The Politics and Markets of French Financial Services, from The Political Economy of Financial Integration in Europe, by Jonathan Story and Ingo Walter, MIT, 1997.

The present situation in the forthcoming campaign in May 2012 for the French presidency in May  has been described as a replay of President Mitterrand’s grand tournant of 1983. The Socialist Party candidate, François Hollande, is playing the role of Mitterrand’s Minister of Industry, Jean-Pierre Chevenement, , who proposed that France introduce tariffs, allow the market to set the franc’s rate relative to the dollar and the DM, and to go for growth while cleaving to the policy of a state-led industrial strategy. President Sarkozy is caste in  the role of Mitterrand’s Finance Minister, Jacques, Delors who wanted an open market solution. The implication was that France align economic policy priorities on those prevailing in Germany. As is well known, Mitterrand decided in favour of the open market solution. That, in turn, led to the collective EU decision to remove capital controls in an orderly manner. Liberalization of capital movements provided the justification for  monetary union,whereby the Bundesbank would be converted into a jointly managed European Central Bank. Of course, the idea that free capital movements could only be achieved through monetary union was a partial argument, plucked from the discipline of economics,and that served Mitterrand’s prime political purpose, which was to fend off German hegemony in Europe. Events of the last six months have not been kind to Mitterrand’s vision. A return to that earlier context may be of interest to readers.

President Mitterrand’s grand tournant of March 1983 ended his short-lived experiment to harness the inherited state-led credit system  to a policy of economic expansion, and opened the way to extensive financial market reforms. The bulk of these reforms were implemented in the years 1984-88, enabling French negotiators to play a decisive role in the EU internal market discussions. They were enacted by a determined group of modernisers in the Trésor, within the Finance Ministry. Although many of the concepts applied were of Anglo-American origin, the measures were enacted within the context of a financial system where the state retained a visible hand.

As with Germany, the years prior to 1945 cast a long shadow over post-war financial arrangements in France. The defeat of 1940 was blamed by both Vichy and the Resistance on the failings of a liberal economy. The state-corporatist mechanisms, rooted in legislation of 1941 and 1945, were designed to overcome the hesitancy of bourgeois France to invest in the nation’s industrial regeneration. Central to the inflationary growth policies pursued under the aegis of the Finance Ministry in the four decades following the end of the war was the idea that state influence alone could transform short-term savings into long term investments. Equity markets were sidelined on quasi-Marxist grounds that the interests of a narrow class of shareholders were not compatible with those of the nation as a whole, in a vibrant economy based on high levels of employment, the near-equal of Germany. This “overdraft economy”1 was constantly modified by shifts in public policy and by the economic and social forces which its successes generated.

France’s financial system had never been free of political controversy. Reforms had been introduced in 1966 to ease the budgetary burden of financing of the state-influenced corporate sector, and to create French universal banks on the “German model.” But it was in the early 1970s that the system ran into serious difficulties as inflation rates rose, followed by world oil prices. In 1972, the left-wing parties under Mitterrand’s leadership signed the Common Programme of the Left. This programme proposed extensive state ownership as well as control over the financial system, and launched France into two decades of partisan and electoral struggle where control of banks, insurance companies and capital markets were among the major stakes. In the 1980s, the politics of French finance was a fitting battleground for special interests and the ideas of statist, Marxist, corporatist, or social market pedigree. This chapter considers the politics of the French financial system, and the reform of French securities markets. A later chapter examines its evolution towards cross-shareholdings centred on para-statal organisations.

                            French State Corporatism: Capitalism Without Capital

The public discourse of French economic policy after 1945 had two objectives: industrial expansion, and (from 1957 on) the promotion of exports in world markets. Jean Monnet’s first plan of 1947 set the tone for the coming decades by defining the choice confronting the country as one between “modernisation or decadence.” Economic growth was the key measure. Already high under the Fourth Republic, French growth rates were surpassed between 1960 and 1973 only by Japan. The rule of thumb for French state planners was to create large enterprises where 20% of firms would account for 80% of national manufacturing output.2 “Expansion, production, competition, concentration,” de Gaulle declared, “these, evidently, are the rules which henceforth the French economy, traditionally circumspect, conservative, protected and dispersed must impose on itself.3 “Per capita incomes came to equal those of Germany. Growth rates slowed after 1974 to about 3.5% per annum, but continued to exceed Germany’s. In the first half of the 1980s, France for the first time since 1945 grew below the average rate of its main OECD partners. The economy picked up from 1987 on, but in the early 1990s sank back again, achieving negative growth in 1994 and lacklustre performance in 1995 and 1996. Unemployment rates rose from half a million in 1974 to over 3 million in the 1990s. In the early 1990s, 2% of firms accounted for 74% of exports, 67% of investment and 93% of research and development expenditures.4

France’s post-1945 state-led capitalism has been the reverse of France’s pre-war “stalemate society,”5  where the influence of the 200 families who elected delegates to the Regency Council of the Bank of France, created by Napoleon in 1800,6 had become a symbolic “wall of money” standing in the way of national reconstruction. The Council was abolished by the left government of 1936. Marshall Pétain’s Vichy regime in 1940 then launched its own national revolution, creating professional associations to organise and modernise the economy under state direction.7 It was guided in part by Catholic social doctrine, which condemned both free market liberalism and the class struggle of Marxist doctrine. The regime sidelined “apatride bank capitalism,” associated with the older Protestant and Jewish banks, and provided the opportunity to restrict competition in favour of the large, Catholic banks.8

On December 2, 1945 General de Gaulle’s first post-war government proceeded to nationalise the Banque de France along with the four major commercial banks and the largest insurance firms. It also constituted a Conseil National de Crédit (CNC) to act as a corporatist parliament of interests, to make key decisions on the allocation of credit. Financial markets were compartmentalised between registered banks, mutuals and savings banks, each with their own specific arrangements, but ruled by the state. Private financial institutions were assumed to put profits before nation.9 French growth was to be based on government-directed credit.

Both the Fourth and Fifth Republics have been served by an élitist and hierarchical administration, their recruitment into the grand corps de l’Etat running through the competitive examinations for entry to the Ecole Nationale d’Administration (ENA) or the Ecole Polytechnique. Their distinctive instrument has been the financial system,10 for which the Banque de France was co-responsible with the Trésor in the Finance Ministry. The formal powers of the CNC merely masked the real powers of this formidable duo. Subordination to political authority was initiated in the law of July 1936,11 confirmed with the nationalisation of December 1945 and modified by the law of August 1993.12 Until the mid-1980s, the Banque de France provided generous rediscounting facilities to ensure banks against the risk of deposit withdrawals and to encourage lending. But the price of cheap credit was inflation. The franc depreciated by 90% against the dollar between 1945 and 1958, and then by 71% against the dollar between 1958 and 1987, and even more against the DM between 1958 and 1983. Periodically, efforts were made to adopt a hard franc policy, as in the years 1965-68 under Finance Minister Debré. Prime Minister Barre’s governments of 1976-81 aimed to achieve “disinflation without deflation.”13 Monetary targets were introduced to strengthen the Banque de France in internal negotiations with the Trésor on the budget.14 But budgetary caution was thrown to the winds in 1981 with the election of President Mitterrand, and expansionary policies were resumed accompanied by three further devaluations of the franc by March 1983.

