AND THREE! One by one the major French banks are going to Canossa and sacrifice to market a "piece" of their balance sheets. Faced with an earthquake and a tsunami regulatory markets, BNP Paribas, Societe Generale and Credit Agricole have now decided to haul down the wing, to reduce their credit or financial markets, so their ambitions.
Regulatory side, it is the new international financial rules – dubbed Basel 3 – exercising tremendous pressure. Before Basel 3, the balance of a bank should respond to a simple rule: for every 100 euros of assets, a bank must prove four euros of capital. Basel 3 is that floor to 7.50 euros (10 euros for the world's largest banks).In fact, walking is even higher, partly because the definition of capital has become more restrictive, because the requirements were noted in respect of the riskiest activities.
To comply with new rules, banks can either raise capital or reduce their activities. Until recently, they preferred the first option would have boosted capital by 2019 – the date of entry into force of Basel 3 – with the setting aside of the results and payment of dividends. It will actually go much faster – the Banque de France demands to be ready in 2013 – and in crisis. But the crisis, precisely, will weigh on results, and thus the ability to create capital.
An alternative course would be to raise fresh capital.But a capital increase – if it manages to attract investors very defiant towards the banking sector – would result, at the current share price, an unbearable dilution of existing shareholders, already battered.
There is therefore now no real choice but to reduce activity. What, specifically, means that Societe Generale, BNP Paribas and Crédit Agricole – like many others who have less news on the topic – "have both feet on the brake," says one industry expert small personal loans.
This has more or less impact. The political and financial authorities do not necessarily see a dim view that banks are reducing their market positions. They are more worried about the air pocket that is beginning to be felt on the structured credit or term loans, such as local authorities.
Three resources
But banks now have even less choice than the decrease in activity is also the most effective response to be made to the current liquidity crisis. Specifically, a bank finances its operations with three main resources: its capital, deposits and customer loans on the market, often for at least half of the balance sheet.
Or, take the market has become difficult and expensive. Difficult, because the widespread suspicion that affects the euro area discourages lenders from around the world to take risks, especially in respect of a banking sector by definition exposed to the debts of States.
Unable to borrow simply, banks have other options, more expensive, such as getting loans secured on assets. But again, the possibilities are reduced with the market value of assets.A good state of Italian example is now much less a guarantee that a few months ago. Moreover, if indeed it is … Every time a customer credit rating deteriorates a sovereign, then it erodes the capacity of refinancing of banks that hold. In this context, banks borrow more short-term before (which makes them more vulnerable) and more expensive, which degrades their margins, so their profits and their ability to produce new capital. Full circle …
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