives agreed to forego 2008 
bonuses and dividends, as a percentage of profits were also reduced. 
 The six banks have also pledged to increase lending between 3% or 
4% annually, as stipulated in conditionality attached to the initial 
liquidity injections guaranteed by the GOF through the SFEF (Ref A). 
 Only the Belgian-French group Dexia has required a "rescue," which 
the French and Belgian authorities conducted jointly in late 
September. 
 
French Banks in Relatively Good Health 
-------------------------------------- 
¶3. (U) Despite some USD 20 billion in subprime-related write-downs 
and credit losses, most large French banks posted net profits in 
2008, and reinforced their capital funds, increasing core Tier 1 
capital ratio above the 8% required level.  However, analysts fear 
that higher credit risk and lower credit demand may affect this 
year's bank results.   Depressed Eastern European economies are not 
likely to have a major impact on the French banking sector.  With 
the exception of Societe Generale, French banks have a relatively 
low exposure to that zone.  According to Bank of France statistics, 
French banks had 49 billion euros in outstanding loans to East 
European clients at the beginning of 2008, which was just 3% of 
their transborder loan portfolio. 
 
¶4. (U) BNP, the largest bank, posted a 3 billion euro net profit in 
2008 compared with record profits of 11.1 billion euros in 2007. 
The bank offset 5.7 billion euros in write-downs and in counterparty 
defaults in financial markets by cutting operating costs and 
reducing bonuses.  Despite the recession in Ukraine, BNP Paribas 
plans to keep its 51% stake in UkrSibbank, the third largest 
Ukrainian bank.  Exposure to Eastern European countries accounted 
for 1.8% of loan commitments in 2008, a situation that the bank 
deems manageable. 
 
¶5. (U) Societe Generale, currently France's second largest bank, 
posted a 2 billion euro net profit in 2008 including an 87 million 
euro net profit in the fourth quarter despite the financial crisis 
and the first impacts of the recession.  The results represented a 
rebound from a 3.3 billion euro loss a year earlier when the bank 
was hit by a 4.9 billion euro trading loss blamed on rogue deals by 
former trader Jerome Kerviel.  Since October 2008, Societe Generale 
has had to triple its reserves to cover credit risk, particularly in 
Eastern European countries where it earns 11% of pre-tax profits. 
The bank's Tier-1 capital ratio of 8.8% gives it a solid capital 
 
PARIS 00000295  002 OF 002 
 
 
position.   But it nevertheless has launched plans to solidify its 
position by combining its asset management unit with that of Credit 
Agricole and by reorganizing its corporate/investment banking unit. 
 
 
¶6. (U)In a government-brokered move the mutual banks Caisse 
d'Epargne and Banque Populaire will merge into a single group, 
effective summer 2009.  The GOF which will inject up to 5 billion 
euros into the group, in a mixture of super-subordinate debt and 
convertible preferred stock, giving it a 20% stake in the new bank. 
The investment bank Natixis, in which the two mutual banks each hold 
a 35% interest, posted 2.8 billion euros in losses in 2008, causing 
concomitant losses for the two parent banks.  In 2008, Caisse 
d'Epargne posted a 2 billion euro net loss, and Banque Populaire 
announced a 468 million euro net loss.  The government has named 
President Sarkozy's chief economic advisor, Francois Perol, to 
become the new group's CEO.  The merger will create the second 
largest bank in France with a network of 7,700 branches and 619 
billion euros in savings and deposits. 
 
¶7. (U) Belgian-French Dexia, the world leader in lending to local 
governments, posted a 3.3 billion euro loss for 2008, in part driven 
by exposure to the U.S. real estate market and related securities. 
Its 6.4 billion euro bailout by the French and Belgian governments 
in late September gave the two governments effective control of the 
bank (over 50% of equity).  Among the streamlining measures has been 
the elimination of Dexia's 900-person in-house trading unit. 
Dexia's core credit business with both individual and municipal 
borrowers has contracted significantly since the beginning of 2009. 
It has moved to anticipate possible losses in Turkey, the emerging 
market where Dexia is most exposed.  Nevertheless, Dexia's Denizbank 
subsidiary there turned a steady 160 million euro profit in 2008. 
Dexia's Tier 1 capital ratio was 10.6% at the end of the year and 
the group had no difficulty with a 3 billion euro issue of two-year 
bonds in February. 
 
Banking and Financial Market Supervision 
---------------------------------------- 
¶8. (SBU) By summer 2009, the government plans to launch a reform of 
the financial supervision system including a merger of prudential 
supervision currently shared by the Banking Commission and the 
insurance regulator (Autorite de Controle des Assurances et des 
Mutuelles- ACAM).  This reflects heavy involvement of banks in the 
insurance business and aims to further strengthen the French 
financial system.  In the mean time, the Banking Commission, housed 
within the French central bank, is also pushing hard within the 
European Union for a more uniform definition of Tier 1 capital, 
which the French supervisors feel is too varied.  The reform is also 
to put the securities regulator (Autorite des Marches Financiers - 
AMF) in charge of overseeing disclosure and consumer protections for 
all financial products including savings, mutual funds, full life 
policies etc. to ensure comparability of information.  The AMF has 
already begun a public consultation on risk disclosure and 
transparency for financial products. 
 
PEKALA