At the core of the French financial system was the “Treasury circuit,” where institutions with surplus funds were obliged to deposit their resources.15 The Trésor set the lead rate on this market through the sale and purchase of government paper. The calendar of new bond issues was managed by a committee of underwriting banks, chaired by the Trésor. The funds were distributed through three channels:

•           Deposits from local governments, the post office and from savings banks were returned into circulation through government expenditures.This direct aid through public funds was allocated through the Fond de Développement Economique et Social (FDES), an interministerial committee chaired by the Trésor.

•           Commercial banks whose loan portfolios exceeded their deposit base borrowed on the money market, so that bank credits were tied to the lead rate.

•           The Trésor distributed funds raised on the bond market to specified sectors through the public and para-public institutions, chief of which was the Caisse des Dépots et Consignations (CdC). Between 1945 and 1958, this circuit provided 80% of investment credits to the French economy.16 In the 1960s, the Trésor moved to de-budgetise corporate financing. Nationalised industries’ share in new investment declined from 37% in 1956 to 24% in 1972.17 The motive was to promote French industrial corporations,18 and the means was to have French banks take the German universal banks as their model.

The 1945 model of state tutelage and corporatist networks inherited from Vichy underpinned the segmentation of the French financial system.19 The Association Française des Banques (AFB) and the FFSA were both compulsory and monopolistic organisations, whose statutes were subject to approval by their respective state authorities. The old model aimed to create an equilibrium between distinct social groups or organised interests conducting their financial affairs through one or other of the state-influenced financial institutions. The relevant competences in the Ministry of Finance were distributed between the Trésor, the Insurance Directorate or the Banque de France, each specifically responsible for the CdC, Post Office, insurance companies and registered (AFB) banks, respectively. The Crédit Agricole was an institution unto itself, with a mandate to distribute state subsidies to the farm sector stemming from the Ministry of Agriculture and the Budget Directorate within the Trésor. This maze of state-corporatist networks became increasingly unwieldy as the economy expanded, and opened to international exchanges. The balance between the various types of banks altered as their deposit bases changed, as regulations imposed on commercial banks were not applied to investments banks, and as insurance companies ate into the resources of  the social security system.

Finance Minister Debré, assisted by his cabinet director Jean-Yves Haberer, launched the first major bank reform in January 1966. Unlike Germany, French banking was¾and remains¾one of the most highly concentrated in the Western world. The top-ten banks account for about 90% of the deposit base. Debré’s decree allowed commercial and investment banks to compete, in that the former could own up to 20% of equities in companies, and investment banks could raise deposits. Bank lending rates were freed and bank branching was liberalised. A system of reserve requirements was imposed.

These reforms proved decisive. They helped to create a managerial “osmosis between the private and public sectors.”20 The investment banks¾Paribas and Suez¾came to own important shareholdings in the 100 large family firms included in France’s top 200 corporations.21 The number of individuals holding bank accounts rose from 35% of the adult population in the 1960s to nearly 90% by the 1980s.22 The banks, assured of refinancing by the Banque de France, rushed into lending. and their branch network grew. In 1972, the Finance Ministry clamped quantitive controls on commercial bank credits, but not on savings or mutual banks. As commercial banks were not allowed to offer interest on deposit accounts, their market share began to shrink rapidly. Commercial banks consequently turned to the bond market for funds, and their debt grew.23 Haberer, now Director of the Trésor, launched the process for further bank reforms in 1980.24

Insurance firms bathed in more secluded waters, under the supervision of the Ministry of Finance. Insurance business in France was small and fragmented, dwarfed by commercial banks and the social security system. State control was pervasive. The Insurance Directorate in the Ministry held the power to grant and withdraw licenses, and submitted firms to regular inspection on matters of administration, taxation and accounting. One third of the highly protected market was in the hands of the five nationalised insurance groups. The General Code of Insurance stipulated strict rules on investment, whereby insurers were to invest their funds in shares and bonds according to a ratio of 25:75. The trade insurance association¾the Fédération Française des Sociétés d’Assurance¾was licensed by the Ministry as the sector’s certifying agent.

In the 1970s, this cosy environment was disturbed by new entrants into the lucrative auto insurance, life insurance and savings markets. International business expanded. Governments turned to the insurance sector as a new source of untapped funds. In 1982, the Finance Ministry ordered the sector to invest 30% of reserves in “participative loans” to state corporations. And the January 1984 Banking Act enabled insurers to conduct all types of banking activity as well. EC law on the internal market was incorporated into the December 1989 Insurance Act.

Crédit Agricole, for its part, had become a key instrument of French farm policy and a conduit for farm influence in Paris. The Crédit Agricole, like the agricultural cooperatives in Germany, originated in the farm mutuals of the 1840s. The Caisse Nationale du Crédit Agricole (CA) was created in 1920 to represent the regional and local member banks to the government. Through to the 1970s, the bank accumulated various priveleges: The Vichy government allowed it to issue long term bonds. The Fourth Republic granted it the right to finance the agricultural cooperatives. The Fifth Republic used it to channel subsidies. In 1971, it was granted the privilege of  extending its loan business throughout France (“la ruralité”). As France became the world’s second farm exporter, CA became international. By the late 1970s, it was eating rapidly into the deposit-base of the commercial banks and had become the main provider, along with the CdC, of funds to the money market. In 1978, the Finance Ministry began to claw-back some of the privileges so readily conceded. For the first time, CA had to pay corporate tax. The Finance Ministry, faced with scarce resources, had grown impatient over subsidising the bank’s profits. In January 1988, CA was  “privatised” as an unquoted joint stock company owned by farmers, businesses and employees. Under its new status, the bank regrouped, and negotiated a further extension of its business activities in return for a surrender of its agricultural monopoly rights.

There was also much continuity over export financing, which remained under the tutelage of the Ministry of Finance. Between 1947 and 1985, the Banque Française de Commerce Exterieure (BFCE) held the monopoly on export credits. The Compagnie Française pour le Commerce Exterieur (COFACE) administered on the Trésor’s behalf, the insurance of large export contracts as against various risks. These channels had been mobilised anew in the 1970s,25 but pushed France into increasing the state’s debt as exports rose. The main change in the 1985 Banking Act was an end to the BFCE’s monopoly and a withdrawal of the automatic refinancing facility at the Banque de France. But the BFCE remained a subsidiary of the central bank, with shares held by the CdC, Crédit Agricole, the Crédit National and the major commercial banks. These owners kept the BFCE low on capital, not least because it was a competitor for the profitable export credit business. Funding for BFCE came from the Trésor, and the priority to large foreign contracts¾which accounted for 10% of French exports¾remained intact. COFACE insurance facilities were opened to EU companies in 1991, in conformity with EU law, but its insurance facilities were still covered ultimately by the French budget. As a critical report summarised the situation on export credits and foreign aid policy, ” an inextricable interpenetration of financial circuits” remained in place, fostering questions about how “certain investments are decided or certain markets are allocated.”26

                                        Towards Reform of the Financial System

By the late 1970s, multiple strains had become visible in the inherited French financial system. For an oil-import-dependent country such as France, the shocks of 1973 and 1979 proved a major setback. Earnings from tourist income and from engineering projects abroad were not enough to compensate for a weakening trade position in the main markets of western Europe.The Federal Republic’s surplus with France accounted for two-thirds of its trade deficit. As French firms bought-in German capital goods in order to modernise their plant and equipment, the current account worsened and French governments had to restrain the rate of growth relative to that of Germany. French exports, which benefitted by heavy state subsidisation, overemphasised on developing country or Soviet bloc markets. The overall balance of payments was weakened also by the growth in French corporate investments abroad, which expanded rapidly in the 1980s as capital controls were lifted. As the outflow exceeded inward investment, government policy had to compensate for the imbalance by attracting portfolio inflows. Even so, a French government study claimed that in 1988 industrial enterprises under foreign control in France represented 28% of national turnover and 22% of employment, as against 21% of turnover and 16% of employment for foreign companies in Germany and an estimated 21% and 13% in the U.K.27

