François Villeroy de Galhau: Challenges for France's economy and
financial sector in 2016
New Year Address by Mr François Villeroy de Galhau, Governor of the Bank of France,
Paris, 18 January 2016.
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Ladies and gentlemen,
Thank you for coming here today to this magnificently restored Golden Gallery. This is the
first time that I am giving this address as Governor of the Banque de France, but it is an
auspicious tradition that brings us together. I would like to start by extending my warmest
wishes to you, your colleagues and your institutions.
2016 has already been marked by volatility: weak financial markets and commodity prices,
from China and the Middle East; political uncertainty in Europe, in Southern Europe, in
Eastern Europe, North-Western Europe with the British referendum, and even in Central
Europe with the refugee crisis. It is our duty to be vigilant, but we must also, on the one hand,
distinguish real information from background noise and real challenges - and there are no
shortages of them - from the sensational and sometimes excessive statements at this start
of this year; on the other hand, in the face of current volatility, we must stick to our
mediumterm objectives. This evening I will not discuss the Eurosystem's monetary policy as we are
in the "silent period" leading up to the Governing Council meeting this Thursday. Such
longterm strategies also apply to the reforms in Europe and in France.
I would like to broaden my personal wishes to three collective wishes: for our country and its
economy first; for its smooth financing second; and for financial stability and the soundness
of your institutions lastly.
1) Today a confirmed recovery is underway, with growth of over 1% in France in
2015, and 1.5% in the euro area. In 2016, despite the uncertainties, all indicators point to
higher growth. France must now transform this modest but real recovery into strong, lasting,
job-creating growth. To do this, two conditions must be met in 2016: public reforms must be
pursued, and corporate investment must be stepped up.
As regards the reforms, France is currently being penalised by excessive debt levels in its
public sector (differential of 25% of GDP vis-à-vis Germany, whereas both countries
displayed the same level in 2010) and the deterioration in its trade balance and
competitiveness. The fight for growth and against unemployment can only be won over time,
with the great virtue of steadfastness. We must therefore keep up all efforts with regard to
containing government expenditure and hold firm on that which is starting to work: the
Responsibility and Solidarity Pact and the Tax Credit for encouraging Competitiveness and
Jobs (CICE) should enable us to catch up, between 2014 and 2017, one-third of our
competitiveness lag with Germany which built up over the first years of the euro (1999-
2007). Transforming the CICE into a permanent reduction in social contributions for
corporations would be a very welcome development. But more is required; the unemployed
and youth cannot afford to wait. In addition to emergency plans, at least four reforms appear
obvious since they have worked for our European neighbours: apprenticeships on a
widespread level; simplifications, including in the area of labour law; the development of
entrepreneurship; and lastly the decentralisation of social dialogue to the company level, i.e.
as close as possible to the economic and human reality.
Corporate investment depends first and foremost on the willingness and the confidence of
thousands of entrepreneurs, but it must naturally be promoted by financing... and therefore
by you.
2) This brings me to my wish concerning the smooth financing of the economy, against
the backdrop of persistently low interest rates. Monetary policy is proving to be effective: in
18 months, since June 2014 and the announcement of non-standard policies, bank lending
rates to business have fallen by around 80 basis points in the euro area, and outstanding
bank loans have risen from a negative growth of 2.5% in June 2014 to positive growth of
0.9% in November 2015. According to estimates, including the decisions of 3 December
2014, non-standard policies improve the growth outlook for the euro area by 1% between
2015 and 2017, and that of inflation by 0.5 percentage point in 2016 and 0.3 percentage
point in 2017.
Bank lending must therefore remain accessible. In this respect, French banks have
achieved good results. Bank lending to business has risen more sharply in France than
anywhere else in Europe: up 4.5% in annual terms at end-November 2015, compared with a
rise of 1% in Germany, and 0% in Italy. Moreover, interest rates in France are among the
lowest in Europe. Interest rates on new bank lending are currently below 2% on average,
compared to 5% in 2007. However, I would like to stress the fact that access to cash loans is
more difficult for very small enterprises. Their fragile financial position may be one reason;
but there is an ongoing misunderstanding with the banks that the latter must seriously
address.
French households' savings must also adjust to the low interest rate environment. This is
an opportunity to encourage more "risky" and more long-term investments, both in the
interest of investors themselves and of our economy. Today only 31% of French households'
financial investments are made up of risky assets, against 45% in the euro area. This
requires taking action in two directions. First, the decrease in interest rates should be
gradually passed on to risk-free investment returns - this is why I proposed lowering the rate
on the PEL, the French housing savings plan, this is also why we must resolutely continue to
lower the returns on life insurance invested in euro funds. Second, new products should be
developed: probably less liquid, with or without a capital protection over the long term, and
possibly offering the best equity performance over time. A crucial point is to avoid any tax
distortions to the detriment of these products compared to liquid and risk-free investments. It
remains all the more essential to fully inform investors about the risks involved when they
invest their savings; two examples come to mind today, unit-linked contracts, and managers
offering disintermediated financing.
3) My third and last collective wish for 2016 is that of financial stability and sound
financial institutions.
Since the financial crisis, the regulatory framework and the supervisory and oversight
architecture have been considerably strengthened. This was necessary, I believe no one
here doubts it. In the banking sector, this involved implementing Basel III / CRD4-CRR,
finalising the TLAC, the new anti-shock weapon, and setting up the European banking union,
which now includes two effective mechanisms: the single supervisory mechanism, and -since
1 January- the single resolution mechanism. Today, French banks are sounder: their core
Tier 1 solvency ratio stood on average at 12% in September 2015, against 6% at end-2007.
And contrary to the fears that have often been expressed, including by some of you, the
current situation shows that these rules have not impacted lending and growth, in particular
thanks to the positive effects of monetary policy. In 2016, the projects still underway should
be completed. In particular in order to improve the comparability of internal models - and
thus improve their credibility -, not to substantially increase overall capital requirements. To
finalise and stabilise Basel III, not to open a new Basel IV.
The insurance sector has not been left out. The entry into force of the European regulatory
reform Solvency 2, also on 1 January, marks a profound break. We all know that "Solva 2"
may still be improved; but it is a significant step forward. In this respect, it is important that all
institutions continue their efforts to improve governance and enhance the quality of estimates
and data submitted to supervisors, in order to ensure an adequate monitoring of risks, in
particular those linked to the persistence of very low interest rates. At the international level,
other challenges lie ahead, notably the definition of systemic groups - it must be similar on
both sides of the Atlantic, like you I am sensitive to this-, harmonised capital requirements
and resolution strategies.
However, the soundness of the financial system does not depend solely on prudential
regulations. It also depends on the confidence that economic players and the public,
households and businesses, have in their financial system. In this respect, the efforts of
financial institutions to protect their clients are essential. In 2016, what is needed is a firm
implementation of the Eckert law on dormant bank accounts and unclaimed life insurance
policies, and greater freedom of choice of loan insurance on real estate loans. And, of
course, more than ever, we need to step up the fight against money laundering and
terrorist financing. New measures have already been taken, some are being strengthened.
I expect from financial institutions - both insurers and banks - an exemplary participation in
this fight. I know that they fully agree to the principle, but they must now carry it through in
their daily management; it is in your interest as compliance risk has become as vital, as
strategic, as credit risk.
May your institutions be strong on both fronts; may our country be as involved in the
economic battle as in the fight against terrorism, with the contribution of all of us; and may
each one of you remain vigilant and active, yet as serene as possible in 2016. Thank you for
your attention.