François Villeroy de Galhau: French financial institutions faced with
the crisis
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the
Autorité de contrôle prudentiel et de resolution (ACPR), at the virtual ACPR Day.
* * *
Ladies and Gentlemen,
I am delighted to be with you for this virtual ACPR Day, which welcomes for the first time the new
Vice-Chairman, Jean-Paul Faugère, and the almost new Secretary General, Dominique
Laboureix. Six months ago, almost to the day, I presented to you the ACPR's 2019 report, and
the situation at that time of French financial institutions.
We still have not emerged from this unprecedented crisis, which was unforeseen, unpredictable,
global and severe. This is the first economic crisis that did not stem from economic or financial
dysfunctions, but simply from the will to save lives. The consequences of this shock to the
financial sector are key concerns of the Banque de France and ACPR.
I would like to make a few remarks on monetary policy ahead of our December Governing
Council meeting; our challenge is to ensure that, until the vaccine is widely available, the negative
effects of the pandemic do not lastingly affect the economy and the outlook for inflation. In all euro
area countries, and for all economic players - governments, businesses, households - financing
conditions are now more favourable than before the start of the covid crisis, despite the second
wave. This proves that our new instruments (PEPP, TLTRO-III) as well as our forward guidance
are proportionate and effective, and play a self-stabilising role by their very existence. Faced with
the risk of prolonged uncertainty, our first objective must be to ensure that these financing
conditions remain very favourable for everyone for as long as necessary. To this end, the
forthcoming recalibration of our instruments will require paying particular attention not only to the
level of our monetary support, but also issues of their duration, flexibility and effective targeting, in
short, the quality of the transmission of our monetary policy.
Despite a sharp decline in earnings, which reflects the impact of the crisis, French banks and
insurers are proving to be highly resilient. This snapshot confirms our confidence but does not
lessen our vigilance: the economic environment is fraught with uncertainty and we are very
closely monitoring financial sector risk developments.
First of all, I would like to stress the importance of vigilant confidence this morning (I). I will then
come to the challenges that banks and insurance companies have to face even beyond this
crisis, while ensuring that they do not get their priorities wrong: in particular, for the banking
sector, the battle must focus on profitability rather than solvency (II).
I. Despite a shock of unprecedented magnitude, French banks and insurance companies
are showing resilience
1.1 The crisis has, to date, had a real but manageable impact on financial institutions
thanks to strong fundamentals and the support of public authorities.
Over the first nine months of 2020, with a slump of nearly 39% compared with 2019, the
aggregate earnings of the four main French banking groups stood at EUR 11 billion. This decline
was primarily due to the more than twofold increase in the cost of risk and, on the income side,
to a significant decline in insurance and asset management activities. Conversely, corporate and
investment banking has held up well overall with income up around 3%. As regards retail
banking, I would like to point out that reached an all-time high in
new mortgage lending
September, with EUR 19 billion in new loans, showing that the bad press is unfounded
concerning the "collapse" in access to real estate financing, which, according to some,
supposedly resulted from the HCSF's reasonable recommendations on credit standards.
Although the impact of the crisis is real, it does not call into question the solid fundamentals of
French banks, which have continued to improve their solvency. Since 2008, their capital has
almost doubled. At the end of September, the four largest French banks had a solvency ratio
higher than that of their European and American counterparts of 14.6% on average, i.e. up 56
basis points compared with end 2019.
As regards insurance companies, despite a drop of 28 percentage points in their coverage ratios
between the end of 2019 and the third quarter of 2020, their overall solvency remains very sound
at around 239%.
This resilience is the result of the efforts of the financial institutions themselves, as well as, to a
large extent, of the measures taken by the public authorities. Households and businesses are
coping with this shock thanks largely to the "liquidity shield" implemented by the public
authorities. And we must commend the unparalleled success of the state-guaranteed loans
actively provided by the banks: they are unique both in terms of their total amount - EUR 125
billion, three times more than in Germany - and in their successful targeting of VSE/SMEs.
1.2 However, given the protracted economic uncertainties, the financial health of banks
and insurance companies needs to be monitored more closely.
In 2020, the euro area economy will have experienced
the deepest recession since the
creation of the single currency; it will not return to its pre-crisis level until the end of 2022 at
the earliest. The French economy shrank more than the average euro area country in Q2 (-14%
against -12%), but rebounded much more strongly in Q3 (18.7% against 12%). This dual trend
may be seen again from the end of 2020 to the beginning of 2021: but although the shock of the
new lockdown appears to be three times smaller than that of spring, its impact could be more
persistent, particularly on our supply capacities in the most affected sectors.
Clearly, uncertainties remain significant for 2021, pending the full benefits of the vaccines. The
impact of the sharp rise in unemployment in the first quarter of 2021 will need to be closely
monitored, as will the level of business failures, even though they remain moderate so far - lower
than in 2019 and 2018. Public quasi-equity schemes will be necessary to support businesses,
while ensuring that they remain selective by systematically involving private co-investors.
However, we have every reason to believe that French financial institutions, even when faced
with severe economic scenarios, will be sound enough to weather this crisis. Their profitability
could be affected, but their solvency should remain sufficiently robust. This greater resilience can
be attributed to two factors: their situation at the end of 2020 was better than expected, and
above all, the crucial role played by public support mechanisms that have proven their
effectiveness. It is therefore essential that these be extended for as long as the crisis continues.