Mitterrand’s accession to power in 1981 also coincided with a collapse in French savings. Conservative governments in the 1970s had chosen, for electoral reasons, to sustain consumption and household savings at the expense of corporate finances. In 1981, household savings dropped from 18% of GDP to 12%, where they remained. The socialists had hoped to provide state financing for lame ducks as well as for “sunrise” industries. But they met stiff resistance from the nationalised banks when asking them in February 1982 to inject capital into the state enterprises, on the grounds that there was a distinction between a bank as lender of other people’s money and a shareholder who takes risks. In November, a FDES meeting decided that the state enterprises’ calls on their shareholder had to be restricted.28 The Trésor, meanwhile, authorised additional savings products on favourable terms in order to attract households, but controversy was fuelled over whether the funds should help small firms or state corporations, foster industrial development, build up pension funds, or feed the money market. Furthermore, the state’s demand for funds helped to ratchet up tax rates and constrained outlays. Mitterrand’s March 1983 decision thus meant adopting policies to foster corporate profits and to discourage the state corporations’ recourse to debt. If France was to avoid overdependence on foreign funds, the gap between national savings and outlays would have to be closed. By 1993, non-residents held one third of the negotiable Trésor debt.29

Mitterrand came to office as the country’s debts were sharply on the rise. His policies only made matters worse. The export credit regime was no longer feasible in light of the debt crisis of sovereign borrowers that began in 1982. Paris Club meetings between debtor and creditor countries, held under Trésor auspices, increased to 18 per annum after 1982.30 French exports declined to the African franc (CFA) zone and to Eastern Europe. Paris Club lending conditions were tightened, and eventually the CFA franc was devalued in 1994.

The French state’s credit was also undermined by the deterioration in public finances from 1974 on. From a decade of budget surpluses, the state moved to two decades of deficits. The state’s borrowing requirements rose to peaks of 3% of GDP 1975-76, and again in 1983-86, and fell back to troughs of 1% in 1980 and 1990, to resume growth to 5% of GDP by 1993. That year, the annual burden of the debt exceeded the deficit. The state’s long-term financing requirements rose from FF 30 billion in 1978 to FF100 billion in 1985.31 The stock of long-term debt was composed of a jumble of loans, issued on varied conditions.State borrowings multiplied, stimulating a rapid growth in bond trading. The external debt rose from $34 billion in 1979 to $80 billion by 1984.

France’s greater trade interdependence had brought its incorporation into a tightening web of international markets and regulation. Its extensive overseas banking network was redeployed out of Africa into Europe, the U.S. and Asia Pacific.32 Between 1974 to 1982, the Trésor had encouraged state enterprises to borrow in London. Foreign loans helped overcome the narrowness of the French domestic market, sustain  investment, and cover the current account deficit.33 The subsequent explosion in debt charges payable in hard currencies was a prime reason for Mitterrand’s decision in March 1983 not to devalue34 and to stay in the ERM. At the same time as French financial management was thus being brought within the EU’s exchange rate constraints, the BIS requirement on banks to raise own funds as a precaution against exposures meant French banks having to move away from their old overdraft habits. To raise own funds from 3.6% in 1978 to the required BIS 8% by the early 1990s,35 French banks adopted two strategies. In the shorter term, the Trésor and the banks used various devices to raise capital, but at the expense of their international ratings. They aggressively internationalised and expanded their off-balance sheet activities. Measured in terms of overall foreign business conducted from home or abroad, French banks’ share rose from 42.8% of total revenues in 1984 to 67.7% in 1993.36

The crescendo to the French political battle over nationalisation and privatisation, and over protection or freer trade within a national or wider European context, was reached in 1981 with the election to the Presidency of Mitterrand. In the radical early months of his administration, prime policy objectives were the extension of state ownership and the “reconquest of the domestic market.” This threatened to further sap the EU of substance and evoked allied efforts to prevent France from “breaking with capitalism”¾as Mitterrand had announced was his intent. The programme for an internal market was thus the completion of a movement begun in the early 1980s. The Trésor’s reforms of the French financial system were launched in 1983-84, prior to Jacques Delors taking up his new post as President of the European Commission, and provided the national counterpart to French support for an integrated market for financial services, without which the proposal for the single market would not have gotten off the ground.37 Yet the internal market programme impinged upon politically charged matters, such as state ownership, insurance, or mutual funds. State-owned corporations fell under closer Commission scrutiny and were encouraged to behave more like private-sector firms, providing an additional reason for privatisation. EU jurisprudence and legislation on insurance demanded major changes to adapt French practices. French law was adapted to accommodate mutual fund techniques developed by “Anglo-Saxons.”

France followed the moves in Belgium, Italy or Spain to  decentralise state functions. Successive governments had inched towards devolving political powers to regions in order to foster local financial communities supportive of local business.38 In the 1982 reforms, running in parallel to President Mitterrand’s ambitious scheme for nationalisation, France’s 22 regions were given real powers to duplicate the subsidisation of business characteristic of the French financial system as a whole. Regional committees of banks, linked to the AFB, were formed. The Sociétés de Développement Regionale, set up in the main after 1960s, raised their support for local firms and the six local stock exchanges. Central government transfers to the regions exploded, followed by a growth in loans from the CdC. With resources in limited supply, the Trésor consequently sought to re-establish central control, promoted local courts of account, and in 1988 merged the six regional stock exchanges with the Paris Bourse. Paris also fostered inward direct investment, and ensured a growing flow of EU “structural funds” to the regions, as well as investments by the European Investment Bank. These funds flowed through central government hands. In 1993, regional and local administrations had a combined budget of 10% GDP, or half the size of the central state budget.

Incorporating EU legislation challenged French statecraft to move away from the “Colbertisme” of the Fifth Republic towards state-corporatist regulation of the market. The FBCD in 1977 had laid down initial terms for an EU banking regime, and stimulated the French debate over bank reform. Director of the Trésor Haberer’s study was presented to Finance Minister Delors in 1981. The draft bill came before the National Assembly in April 1983, and the Banking Act entered into effect in July 1984. The Banking Act formally introduced universal banking to France, and provided a uniform set of prudential rules for all financial institutions, and all registered banks, mutuals and cooperatives were incorporated under the Act.

This modernised state-corporatism reinforced the position of the Trésor and the Banque de France. The 1984 Banking Act centralised regulatory powers for all bank sectors in a Comité de la Réglementation Bancaire (CRB), presided by the Governor of the Banque de France, and the Director of the Trésor. The Governor also chaired a Comité des Etablissements de Crédit (CET), which operated as registrar for rules and regulations. The sole authority to implement the rules was the Commission Bancaire (CB), whose personnel came from the Banque de France. The Act stipulated that all banks would join a common umbrella organisation¾the Association Française des Etablissements de Credit (AFEC)-answerable to the Competition Commission, established in 1977.

The 1984 Act initiated a revolution for banking in France. Banks could no longer count on automatic rediscounting at the Banque de France. Tighter regulations forced banks to raise their own capital, and to pay more attention to profits. On the resource side, AFB banks faced disintermediation as customers moved out of zero-interest deposits. So the banks moved to corner the fast-developing markets in life insurance or unit trusts, where their subsidiaries held up to 50% of the market. Their off-balance sheet activities surged as well, and their role in bond issues rose.

