Christian Noyer: "Noyer heralds new era for eurozone and for France" -
Interview in Euroweek
Interview with Mr Christian Noyer, Governor of the Bank of France and Chairman of the
Board of Directors of the Bank for International Settlements, in Euroweek "France in the
Capital Markets", 25 February 2013.
* * *
EUROWEEK: You were frequently quoted in 2012 as saying that the eurozone was
moving in the right direction. Do you feel vindicated by the recent strength of the euro
and the performance of the eurozone's financial markets?
Noyer: Things have clearly improved, but this should not come as a surprise. It's clear that
markets lagged a bit before taking stock of what has happened, but looking back, enormous
progress has already been made on all levels. This is true in terms of policies aimed at the
restoration of sound public finances in many, if not all, eurozone countries as well as in the
field of structural reforms.
For example, we have seen very extensive progress in areas like pension reforms in France
and Italy, banking reform in Spain and labour market reforms across much of southern
Europe and France.
We have also seen great progress in terms of surveillance - not just surveillance of fiscal
policies, which is a must in the context of the European monetary union, but also surveillance
of competitiveness which is the basis for structural reforms. This is essential if we are to
avoid distortions in the convergence of competitiveness and therefore prevent a
reemergence of the problem of growth moving towards certain parts of the eurozone to the
detriment of others.
In structural terms a decisive move in this direction was the agreement on banking union
which will break the negative feedback loop between banks and sovereigns and will ensure
the efficiency of the single monetary policy. Last but not least there was the new concept
developed by the ECB saying it was determined to do whatever it took to ensure the stability
of the euro. The concept of the OMT has the merit of making it difficult for the market to fight
the central bank once it has expressed a determination to do whatever it takes to achieve a
certain goal.
On the other hand, the OMT is also credible because of the conditionality. It's not a case of
simply endlessly signing cheque after cheque. It is framed within the context policies which
are geared towards sustainability.
Finally, of course there is the permanent backstop of the ESM. So I think that when we look
at all these decisions they amount to a very comprehensive package which addresses all the
doubts and questions which have been raised since the start of the sovereign debt crisis.
Therefore it is quite natural that 2012 is considered by market participants to have been a
landmark in the creation of a new era for the eurozone.
EUROWEEK: You have often expressed frustration that markets aren't ready enough
to acknowledge the longer term sustainability of monetary union. Are views changing,
especially beyond the eurozone itself?
Although it is of course clearly understood in Europe, it is starting to become
Noyer:
relatively well understood in the US and in Asia. It is taking more time outside Europe to
develop this comprehensive view, because markets in the US and Asia don't have as much
information at their disposal about Europe. But given how globalised markets now are, the
fact that they have been so positive in recent weeks is to me a clear sign that it has started to
be understood relatively well all around the globe.
EUROWEEK: You've been speaking with your eurozone hat on, rather than specifically
about France. Some of the data that has come out recently about European growth in
general and French growth in particular have been very depressing, haven't they? Is
there a concern that the so-called modèle Français is defunct?
Noyer: It is absolutely true that the figures have been disappointing in 2012. But what has to
be taken into account is that France has been facing the same very strong headwinds that
have been blowing across certain parts of Europe. Apart from Germany, the major markets
for French exports are the southern European countries and the UK, all of which have been
in recession in 2012.
The consequence was that the French economy was more or less stagnant. At a time when
so many other parts of Europe were stagnant or in recession, this should not come as a
surprise.
Additionally, French consumption, which had been very resilient during the crisis, was
weakened by the fact that to restore credibility in the consolidation of public finances the
government decided to implement a number of tax increases. These inevitably have had an
impact on consumers' behaviour.
I do not believe that this will necessarily last, because the savings ratio in France is high
compared to the average elsewhere in Europe. We can therefore expect the savings ratio to
decrease somewhat, leading to a more sustained recovery in consumption.
That is hopefully one positive factor for the future. Another is that France is definitely moving
towards reversing the trends in terms of competitiveness. The country is now demonstrating
that there is a clear understanding of the need to pay close attention to firms' production
costs, which is illustrated by the government's so-called Competiveness Pact. It is also
illustrated through a number of structural reforms that have started to be introduced to
increase the flexibility of the economy and make job creation more resilient.
