French senator: ‘All the ingredients of a new financial crash are in place’

Wall Street at the height of the financial crisis. [Paul Stein/Flickr]

Ten years after the sub-prime mortgage crisis threatened to destroy the global financial system, conditions in France are ripe for another financial crash, according to a recent senate report. EURACTIV’s partner La Tribune reports.

As the major French banks unveil solid annual profits for 2016, with revenues in excess of pre-crisis levels, in spite of the low-interest rates eating into their margins, Senator Pierre-Yves Collombat on Wednesday (1 March) presented his report entitled A crisis without end: when history repeats itself. In it, the RDSE (European Democratic and Social Assembly, formerly the Radical Left Party) senator examined “the possibility of another financial crash, nearly ten years after the crisis which began in 2007 and has still not finished”.

His conclusion is pessimistic: the “technical” probability of another financial crisis of similar amplitude “has not fallen, quite the contrary. All the ingredients for another crash are in place”, he told senators.

But for Collombat, this is “not the most probably scenario”. The philosopher-turned-politician fears above all the “electoral riots” unleashed by the economic crisis, which could provoke another financial crash.

ECB's monetary policy under attack, Brexit scavengers continue to circle UK

The European Central Bank (ECB) is under increasing pressure to exit its loose monetary policy but the Frankfurt bank remains unconvinced by inflation growth. The institution is also looking into cross-border bank mergers, as the rest of Europe eyes the UK’s post-Brexit scraps.

Universal banks in the spotlight

This resolutely political approach is probably the weak point of this report, which offers little by way of concrete solutions. Collombat suggests “some sectoral reforms capable of securing the sustainable development of the European financial system, which would avoid the need for intervention in a future catastrophe”.

And he outlines one priority: “We absolutely must have a real separation between the activities of deposit banks and commercial banks, making deposit banks solely responsible for the provision of loans. If we do not do this, banks can speculate with deposits and the credits these deposits can generate,” the senator told journalists on Wednesday.

France passed a banking separation law in July 2013, following François Hollande’s presidential campaign promise to tackle “enemy finance”, which was largely emptied of substance. BNP Paribas and Société Générale both hived off their trading activities, but it did not change much.

At the European level, too, former Finance Commissioner Michel Barnier’s regulatory plans were buried under lobbying pressure. The French banks were among the most vocal opponents of this reform, which threatened their universal bank model, whereby all baking activities take place under the same umbrella company. According to the banking lobbies, this model is the most resilient.

Over the last six months, the booming commercial activities and successful asset management departments of France’s banks have compensated for their weaknesses in the retail sectors, due to the renegotiation of mortgage loans.

A real separation, like that imposed under the 1933 Glass-Steagall Act in the US, would be a “false good idea” for France, according to Christian Noyer, the honorary governor of the Bank of France. He argued that the European banks that ran into trouble during the crisis were weakened by speculation and that the two big symbols of the subprime crisis were not universal banks.

“Lehman Brothers was purely an investment bank, Northern Rock in England was purely a retail bank.”

Investors fear next financial crisis will be climate-related

A rushed transition to clean energy triggered by extreme weather events linked to global warming “will be very expensive” to swallow for the economy, investors warned policymakers at an event in Bratislava last week.

Financing SMEs with regional savings

The senator also recommended “a substantial change in business financing models, particularly for SMEs”, by returning to a system from before the 1984 banking reforms, making better use of regional savings and extending the remit of the public financing group Caisse des Dépôts and the Post Bank.

He also mentioned “the strict limitation of the lever of banking debt” and the “cleaning of balance sheets of their dubious loans”, which is already well advanced in France and under way elsewhere.

The report also briefly touched on major issues like the regulation of high frequency trading, which Bank of France Governor Villeroy de Galhau criticised as of “questionable economic utility”.

The senator made no attempt to hide his distaste for the banking and finance sector, which he referred to as “parasites”, without giving much space to the arguments of the banking lobby.

Commission fines banks €485 million for derivatives cartel

The European Commission fined JP Morgan (€337 million), Crédit Agricole (€114 million) and HSBC (€33 million) on Wednesday (7 December) for participating in a cartel in euro interest rate derivatives initially unveiled in December 2013.

Subscribe to our newsletters

Subscribe