Similarly, the ending in 1986 of quantitative credit restrictions brought competition to the loan business. Corporate demand for credits fell away, as their self-financing rose from 68% in 1984 to over 100% in the 1990s.39 The banks rushed into household loans, developed advisory services, and adopted different corporate strategies in response to the prospect of the EU’s internal market. In the early 1990s, the boom ended, and bank margins fell. Individually, the recession of the 1990s revealed the stark differences in corporate strategies adopted by the major banks: Societé Générale, the only commercial bank privatised in 1986-87, registered record profits. Banque Nationale de Paris’ results were mediocre. Crédit Lyonnais, driven by the ambitions of its chairman, Jean-Yves Haberer to imitate what he considered as the “German model” of close “bank-industry” partnerships, in effect went bankrupt.

                      The Role of the State at Its Zenith: The Crédit Lyonnais Saga

In late 1992 Jean-Yves Haberer, Chairman of Crédit Lyonnais (CL), reaffirmed at every opportunity his aim to turn his institution from a staid, state controlled French bank into a high-performance pan-European universal bank¾a consummate player in both commercial and investment banking and a veritable cornerstone of European finance¾by the turn of the century.40

According to Haberer, the banks likely to be the future leaders in Europe were Deutsche Bank of Germany, Barclays Bank of Great Britain, Instituto Bancaria San Paolo di Torino of Italy, and Crédit Lyonnais¾i.e., the leading banks located in the leading European countries. Few others, he believed, had much of a chance. Only the leaders would, he believed, have the capital strength, the domestic market share, and the intra-European networks to intimidate rivals and repel all competitive threats from all sources, European or otherwise.

Haberer had chosen the grandest strategy of all. It was a strategy that would have enormous appeal to CL’s owner, the French state, in its vision that a few Euro-champions needed to be nurtured in each important industry through an aggressive “industrial policy” of protection, subsidisation, ministerial guidance, and selective capital infusions. Each Euro-champion¾as many as possible French¾must be capable of prevailing in commercial warfare on the global battlefield against all comers. In financial services, according to Haberer, Crédit Lyonnais would be the chosen instrument. Four daring ideas outlined Haberer’s plan for achieving his objective:

•           Crédit Lyonnais had to grow to be large, very large. The size goal was to capture between 1% and 2% of all bank deposits in the 12 European Community countries. This meant capturing significant market share in multiple areas of banking and securities activities at once, and doing so quickly. Given the competitive dynamics of the financial services sector, urgency was of the essence. The only viable solution required acquisitions of existing businesses in various countries on several fronts simultaneously.

•           Crédit Lyonnais had to become very European. That meant going up against entrenched domestic competition in most of the national EC markets simultaneously, either via aggressive expansion, strategic alliances and networks, or acquisitions. The strategy was clear, but no one tactic would suffice. Opportunism and flexibility were key.

•           Crédit Lyonnais had to exert significant control over its corporate banking customers via both deep lending and investment banking relationships with major non-financial firms and via large ownership stakes in many of these same firms. Only in this way, he felt, could CL exert sufficient influence over their financial and business affairs to direct large and profitable business his way.

•           Crédit Lyonnais had to retain the confidence of the French government. It owned the bank. It would have to inject a great deal of capital. It would have to clear the way for acquisitions and ownership stakes. In would have to look beyond the inevitable “accidents” would occur on the road to greater glory. Crédit Lyonnais would have to become an indispensable instrument of French and European industrial policy. And the special relationship would have to survive political changes in France, even changes leading to CL’s own privatisation.

Crédit Lyonnais first opened for business in Lyon in 1863 as a banque de dépôts.41 CL began its international operations in London during the Franco-Prussian war, and expanded throughout France and in many of the major foreign business centers in the 1870s. By 1900, it was the largest French bank in terms of assets.

With the First World War, many large-bank personnel were conscripted, and competition in French banking increased. Smaller banks took advantage of the larger banks’ staffing difficulties and expanded rapidly. Beginning in 1917, Crédits Populaires, a new form of banking establishment, were allowed to be established and added to the domestic competition in France. With the Revolution in 1918, sizeable Russian deposits were withdrawn as their owners demanded that Crédit Lyonnais restitute assets confiscated by the Bolsheviks. Although profitable, CL was not making nearly the kinds of profits during the 1920s that it had enjoyed had before the war.

During the Great Depression CL adopted a cautious approach, closing about 100 offices in France and abroad. With the onset of World War II, Crédit Lyonnais remained essentially apolitical, maintaining the majority of its banking activities¾although some foreign offices were not under the control of the main office during the German occupation. With the restoration of peace in 1945, a number of events were of signal importance in determining CL’s future course:

•           1945: The French government nationalised the Banques de Dépôts¾Crédit Lyonnais, Société Générale, Comptoir National d’Escomptes de Paris (CNEP), and Banque Nationale de Commerce et d’Industrie (BNCI).

•           1966: The Ministry of Finance merged the two smaller banks, CNEP and BNCI into BNP (Banque Nationale de Paris).

•           1970: The president of CL, François Bloch-Lainé, Inspecteur des Finances, adopted a strategy of partnerships with other banks in the form of Union des Banques Arabes et Françaises (UBAF), and Europartners (see below).

•           1973: A law was passed that allowed the distribution of shares to the employees of nationalised banks and insurance companies such as Crédit Lyonnais.

•           1974: Election victory of the conservative parties, led by Valéry Giscard d’Estaing and appointment of Jacques Chaine (Inspecteur des Finances) to replace François Bloch-Lainé as chief executive of CL.

•           1981: Election victory of the leftist parties and François Mitterand. Appointment of Jean Deflassieux, financial advisor to the Socialist Party to replace Jacques Chaine at CL.

•           1982: Nationalisation by the Socialists of all major French banks. The government’s declared objective was to influence the functioning of the banks in a direction more favourable to small and medium-sized business, as well as to help define and implement a new and more interventionist industrial and monetary policy. For Crédit Lyonnais, the only immediate implication was the re-nationalisation of the shares the bank had sold to employees in 1973.

•           1986. The Gaullists once again regained power in the legislative assembly, with the appointment of Jacques Chirac as Prime Minister. This ushered-in a period of “cohabitation” with a Socialist president, François Mitterand. Jean Deflassieux was replaced as CL chief executive by an ardent privatisation advocate, Jean-Maxime Lévêque.  A privatisation law authorised the public sale of 65 large industrial companies, although Crédit Lyonnais was not targeted for the first round of privatisation. Groupe Financière de Paribas and the Société Générale were both successfully privatised.

•           1988: The Socialists regained power. Privatisations were immediately suspended, and Jean-Yves Haberer replaced Jean-Maxime Lévêque as president of Crédit Lyonnais.

•           1992: The Socialists were locked in an election battle with a conservative coalition led by Edouard Balladur and Jacques Chirac, which could lead to another period of cohabitation, since things looked bleak for the Socialists and the French presidential elections were not due until 1995. A plank in the conservative party platform promised a resumption of privatisations to include a broad array of state-owned enterprises. Names such as Thomson, Bull, Péchiney, Rhône-Poulenc, Elf-Aquitaine, Aerospatiale, Air France, Cie. Générale Maritime, SNECMA, Usinor-Sacilor, GAN, UAP, Banque Nationale de Paris and Crédit Lyonnais were all thought to be on the list.