From that standpoint the first move which is very significant is the so-called National Pact
between business and unions which will be vetted by law. This is a complete reversal of the
previous trend. So in a sense, yes, the modèle Français is adapting.
But I also think the model is retaining some features which are strong cultural characteristics.
It relies on positive demographic trends, high educational standards and the quality of
infrastructure. So it is not true to say that the French economic model has been
characterised exclusively by the excessive inflexibility of its welfare system.
I would add finally that France has started taking measures to correct the excessive costs in
the welfare system while not by changing radically the way it is constructed. Instead, we will
probably move more towards what the Scandinavian countries have been able to do by
introducing pension reforms to contain the costs of the system for corporates and containing
healthcare expenditures. The Nordic countries have proved that you can have an efficient
welfare system without damaging competitiveness.
EUROWEEK: But countries like Portugal are seeing their exports surging,
underpinned by lower unit labour costs, while France's exports continue to fall. Does
it concern you that the IMF has openly suggested that France is in danger if being
overtaken by southern Europe?
My understanding of what is behind the IMF's comment is the idea that these
Noyer:
countries are addressing their competitiveness problems in a very strong manner, knowing
that their problems were much more severe than those we had in France. Their relative
productivity was lower and they also had relatively inflexible labour markets, which they are
now reforming, notably in Spain and Italy.
So the IMF has simply observed that France can't afford to stand still when Germany began
to reform some years ago, and given that the southern European countries are also moving
to address the problems of cost competitiveness and rigidities. This is clearly why the
economic reforms announced in France are so important. I'm delighted that the government
has made this such a high priority.
EUROWEEK: Let's move on to France's relationship with the financial markets and
with the developments in its banking system. Are you concerned about what the
ratings agencies have been saying about France? Or are ratings agencies irrelevant
these days? They don't seem to have had much of an impact on France's borrowing
costs.
Noyer: No. I don't worry about ratings agencies. The crisis led to a weakening in public
finances in most countries, so in relative terms there have been few changes in their ratings.
No agency is denying that France still has one of the strongest risk profiles in Europe.
The second reason why I don't worry is that worldwide authorities such as the G20 and the
FASB have said very clearly that they want market players to rely less on credit ratings
agencies and to make their own judgments. This can be done by banks' internal models or
other types of analysis by investment managers which are more sophisticated than they used
to be a few years ago. For all those reasons I don't think the agencies are as influential as
they used to be.
The agencies themselves have always claimed that they are just one of the resources
available in the market. They have always insisted quite rightly that they are not the final
arbitrators of investment decisions.
EUROWEEK: What about the French banking system? Are you comfortable that the
French banks are adequately prepared for Basel III?
Noyer: I have always considered each of the five major groups within the French banking
system to be basically resilient. The universal banking model is playing an important role in
that respect because it creates a large base of diversified revenues which means that when
one business line of the banks has been hit by a shock they can rely on the variety of their
other revenues and preserve their earning capacity.
But this being said, with the benefit of hindsight, it's clear that like many others the French
banks weren't sufficiently resilient to withstand major external shocks and tail risks during the
crisis.
So the French banking sector had to increase its capital base and reduce its leverage. I have
to say that in my view the French banks have done so quite successfully and rapidly.
Between the end of 2011 and June 2012 they increased their capital base by €20bn through
retained profits or fresh fundraising in the market or from their shareholders.
They have also managed to achieve a very well controlled process of deleveraging by
reducing their exposure to non-core businesses, in general at good prices. So their overall
balance sheet situation has been substantially improved and they are now in the process of
meeting in full the requirements of Basel III with core tier one ratios of 9% before the end of
2013. This is several years ahead of the schedule that was originally stipulated.
By the way, I always felt that the time frame determined by the supervisors in Basel for
compliance by the beginning of 2019 was always a little bit theoretical, because markets
were likely to ask for more rapid implementation, which is what the French banks have done.
So when I compare the French banking system with other major banking systems, be it in
North America or in Europe, I have the clear conviction that the French banks are on track
and are among the best performers in terms of their capital ratios.
EUROWEEK: Has this deleveraging process been at all damaging to the economy, as
some people say it has been in the UK and in southern Europe, by reducing their
lending to the corporate sector? Or is the universal banking system such that this is
much less of a threat in France than elsewhere?
