French Banks’ Trading Assets Create ‘Systemic Risk’

Growth in assets boosts case for separation from consumer banking

The trading assets held by French banks have grown so rapidly that they now nearly equal the GDP of the entire nation, and that’s making the case for the recommendation of a European Union (EU) group: that such assets should be walled off from other banking activities as a means of protection against risk.

Bloomberg reported Wednesday that banking data show that among them, the investment banking units of BNP Paribas, Société Générale, Credit Agricole and Natixis hold 2.05 trillion euros ($2.64 trillion) in trading assets. That includes bonds, equities and derivatives.

Those assets grew 21% from June 2011 to June 2012, and now stand at a two-year high. The total is also just a bit short of the entire GDP of France, which is $2.77 trillion.

“The very growth of these market products creates systemic risk,” said Jean-Paul Pollin in the report. Pollin, a professor at France’s Orleans University, continued, “Interconnections among players rise, even assuming that on the micro level the risks are well checked.”

AdvisorOne reported Tuesday that the EU group’s recommendation was for separation of investment banking from retail banking to lower risk, as well as a higher reserve requirement on property lending. In its report, the group called for “legal separation of certain particularly risky financial activities from deposit-taking banks within the banking group.”

The report also found that the highest proportion of trading assets, more than 30% of total assets, was held at five banks: Paris-based BNP Paribas and Société Générale, together with Barclays of London, Frankfurt-based Deutsche Bank and Royal Bank of Scotland Group of Edinburgh.

Derivative trading at BNP Paribas during the 12 months ending in June increased by 48% to 446.1 billion euros. At Société Générale, it increased 38% to 242.8 billion euros.

Christophe Nijdam, an analyst at AlphaValue in Paris, said in the report, “If derivatives exposures increase, it means that market risks don’t decline and the too-big-to-fail issue lingers.”

While bankers have protested the notion of separating retail and investment banking, Pollin said it could be necessary to protect customers on the retail side. He was quoted saying that the U.K.’s Vickers proposal, named after a group led by the former Bank of England Chief Economist John Vickers, “does prohibit movements of capital and liquidity between an investment and a retail bank, and that’s key.”

President Francois Hollande of France has said that he will overhaul the banking system to protect consumers on the retail side from the actions of investment banking operations.

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