The successive changes of chief executives at Crédit Lyonnais with incoming governments illustrated the persistent intervention of the State in the running of companies, commonly known in France as dirigisme. From relative independence after nationalisation in 1945, when most of the original CL board remained intact, the government had been playing an increasingly important role in defining the bank’s strategic direction and the structure of its leadership. In effect, the government used the nationalised banks as an industrial policy tool.

Regardless of the political ebb and flow, the French financial system, traditionally highly concentrated and compartmentalized, underwent substantial structural change, resulting in the reforms of 1984-86 and the rapid development of the domestic capital market. In part, this reflected government efforts to promote Paris as a viable financial-centre competitor to London, and in part changing political fashion. The financial market reforms undertaken with special vigor by the Chirac administration helped shift French corporate finance toward open capital markets.

Jean-Yves Haberer was a paragon of the French system. He graduated first in his class at the elite École Nationale d’Administration, and joined the French Treasury as an Inspecteur Général des Finances. As mentioned, he had served as Finance Minister Debré’s Chef de Cabinet, playing the leading part in the 1966 bank reforms. And then, in the capacity of directeur du Trésor, launched the process of further financial reform which led to the Banking Act of 1984. His consistent intent was to create a French style of universal banking capable of competing on an even footing with its German counterpart. paradoxically, the opportunity to put the idea into practice coincided with the German universal banks efforts to disengage from both expansionary retail banking abroad and excessively intimate bank-industry relationships, as recorded in the previous chapter.

Haberer’s career illustrated the French élite’s ability to serve governments of both Right and Left. Thus, in 1982, he was pulled by François Mitterand from the Trésor where he had served under President Giscard d’Estaing, to run the newly nationalised Paribas (Compagnie Financière de Paris et des Pay-Bas). Haberer was widely resented within Paribas, and was seen as the instrument of its nationalisation. During his leadership, Paribas suffered its worst fiasco, with the acquisition of the stockbroker A.G. Becker in New York, which it sold a few years later at a $70 million loss. When Paribas was reprivatised in 1986, Haberer was removed from office.

Widely described as authoritarian, brilliant, intimidating, and driven, Haberer’s endorsement of Mitterand’s nationalisations led to his being soundly disliked by the Right for serving as a tool of the Left at paribas in 1982. Without important political friends on the Right, his personal career came to depend on the political fortunes of the Socialists, particularly Jacques Delors in his capacity of Minister of Finance and later President of the EU Commission, and Pierre Bérégovoy, twice Minister of Finance in 1984-86 and again in 1988-92, at which point Bérégovoy was appointed Prime Minister. Bérégovoy appointed Haberer to the position of chief executive at Crédit Lyonnais despite his record at Paribas, with a clear mandate to deploy the bank as an arm of French state policy in the EU’s internal financial market. There, he was repeatedly criticised for grand schemes that might never have survived board scrutiny or shareholder reactions in privately-owned financial institutions.

By the early 1990s, Crédit Lyonnais had become a highly diversified bank that offered a complete spectrum of financial services to most client segments across much of Europe. Elsewhere, CL had holdings in Asia and in North America under its own name. In South America and Africa it generally operated under the name either of partially or wholly-owned subsidiaries.

In its drive to be a functionally “universal,” bank Crédit Lyonnais offered a very broad spectrum of financial services. At the end of 1992, CL had 2,639 retail banking outlets in France, as well as an array of specialised affiliates such as the Paris broker Cholet-Dupont Michaux, money-management affiliates, and niche-type businesses such as leasing. It also offered a range of insurance services (particularly life insurance) and maintained a major portfolio of holdings in different French and European companies.

Operationally, Crédit Lyonnais was structured into five more or less distinct units:

•           The banque des entreprises (business bank) catered to the financial requirements of a broad spectrum of business and industry. The core function was commercial lending. For small and medium businesses, Crédit Lyonnais also offered risk management products, including financial and foreign exchange options and other derivatives, asset management services covering a broad range of investments, and international development assistance such as helping to initiate cross-border partnerships and alliances. For large companies, Crédit Lyonnais services extended from fund-raising through syndicated lending, Euronote and Euro-commercial paper distribution to large and complex financing arrangements such as project and acquisitions financing, M&A advisory activities, and real estate financing. It also maintained leasing subsidiaries¾Slibail, Slificom, Slifergie in France, Woodchester in Ireland and the U.K., and Leasimpresa in Italy.

•           The banque des particuliers et des professionels (retail bank) serviced private individuals and professional clients, and carried out basic banking services such as deposits, payments services and personal loans. There had been a significant decline in demand deposit account balances in favour of interest-bearing accounts in recent years. Traditionally, French retail clients maintained non-interest-bearing checking accounts, but with intensified competition  and changes in legislation, clients were increasingly opting for SICAVs, open ended unit trusts, and specifically SICAVs monétaires, or money market mutual funds. To attract and maintain retail clients (and achieve cost-economies, especially in payments transactions for retail clients), CL was forced to innovate and enhance the retail banking services available. These included debit cards and ATMs, and home banking through Minitel, (the French interactive telephone information system). In addition to life insurance, Crédit Lyonnais provided personal lines (e.g., automobile) coverage through its Lion Assurances subsidiary. And for large individual and professional clients it also provided private banking services and tailored insurance plans as well as special financing arrangements¾such as Inter-Fimo or Crédit Médical de France, which financed the purchase and installation of medical equipment.


            •           The banque des marchés de capitaux (investment bank) was responsible for underwriting and distributing bonds and equity new issues. In global markets, Crédit Lyonnais Capital Markets International’s units¾such as  Crédit Lyonnais Securities in London¾assured the bank’s presence in foreign financial centers, while the French markets were covered by affiliates such as Cholet-Dupont. In 1991, CL was ranked first in placing domestic and Euro-franc bonds. In the derivatives sector, it accounted for about 10% of volume on the MATIF, France’s futures and options exchange.

•           A finance company, Altus Finance, the former finance subsidiary of Thomson, in which CL acquired a 66% interest in 1991. During that year Altus increased its portfolio of high yield (junk) bonds from the failed American insurance company Executive Life¾an amount equivalent to one-third of CL’s Tier-1 capital.

•           The gestionnaire pour compte de tiers (fund management group) was responsible for the management of private portfolios as well as SICAVs in which private individuals held shares. CL had enhanced its offerings to include those guaranteeing capital (CAC-40 Sécurité), revenue (Performance Olympique), and global funds (Crédit Lyonnais Growth Fund).

•           As actionnaire des entreprises, Crédit Lyonnais had been increasing its share-holdings in other companies to further the concept of a universal bank. The notion was that, by holding substantial shares especially in nonfinancial companies, CL would be able to develop a much better understanding of those companies’ financial needs. Its holding structures included:

n         Clinvest, CL’s banque d’affaires, with a diversified holding of French companies, which had been a highly profitable part of the bank.

n         Euro-Clinvest, a Clinvest subsidiary, with a portfolio of shares of companies in eight European countries.

n         Clindus, established in 1991, had strategic and statutory holdings, principally in Rhône-Poulenc and Usinor-Sacilor, that were added to CL’s balance sheet with the “assistance” of the government.

                        n         Innolion, a high-tech, start-up venture capital fund operating in France.

n         Compagnie Financière d’Investissement Rhône-Alpes, which invested in the Rhône-Alpes region of France.

n         Lion Expansion, a development capital fund for small and medium businesses and industries.


The Pan-European Launching-pad

Haberer considered CL’s existing structure to be an ideal basis upon which to build his banque industrie concept of a pan-European universal financial institution, with enough capacity to launch a simultaneous multi-pronged attack on an array of national markets, financial services and client segments, and to do so rapidly.

