Potential new “hot potato” between France and Belgium!
Rumours concerning the intention of a transfer to its Belgium affiliate of BNP’s portfolio of Italian and Spanish credits are, deservedly, preoccupying given the current context.
Indeed, if it is legitimate for an institution to attempt to maximise returns on its assets (in the event, the excess deposits held in its Belgian and Swiss subsidiaries), serious consideration should also be given to the current fragility of the European banking sector. It has arisen and been amplified to a large extent by assuming transnational risks, financed by resources from domestic or third party countries.
These credit portfolios were accumulated during the first ten years of EMU, a period during which the financing of assets by resources both denominated in € was considered to be fully protected from any “exchange risk”. The potential withdrawal of Greece from the Eurozone – openly envisaged by some, considered unavoidable by many or even recommended by others – together with the fear of contagion leading to the implosion of the Euro has radically changed the situation.
In order to forestall the consequences of such developments, banks have resorted recently to what is describe as “repatriation of risks”; the aim is to match receivables and payables within in each country of operation, whether incurred directly, through branches or affiliates. In a previous paper, I had already mentioned the dangerous implications of this trend which, clearly, fly in the face of the timid efforts, endorsed by the Brussels summit, to create a “Banking Union” within EMU.
The spreading of this practice, justified in the name of prudent risk management, (which banks have previously been accused of neglecting), reveals starkly their own judgement on the chances of survival of the Euro! These policies contribute to the lack of confidence in the banking sector as a whole, already severely shaken by the recent revelations of the LIBOR market manipulations. Without restoring basic trust in banks, any exit of the crisis will prove impossible.
Two remarks are in order, as far as the specific operations that BNP is alleged to be considering:
a) At group level, the internal transfer of the Italian and Spanish credit portfolio has no impact on the country mismatch between the assets and the source of funding. It is a simple transfer of risks between France and Belgium, camouflaged in the jargon of optimisation of available resources.
b) It behoves the Belgian Government (and the Belgian National Bank as Regulator) to impose on BNP the following choice: either BNP ”borrows” from BNP-Fortis the deposits need to fund its italo-spanish credit portfolio, either it guarantees the credits transferred to BNP-Fortis.
It is high time that the Belgian taxpayer stops assuming risks originated by French banks, whether Dexia or now BNP!
If the French Government is sincere in its support for the future banking Union, (which implies some significant further transfers of sovereignty), there should be no difficulty for BNP to accept the proposed safeguards. If, on the other hand, the transfer being mooted by BNP is part of a more general policy stance aiming first at preserving the integrity of the French banking system in the event of an implosion of the Euro, then the Belgian Government should oppose the decision vigorously.
Furthermore, anticipating its future role as Regulator/Supervisor on the EMU banking sector, the ECB should immediately make known its position concerning the question of “risk repatriation” as its amplification could be a major factor of crisis contagion.
The glimmer of hope, raised by European Council conclusions, will soon evaporate and markets will resume rapidly their “speculative attacks” if nothing is done to ensure coherence between short, medium and longer term EU objectives and the daily practices of their banks. Indeed, the instauration of a Banking Union would eliminate the necessity for reintroducing purely “national” considerations in the prudential risk management of a unified banking sector. To tolerate - not to say encourage - such practices would underline the lack of confidence that Authorities have in their own decisions.
Brussels, July 3rd 2012
Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute.
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