Noyer: The deleveraging of the French banks has been partly done through the reduction of
their exposure to sovereign debt markets globally. The remainder has been in areas such as
project and trade finance.
The French banks haven't exited from these businesses altogether, because they have very
strong franchises in these areas which are a good source of revenue. But they have
managed to liquidate a number of operations that were weighing down their balance sheets.
That has helped them to reduce their financing needs.
They did not reduce their leverage through imposing some kind of credit crunch - absolutely
not.
Actually, the change in the volume of bank lending in France has been less rapid than in
almost all other eurozone countries - or almost all other European countries, including the
UK.
I don't believe there has been any constraint on the supply of credit to the economy. If there
has been a decline in lending volumes this has been a reflection of reduced demand, rather
than any decline in supply.
Possibly in the future there may be a relative decline in the importance of bank lending,
because we have worked a lot on developing simple and transparent alternative financing
instruments such as securitisation.
These may attract more attention from institutional investors and would therefore be a way of
providing more credit to the economy without putting as much pressure as there may have
been in the past on the balance sheets of the banks. This will be positive as long as we can
avoid the defaults we saw at the beginning of the crisis, which were created by vehicles that
were opaque and complex and impossible for investors to understand.
EUROWEEK: At the same time, presumably French banks should not be discouraged
from using the skills of their derivatives technicians, which are recognised throughout
the world?
Noyer: I agree completely. That is why I have been reticent about the idea of separating
investment banking and retail operations. I don't think that is an appropriate concept.
We live in a world where medium-sized and large corporates require access to bank lending
for a large number of banking activities but also for market operations. Exporters, for
example, also use the markets to hedge their risks - so they're re-shaping the risk on their
balance sheet by changing the structure of their liabilities or their assets if they have claims
arising from trade.
For all these activities and risks, giving corporates access to banks which are able to
respond to their entire commercial and investment banking needs is crucial for the
development of the economy.
On the other hand, what we don't want to see is banks embarking on proprietary trading
which is totally disconnected from their banking activities. The ideal approach is to have a
clear separation between what we in France call "purely speculative activities" - in America
they would call it "prop trading" - and what is useful for the financing of the economy.
Admittedly, it is not always simple to know exactly where the line should be drawn between
these two purposes. But if the guidelines are clear enough it should be up to the supervisors
in each country to make sure that this line is respected, and if need be to oblige banks to
reorganize their activities. This is the philosophy which was the basis of the Liikanen Report
and hopefully it will prevail.
EUROWEEK: And if things do go wrong is it fair to have a bail-in regime where debt
investors bear their share of the losses?
Noyer: Bail-in is an important concept. We discovered during the crisis that if all
stakeholders are not eventually obliged to take part in the cost of restructuring a bank if
necessary, the consequence might be that the taxpayer has to foot the bill, which is not fair ,
although it can be necessary in extreme circumstances.
The other consequence is that banks are forced into fire sales of assets, which means the
prices they command are very low and their losses are maximised. The result is either that
the bank is pushed towards bankruptcy if the state allows it, or has to be supported using
taxpayers' money and possibly having them bearing the losses, which as I said before is not
right.
So the concept of bail-in after all the equity holders and the subordinated debt holders have
been wiped out, could involve the transformation of senior debt into equity or semi-equity in a
going concern bank. In such a case, it is a very good and important concept.
To my mind, bail-in should be part of the extra powers given to the supervisor. That is the
only way we can reassure investors that it will be used only when it is absolutely needed to
avoid a bankruptcy. That means that ultimately it is in the interests of senior bondholders to
know that they won't be penalised just because it's beneficial for other stakeholders, but
because it can't be avoided. This is why it is essential that this power should be in the hands
of the supervisor.
But bail-in needs to apply to the whole of the senior debt. I'm not completely convinced that
there is merit in having specific bail-inable instruments like CoCos. This is because either it
makes the basis of the bail-in very restricted and may not be sufficient in many instances so
that in the end you may need recourse to a second layer. Or, if it is a big amount, it can be
extremely costly because of the specific risk, and therefore it may be better in that event to
move directly to equity.