By late 1992 Jean-Yves Haberer had already developed the beginnings of a pan-European bank in the retail sector via an extensive cross-border branch network. This was needed to meet his target of capturing between 1% and 2% of total retail deposits in Europe, which in turn was intended to provide the “bulk” the bank needed and the basis for all of the other growth initiatives. He had in fact moved systematically in this direction since 1988. Several acquisitions and purchases of strategic stakes in other banks had been undertaken in quick succession as CL bought local medium-size financial institutions in Belgium, Spain, Italy and Germany. Consequently, between 1987 and 1992 the number of branches in Europe had increased three-fold, and in 1991 47% of the bank’s profits came from outside France (compared with 30% in 1987).

•           In Belgium, CL had rapidly expanded its local presence via aggressive branching. It tripled the number of retail and private banking clients in 18 months with a new higher-yield account called Rendement Plus. It offered 9% on savings deposits, compared to 3-4% offered by local banks. These rates were possible mainly because Crédit Lyonnais did not have the cumbersome and expensive infrastructure of the Belgian banks. It had only 960 employees for 32 branches in that country, three per branch; the three big Belgian banks each had at least 10 employees per branch in over 1,000 branches.

•           In the Netherlands, Crédit Lyonnais had raised from 78% to 100% its stake in the Slavenburgs Bank (renamed Crédit Lyonnais Bank Nederland NV) and in 1987 had acquired Nederlandse Credietbank, a former subsidiary of Chase Manhattan Bank of the United States.

•           In Ireland, CL held a 48% stake in Woodchester (renamed Woodchester Crédit Lyonnais Bank), a leasing and financing company which intended to acquire a total of 40-50 retail banking outlets.

•           CL had reinforced its position in the London market by buying the firm of Alexanders Laing & Cruickshank after Big Bang in 1986, subsequently renamed Crédit Lyonnais Capital Markets in 1989.

•           In Spain CL’s branches had been merged with Banco Commercial Español (renamed Crédit Lyonnais España S.A.), complemented by the acquisition of medium-sized Banco Jover in 1991.

•           In Germany, it completed a deal to purchase 50.1% of the Bank für Gemeinwirtschaft (BfG) for DM 1.42 billion, thereby ending a five-year search for a viable presence in the most important European market outside of France.

The acquisition of Bank für Gemeinwirtschaft was a key achievement, in Haberer’s view. Not only was Germany the largest European banking market, but it was also the most difficult to penetrate. Others had tried, and many had failed. Those who succeeded had done so by building or buying niche-type businesses, often with indifferent results. None were taken especially seriously as major contenders alongside the three Großbanken, the large regionals and state-affiliated banks, and the cooperative and savings bank networks. With the acquisition of Bank für Gemeinwirtschaft, Crédit Lyonnais promised to break the mold.

In 1990, the third largest German insurer AMB (Aachener und Münchener Beteiligungs GmbH), had negotiated with the state-owned French insurer AGF (Assurances Générales de France) about a partnership arrangement. Besides the attractiveness of the German market, AGF was watching strategic moves by its arch-rival, the state-owned insurer UAP, whose expansion into Germany had come by way of the acquisition from Banque Indosuez of a 34% stake in Groupe Victoire, a major French insurer which had earlier purchased a German insurer, Colonia Versicherungs AG.

AGF had bought 25% of AMB stock, yet was limited to only 9% of the voting rights by the AMB board, clearly concerned that the French company, twice its size, was out to control and eventually swallow it. Alongside the AGF acquisition of AMB stock, Crédit Lyonnais bought a 1.8% stake in AMB as well. As part of its defensive tactics, AMB arranged for an Italian insurer, La Fondaria, to acquire a “friendly” stake amounting to 20% of AMB shares. AGF then fought an historic shareholder rights battle in the German courts against the AGF board and a German industrial “establishment” instinctively distrustful of hostile changes in corporate control. The defense was further bolstered by the fact that 11% of AMB stock was held by Dresdner Bank, 6% by Munich Re.¾and Allianz, the largest German insurer, was a major shareholder in both Dresdner Bank and Munich re. It was a sign of the times, Haberer thought, that AGF prevailed in the German courts and, with the help of CL’s AMB shares was able to obtain AGF recognition of its voting rights¾no doubt the basis for further share acquisitions, possibly the La Fondaria stake.

The AGF-AMB battle provided Haberer with the opening he was looking for¾appearing on his radar-screen when AGF proposed that Crédit Lyonnais buy AMB’s bank, the Bank für Gemeinwirtshaft (BfG), which AMB was keen to dispose of and which had been for sale for some time. BfG had been the bank of the German labor movement, plagued by poor management, periodic large losses and scandals, and a down-market client-base. AMB had already made great strides in turning BfG around. Still, a loss of DM 400 million in 1990 and a profit of DM 120 million in 1991 indicated that a major capital infusion would be required in 1993. AMB was hardly interested in supplying it, and a takeover by Crédit Lyonnais was seen as a welcome opportunity to divest itself of an albatross.

Of course, acquisition battles like BfG were only the first, and perhaps the easiest, part of the building process. Certainly not all of CL’s acquisitions had been easy to digest. Its purchase of the Slavenburgs Bank in the Netherlands, for example, had been the source of many headaches. Beyond the corporate culture issue, there had been a serious problem in maintaining supervision. It was CL Nederland that was responsible for the large loans to Giancarlo Parretti in California¾loans which CL head office in Paris indicated it was not aware of until it was too late.

Besides outright acquisitions and aggressive expansion in the important European markets, CL employed another strategy as well¾strategic alliances and networks. One of the older of these, Europartners, was set up as a loose association between Crédit Lyonnais, Commerzbank, Banco di Roma and Banco Hispaño Americano (BHA), based on the idea of extending banking networks into neighboring countries and setting up new conjoint operations. Its goals were to provide a cheap mechanism to allow each of the partners’ customers access to basic banking service in the other countries.

But is was not long before strains began to appear in the partnership. Over the years, Commerzbank had tightened its relations with its Spanish partner, and in 1989 BHA agreed to swap a 11% interest in its shares for a 5% stake in Commerzbank¾the 1991 merger of BHA and Banco Central into Banco Central-Hispaño diluted Commerzbank’s share in the merged bank to 4.5%. At the same time there was a dispute over CL’s expansion into Spain with the purchase of Banca Jover in the summer of 1991. A year earlier, Crédit Lyonnais had tried to purchase a 20% stake in Banco Hispaño Americano and was flatly rejected. BHA perceived the new action as a threat of direct competition in its home market, and suspended the relationship with Crédit Lyonnais.

Rebuffed in Spain, CL had also been thwarted in its attempt to deepen the Franco-German part of the Europartners agreement. In 1991, Crédit Lyonnais discussed swapping shares with Commerzbank, the smallest of the three German Großbanken¾thought to have involved 10% of Commerzbank’s equity for 7% of CL’s equity. Discussions broke down over German fears that the French bank had more in mind than cementing an Europartners alliance. Commerzbank clearly did not want to be the German arm of a French bank. And there was the matter of price: Based on comparative profit figures, Commerzbank wanted a 10% for 10% swap¾even though the French bank was twice its size¾because it considered itself to have a much better future in terms of earnings and margins.