II. Beyond the crisis, addressing the right challenges
This generally reassuring situation is obviously in no way a call for a "status quo". Banks and
insurers are experiencing it: the Covid crisis is acting as an of their changes in
accelerator
response to the major structural challenges they are facing. However, we must not choose the
wrong debate, or the wrong battle: the issue today is much less one of solvency than of the
profitability of French financial institutions.
2.1 Putting into perspective the debate on solvency
Many demands and even complaints from the financial sector are still focused - once again! -
on solvency issues, and excessively so in my opinion. Let's start with the veiled criticism of
Basel III. No one can seriously dispute the fact that the Basel rules have prevented the economic
crisis from spiralling this time into a banking crisis this year. And, no one can seriously claim that
they are hampering lending to businesses - which has risen by 13% over the past year - and in
particular to SMEs - which is up 18%. So yes, France must remain committed to the full
implementation of the Basel III agreement, which remains "fair, reasonable and final": fair in
particular with regard to its consistent implementation in both the EU and the United States;
reasonable with regard to the application in particular of the output floor; and final because there
will not be a Basel IV.
The fact that the implementation of the agreement has already been postponed by one year also
demonstrates the Basel Committee's commitment to limiting the operational burden on banks. At
the same time, active measures have been taken to enable them to use their capital and liquidity
buffers to support the financing of the economy. Banks are invited to use this leeway as much
and as long as necessary. It may seem paradoxical to ask for a hypothetical relaxation of Basel
III, but not to use the real leeway that is available. To make it easier to use these measures, we
supervisors need to be clear about the sufficiently long horizon for rebuilding these buffers once
the crisis is over.
Lastly, as regards dividends, I believe that it is necessary to be "wise with sobriety", to
paraphrase Molière. Undeniably, earmarking all earnings as reserves in 2020 was an effective
measure to bolster solvency. However, there are now two arguments for moving towards a
cautious distribution, the terms of which will require discussion. The first is the resilience of
financial institutions to very large shocks, as illustrated by their situation at the end of 2020. The
second, which is strategic in the current context, aims to preserve the attractiveness of financial
institutions - and also insurance companies - for investors, which is essential for raising capital.
Especially since most jurisdictions outside Europe seem to be moving towards a controlled
liberalisation at least.
As regards the solvency of insurers, we are making progress within EIOPA towards a
compromise on the Unquestionably, and as the health crisis has
review of Solvency II.
confirmed, Solvency II has helped to safeguard the European insurance sector. At this stage, the
review will have a neutral impact, without the interest rate shock, in terms of capital requirements
and this is a good thing. Moreover, the schedule - as the review will enter into force in 2024 at the
earliest - will give insurers precious time. They should make the most of this time to adapt their
models to the changes related to the interest rate shock, and to take advantage of the major
advances in the treatment of long-term investment.
2.2 The real challenge for banks is profitability
I said it last May and I will say it even more clearly today: "compared with US banks in particular,
the French banking industry's profitability is neither excessive nor even adequate". There are
many reasons for this, which I will come back to later. But there is no doubt that the prolonged
low interest rate environment has put pressure on the profitability of financial players.
Acknowledging this is not to say low rates are a bad thing: they reflect long-term structural trends
and are implemented for the common good. But acknowledging this means that it is necessary
to adapt.
Thus, since September 2019,
the Governing Council has been able to offset the impact of
low interest rates. This is the aim of the tiering mechanism, which reduces the annual cost of
negative interest rates by over EUR 4 billion for European banks, of which around EUR 900
million for French institutions. In addition, the "very favorable TLTRO borrowing rate (-1%), which
is lower than the deposit rate (-0.5%) until June 2021, also has a very significant impact.
But structural challenges will have to be met through the digitisation and consolidation strategies
of the financial institutions themselves. The rapid digitisation of processes and networks
generates crucial savings for the future, and is indispensable for customer loyalty, especially
among the youngest customers. Efficiency also rests on the development of a true "single
banking market". We have to speed up the creation of genuine pan-European banking groups
capable of capitalising on their size, and generate economies of scale to cope specifically with
these digital investments, which are fixed costs. The European financial sector is still too
fragmented and vulnerable to asymmetric shocks.
For insurers, the challenge of profitability in a low interest rate environment will inevitably
involve adapting their business models: the combination of security, liquidity and returns -
which has done so much for the success of the euro-denominated life insurance funds - is no
longer sustainable. However, diversifying client assets into unit-linked products should not be the
only or the best alternative: the insurance industry must rethink its product range. Less liquid,
longer-term savings should combine a degree of capital protection with the higher return on
stocks. In this context, the sector can assess its capacity to provide long-term capital support
to viable companies weakened by the crisis. The PACTE law is an important step forward with
the development of Eurocroissance and especially of retirement savings. And thanks to clear
information on the overall cost of contracts, decisions on whether or not to take out a policy can
be made on a fully informed basis. It is also important to ensure that management costs are
monitored and transparent.
***
The ACPR staff - and those of the SSM at the European level - have been working tirelessly to
tread the tightrope between trust and vigilance since the beginning of this crisis. This is our
requirement in order to shore up financial institutions in a pragmatic way and allow them to
concentrate on their primary mission of serving French citizens. Is there ultimately any better
proof of the need for strong financial intermediation than this crisis? On the one hand, EUR 90
billion in additional savings of the French public; on the other hand, tens of billions of euro in
additional needs of companies in terms of their equity capital. The aim is not to directly expose
savers to excessive risks, but to innovate in the area of banking and insurance products and
services in order to channel French savings into reconstruction and private investment. And to
accelerate the Schumpeterian transformation of the financial institutions themselves. In this
case, this harsh crisis could also become an opportunity for us. Thank you for your attention.