In any case, the fact that bail-in is now on the table and can be used by the supervisor will
probably be one of the reasons why the banks will be tempted to increase their capital base
regularly over time, to demonstrate to the buyers of senior debt that they are sufficiently
protected. It will also be a strong incentive for banks to limit and control their risks and clearly
communicate to the market how they do so.
EUROWEEK: Has all this done enough to break the pernicious and highly damaging
loop between sovereign and bank risk that was so central to the crisis? Or is that loop
one that is simply impossible to break?
Noyer: I think we have reduced that risk. The work is not totally finished. We need to
continue in the direction we have taken. But to my mind there were three decisive moves that
have addressed the problem of this feedback loop. One was the action that was taken on the
consolidation of public finances, because if you have stronger government finances then of
course the risk for banks is reduced.
The second was moving decisively on the banks' capital bases, because clearly if you have
stronger banks then the risk for governments is lower.
And finally, the decision to move to a banking union starts with supervision and then allows
us to advance to the second and third steps which will have to be a resolution scheme and a
resolution authority and finally a euro area deposit guarantee scheme.
There is also the possibility in the euro area to ask for refinancing by the ESM. Those
developments are key for providing a comprehensive response. We still have some work to
do to finalise the consolidation of public finances and establish them on a stronger footing.
But clearly we are well advanced in the process of doing so, and the same is true of the
banks' capital base, although we may have to finish that with the SIFIs' capital surcharge as
from next year or thereafter, and with banking union which is in the process of being
negotiated.
EUROWEEK: You've made some very strong comments about London. But what role
does Paris see itself playing as a financial centre in the European context?
Noyer: First, it's clear that London is and will remain a major financial hub which brings a lot
of advantages to the global economy, given its skills base and the capacity of its
infrastructure.
The comment I made was not a suggestion that Paris should replace London but simply that
I do not believe in the trend of financial services concentrating more and more in London.
This is something that should not be acceptable from a financial stability perspective by the
euro area authorities.
Why? Because, in the event of any problems, the central bank needs to be able to provide
liquidity without any time lag where and if it is needed, and in a strictly controlled way. To do
so, central banks need to exercise very close oversight not only on the banks themselves but
all the major financial players and infrastructure providers.
So I think it's normal that within a given monetary area the bulk of banking and financial
activities should take place within the area itself and not overseas. Clearly there are many
US dollar operations that take place outside the US, but the bulk is still concentrated in the
US, and the same is true of activities in pound sterling, Japanese yen, Canadian dollar. The
same must apply in the eurozone because it is a complex area and its activities should
therefore be shared between Paris, Frankfurt and other financial centres within the zone.
To answer your question about the specificities of Paris, we have several assets to play an
important role. First, the Paris marketplace has a very strong position in equity markets within
the euro area. Second, in the fixed income sector, Paris is by far the most important centre in
two areas - the market for short term paper, where it has a share of about 36% of the euro
market, and the corporate bond market, where its share is about the same.
Finally, we have in Paris the world's second largest asset management industry after New
York. We may not have the entire panoply of banking strengths, but we have a number of
very strong niches which will continue to make Paris a strong hub, which can and should
continue to play an important role in the European financial services sector.
EUROWEEK: At the same time, would you like to see the big French banks continue to
be active on the global stage, where their experience has been mixed? They didn't do
very well in southern Europe, did they?
Noyer: There was a time when there was a feeling in the market that we were going to move
towards a return to more national banking system, which meant that international
diversification was basically a weakness.
Things have changed quite a lot and I don't think anyone would argue that the move by BNP
Paribas to acquire Fortis during the crisis was not a clever one.
The French banks weren't alone in believing that because we were supposed to have a
single market in Europe, it was natural for banks to expand to neighbouring countries - just
as it is natural for banks originally set up in Scotland to expand to England. So it was natural
for French banks to see the eurozone and future euro area members in central and eastern
Europe as their backyard.
Yes, we had the Greek problem, which was painful and costly for Crédit Agricole. But this
was really an extreme case and hopefully we'll never see similar accidents again in our
banking industry.
As we move out of the financial crisis, I believe that having activities in several countries
across the eurozone will soon re-establish itself as a normal diversified business model that
is regarded as a strength rather than a weakness.