By the end of 1991 Europartners was effectively dead, although this hardly precluded strategic alliances as a further option for Crédit Lyonnais. Other partnerships has been more stable. An example was the Banco de Santander-Royal Bank of Scotland agreement, cemented by a share-swap, to create a link-up through which clients could conduct cross border transactions at terminals located at either bank’s branches. Crédit Commerciale de France had signed-up to join this alliance. And there was the BNP-Dresdner deal, a co-operative agreement that involved cross-shareholdings with each bank continuing to run its existing operations but opening joint offices elsewhere, such as Switzerland, Turkey, Japan and Hungary. Joint board meetings were being held twice yearly, each bank contributed a member to the other’s board, and there was considerable discussion about an eventual merger.

The Government Link

The French economic and financial policy environment over the years had been rather unstable. When President Mitterand acceded to power in 1981, his approach to reflating the economy by increasing the size of the public sector, cutting the work week and nationalising 49 key industrial and financial firms had rapidly increased imports and led to a deterioration of both the trade balance and international capital flows. Under those conditions, the possible solutions were to either devalue the franc and take it out of European Monetary System’s Exchange Rate Mechanism or seriously reduce monetary expansion, reduce the fiscal deficit (including cuts in spending), and stimulate the private sector.

The latter route was chosen. Taxes were cut, the capital markets were deregulated, and the economy boomed through most of the 1980s. Finance Minister Pierre Bérégovoy, the driving force of fiscal prudence, maintained a franc fort, low-inflation policy throughout the period and committed the country to partial privatisation, starting with the sale of minority stakes in Elf Aquitaine, Total, and Crédit Locale de France in 1991.

On the other hand, the Socialists had not only nationalised the big banks in 1981 when they came to power in 1981, but had continually influenced their activities since then. For example, in 1992 BNP had been asked to acquire an equity stake in Air France, and Crédit Lyonnais itself had been “encouraged” to buy into Usinor-Sacilor¾both of them inefficient state-owned firms making large losses. By linking-together the state-owned equity portfolio and the equity holdings of state-owned banks, these deals could allow the government to maintain control despite partial privatisation of non-financial companies. There was considerable debate whether any new government that might take office in 1993 would couple a program of aggressive privatisation with non-intervention in the strategic direction or the operations of banks and industry¾that is, whether the micro-intervention of the past was a “Socialist” or a “French” attribute.

In addition to its direct and indirect equity holdings, the French government had a strong control lever through “moral suasion”a tradition of political meddling by bureaucrats who considered themselves able to come up with better economic solutions to national needs than the interplay of market forces. On a European level, beyond the blatant tampering with free competition of the past and a highly protectionist stance within the EC decision process in matters of industrial and trade policy, there was concern that the French government would continue its dirigiste role and even try to extend it to the cross-border relationships of French firms and banks.

Habérer considered the role of the state in France as a two-edged sword. It could at times make life difficult in doing what needed to be done in carrying out the vision, but the backing of the state could provide the deep pockets and political support to overcome obstacles and setbacks that would stop ordinary banks in their tracks. Maximising the advantages and minimising the drawbacks meant strong backing by the Mandarins who mattered was critical.

The value of the government link became obvious in several “accidents” that befell CL in its drive for growth. Specifically in wholesale lending, where balance sheet growth could be most rapidly achieved, growth meany narrower lending margins. Moreover, as the European recession began to set in during 1990 and 1991, most banks retrenched to weather the storm. Crédit Lyonnais, on the other hand, announced that it would maintain its set course and “buy” its way out of the recession. The bank had thus taken on much riskier projects than many of its competitors, and the list of CL’s lending problems in the early 1990s included (a) the Robert Maxwell affair, involving significant credit losses; (b) Hachette, the French publisher, whose television channel La Cinq went bankrupt; (c) Olympia and York, the failed Canadian real estate developer, where CL was the second-largest European creditor of the firm’s Canary Wharf project in London; and (d) loans of over $1 billion by CL’s Dutch subsidiary to Giancarlo Parretti, an Italian financier (later accused of fraud), for his purchase of the Hollywood film studio MGM/UA Communications.

Rapid expansion during 1991 and 1992 did indeed provide a significant increase in CL’s net banking income. In 1990 Crédit Lyonnais achieved a net profit of FF3.7 billion, a 20% increase over 1989, although a major portion of this increase was attributable to Altus Finance. But a long list of bad debts and investments produced an equally large increase in provisions. By the end of 1991, Crédit Lyonnais was suffering serious growth pains as profits fell to FF3.16 billion and provisions were increased from FF4.2 billion to FF9.6 billion. At 1.6% of total loans, CL’s level of provisions were precarious when compared to those of other French banks. They were three times those of its main French competitors¾but still better than most U.K. banks, for example. Nevertheless, the MGM/UA Communications controversy and CL’s increasing exposure to risky loans resulted in Moody’s Investor Services downgrading CL’s bond rating from Aa1 to Aa2, despite the French government’s continuing ownership of the bank and its own Aaa rating.

Also worrisome was the fact that CL’s interest margins continued to decline as competition for deposits increased. At the same time, costs were rising as investment in technologies became increasingly necessary to keep pace with the competition, and difficulties were encountered in curbing rising personnel costs. Assuming that margins were unlikely to improve and cost pressures would be difficult to reverse, CL would have to rely more heavily on commission income in the future than it had in the past.            In September 1992 Crédit Lyonnais announced its group profits had plunged 92%, to FF119 million for the first half, compared to FF1.6 billion for the same period the year before. The precipitous drop was again due to an increase in provisions against bad debts, from FF3.4 billion for the first half of 1991 to FF6.3 billion for first half of 1992¾even as net banking income grew by 16% and gross operating profit before provisions increased by 33% in the same period. 40% of the bad debt provisions were attributed to CL Bank Nederland, the Dutch subsidiary, in connection with the MGM/UA Communications loans. In December 1992 Moody’s once again downgraded Crédit Lyonnais debt to Aa3, citing “higher risk in both the loan portfolio and the bank strategy.”42

All of these problems notwithstanding, CL’s performance was considered acceptable by its owner, the French Republic, with growth evidently deemed more important than profits. Still, the issue of capital adequacy could not be avoided¾under either the BIS capital standards or the EC Capital Adequacy and Own Funds Directives¾both to absorb the various credit losses and to support Haberer’s grand design. As a state-owned bank, Crédit Lyonnais had not been allowed to raise equity capital independently. Only five percent of CL’s capital was owned by shareholders, in the form of non-voting Certificats d’Investissement. The rest belonged either to the government or to government-controlled companies. As such, new capital infusions would have to come from the state. Infusions from private sources had been blocked by the Socialist government’s “no-no” policy “no-privatisation, no-nationalisation.”

Complicated arrangements were made under French government sponsorship with five state-controlled companies during 1989-91 in order to bolster CL’s capital base and at the same time solve certain industrial problems. In November 1989, CL raised FF1.5 billion by selling shares to the Caisse de Dépots et Consignations. In February and December 1990, share swaps with Thomson brought in FF6.4 billion. A deal with Rhône-Poulenc raised another FF1.7 billion in 1990 as well. In 1991, at the request of Prime Minister Edith Cresson, Crédit Lyonnais invested FF2.5 billion in the state owned steel works, Usinor-Sacilor, and gained a 10% stake. The bank also swapped 10% of Usinor’s shares for 10% of new Crédit Lyonnais shares, thereby boosting CL’s shareholder equity by about FF3 billion. This allowed Crédit Lyonnais to consolidate its share of Usinor-Sacilor’s profits and losses. This had the effect of diluting CL’s earnings, but provided a neat (if temporary) solution for the steelmaker’s problems.

