Christine Lagarde made this announcement Monday night. The six largest French banks must benefit from these funds in order to sufficiently finance the economy and place themselves at the level of their European competitors.
The French state said it was ready on Monday evening, October 20, to inject 10.5 billion euros into the capital of six major French banks to strengthen their equity and allow them to reopen the credit tap to households, SMEs (small and medium-sized enterprises) and local authorities, seized by the financial crisis. Under this plan, the State undertakes to subscribe by the end of the year to subordinated debt securities issued by the banks concerned with an interest rate higher by about 400 basis points over the year. the rate used for “risk-free” loans.
Crédit Agricole will receive the largest amount, ie 3 billion, BNP Paribas 2.55 billion, Societe Generale 1.7 billion, Credit Mutuel 1.2 billion, Savings Banks 1.1 billion and Banques Populaires 950 million.
Following a meeting with the bankers, the Minister of the Economy, Christine Lagarde, said that the state was ready to maintain this open window and to subscribe, “if market tensions were to persist”, “to a new tranche of an equivalent amount in 2009”.
This plan is part of the exceptional package of nationalization and recapitalization of financial institutions decided in Europe, the United States, and other countries to respond to the financial earthquake of recent weeks.
“The subscription to debt issues will be via the state equity holding company (SPPE),” said Christine Lagarde. The subordinated debt is included in the eligible own funds for the calculation of the tier one ratio, which measures the solvency of the banks; this ratio reflects the requirement that banks maintain a certain amount of equity, taking into account the risks they take by granting credit.
RESTORE MARKET CONFIDENCE
Thanks to this capital injection, the ratio of French banks participating in the operation should thus be raised by around 50 basis points and thus be in line with the European average of 8.5%. Securities of French banks have been strongly attacked on the stock market in recent days because of the relative weakness of their ratio compared to their European counterparts, some of which, like the Dutch group ING or the Swiss bank UBS, have recently made the subject to massive recapitalization by their respective governments. These recapitalization measures could thus contribute to restoring the markets’ confidence in French banks, which will be recapitalized.
In addition, Bercy stressed that regardless of these new measures, the state remained ready to intervene “if necessary in capital” if an institution came to experience major difficulties, as was the case with the bank Dexia, which has benefited at the end of September from an emergency recapitalization plan of 6.4 billion involving the Belgian, French and Luxembourg States.
“Since the beginning of last week, the market had put pressure on French banks whose tier one and ‘core’ tier one solvency ratios were clearly below the European average,” analyst Eric Vanpoucke told Reuters. banking at Sal. Oppenheim.
A study by Merrill Lynch revived on Monday the fears of the insufficient capital of European banks in the belief that if its worst-case recession scenario was realized, these banks – including Socgen, BNPP, and Credit Agricole – would have an additional need for the capital of 73 billion euros.
The Banque de France stressed, Monday night, in a statement, that the six banking groups concerned by the plan presently present a level of capital “quite satisfactory, consistent or superior to what was asked by the banking commission to each institution, depending on the nature of its activities and its risk profile”. She added that French banks “compare very favorably with other European banks”.
This state aid to banks, which has yet to receive the approval of the European Commission, is part of the plan of support of France to its banking system, announced on October 13, for a total amount of 360 Billions of Euro. This plan has two components: a State guarantee to refinance banks capped at 320 billion and a structure to provide them with own funds, whose guarantee is capped at 40 billion and where will be drawn the 10.5 billion in question. In return for this aid, banks must facilitate credit to SMEs, local authorities, and households, with a focus on online personal loans bad credit instant approval, which have suffered from the market downturn. In total, the banks have set a target of increasing they’re outstanding in the range of 3% to 4% in these different types of financing of the economy.
Another counterpart and not least: the banks are committed to respecting “ethical” principles of governance by banning parachutes in particular golden failure of leaders.