Altogether, by late 1992 about 28% of CL’s total capital base thus consisted of shares in state-owned firms. In all of the share-swaps, both parties paid much higher than book values. These agreements had the effect of linking the fate of the bank to the success of the companies concerned, and also represented a powerful incentive to support these same companies in the future in the face of uncertain profitability. In any case, the resulting capital infusions were insufficient to meet the bank’s future needs, and the question remained what implications these crossholding arrangements would have if and when especially Thompson and Rhône-Poulenc were privatised. The rest of the badly-needed equity would have to be injected by the government.


The Grand Design

Haberer’s mosaic seemed to be coming together much faster than anyone could have predicted when he took control in 1988.

•           The bank’s balance sheet had grown enormously under his leadership.

•           It had penetrated all of the important European markets in significant ways, including the most difficult of all, Germany.

•           It had maintained its close relationship to its shareholder, the French state, which had shown its willingness to inject capital and to tolerate even serious setbacks on the road to greater glory. The bank’s rapid growth and European cross-border market penetration was well suited the French government’s industrial policy objective of having one large French firm as a leader in every major sector of the European economy, notably CL in banking, Thomson in electronics, Rhône-Poulenc in chemicals, Aerospatiale in aerospace, SNECMA in aircraft engines, and so forth.

•           Its shareholdings in industrial companies had grown from FF10 billion in September 1988 to FF45 billion in early 1992, and it had accumulated significant equity stakes in key French industrial companies, whose strategies and financing activities it was in a position to influence. At the same time, it had provided the government with industrial influence even if the affected firms were to be privatised.

According to Jean-Yves Haberer, “Our strategy considers that Western Europe will be increasingly the domestic market of major European banks for the coming decade.  What we are preparing for is no longer the EC market of 1993, but the market of the years 1995 to 2000. For our corporate clients, which are large multinational groups, the location of our teams, mainly in big financial centers, is relatively unimportant. On the other hand, to offer our services to small and medium size corporations and individuals requires vicinity and local intimacy. We intend to build a large and profitable European banking group.”43

Commentators, on the other hand, pointed to various alleged weaknesses in the strategy, which was considered highly controversial:

•           France’s EC partners could object to French export of blatant tampering with free competition in the market economy via the acquisition of local banks, and refuse to permit it to continue.

•           Haberer had not adequately addressed the problem of how to expand rapidly without buying excessive quantities of low-grade paper. He could therefore eventually create such an awful mess in CL’s loan portfolio that the government would blow the whistle.

•           Haberer and his strategy were on everyone’s casualty list for the political infighting that surely would follow the next French presidential election in 1995. Time was running very short indeed to accomplish all he hoped for.

•           Haberer had neglected the investment banking and capital markets side of the business. Indeed, even companies in which the bank had holdings, assuming sufficiently high credit standing, would prefer to use the capital markets rather than bank borrowing for their financing requirements.

Indeed, some critics combined all of these points to formed a gloomy picture of Crédit Lyonnais in the late 1990s as a bank with plenty of impotent industrial shareholdings in companies focusing their financing on the capital markets, plenty of acquisitions and alliances with foreign banks whose major clients were likewise using the capital markets, and plenty of bad loans acquired along the way to amassing gigantic size that was of no use. This view turned out to be correct, with the subsequent massive bailout and capital injection by the state to the consternation of its competitors, and a tough slog to fundamental restructuring of the bank heavily financed by the taxpayer. Jean-Yves Haberer was fired and disgraced by the same system that produced him, with criminal investigations launched into his own conduct, as well as that of the Crédit Lyonnais board, in July 1996.44

                                                            Structural Reforms

The 1984 French Banking Act did not include the savings network and the postal services.45¾the savings banks’ status was redefined in 1983, and more fully in 1991 when they were restructured to become one of the country’s nine major retail networks.46 They were too valuable to the Trésor, and continued to supply the Trésor’s circuit¾its continued role as market participant, shareholder, and regulator. The Commission des Opérations du Bourse (COB), set up in 1967 as watchdog for the securities markets, remained in  relative obscurity until the aftermath of the October 1987 crash, when the fall in share prices prompted an outburst of takeover bids. In late 1988, the socialist government used the CdC and state corporations to buy back the shares of privatised companies, and to fill socialist party coffers. The U.S. Securities and Exchange Commission alerted the COB to suspicious share movements, prompting an investigation which revealed that close associates of President Mitterrand and Prime Minister Bérégovoy were involved. Mitterrand sought to head off public criticism by announcing forthcoming legislation to protect French corporations against “roving, predatory money.”47 In effect the August 1989 law on “security and market transparency” implemented the EU directive on insider trading and obliged investors who built up a stake of over 33% of a listed company’s capital to make a full bid for at least 66% of shares. The law strengthened the COB to protect companies against hostile takeovers by other companies. It did not address the central problem facing the French state of how to police itself.

The French state had other ways of resisting external penetration of its financial system. Greater competition among French banks did not preclude cooperation, notably where it promised to increase the productivity of the banks’ highly unionised workforces. Given the state’s continued tutelage, cutting back on branches or employment proved difficult.48 Common technology projects also held the additional attraction of combining the advantages of a banking oligopoly with the monopoly position of the Ministry of Telecommunications and France Télécom. The practice of “interbancarité” is defined as “a major characteristic of the French banking and financial system in the service of the clientele which benefits by and aspires to maintain it¾it finds expression in technical systems realised and managed together.”49 This was expressed in two key initiatives: the mutual banks, tied in to the German-centred Eurocard payments system, reached an agreement with the registered and savings banks, affiliated to the VISA international network, to create an electronic “banking card” system, which allowed for a rapid rise in the use of plastic money in France. The Ministry and France Télécomm developed a videotext terminal (Minitel) handed-out free to French telephone subscribers. The Minitel provided information about financial markets, individual accounts, and savings facilities. The technology opened the home banking market to all French banks.

In similar fashion, as insurance moved into the orbit of EU legislation, the domestic policy thicket in insurance became more dense. The December 1989 Insurance Act incorporated EU legislation, but created a corporatist regulatory framework.50 The Act established a Control Commission modelled on the CB, and a Conseil National des Assureurs (CNA), presided over by the Finance Ministry and supervising three different committees for licensing, client relations and regulation. This was the one area where the corporatist dimension of rule-making and rule-enforcement gained while the Finance Ministry’s Insurance Directorate lost responsibilities. A deal was cut between firms and insurance agents whereby contestants to a territorial market had to offer compensation.51 The nationalised insurers¾AGF, GAN and UAP¾were regrouped into holding companies and took advantage of the new legislation to buy participations in banks and industrial companies. But as market pressures revealed the limits of “bancassurance,” direct marketing gained ground, real estate prices tumbled and bad loans appeared on the books of banks in which they held participations, these firms were opened to the private sector. Even the Post Office won permission to sell insurance, prompting the insurers in despair to appeal to the European Commission to end the special priveleges of their mutual and savings bank competitors.

Internationalisation of the French banking markets required a strengthening of prudential supervision. In the retail markets, the public was little concerned by the prospect of bankruptcy. Article 52 of the 1984 Banking Act gave official recognition to such interbank solidarity, and provided for the Governor of the Banque de France to call on shareholders to protect the interests of depositors and third parties. The state stood behind the deposits of both the CdC and the large banks, whether nationalised or not. The bank cartel ensured that depositors faced nearly identical interest rates. The various categories of banks, whether registered or mutuals, had their own not-so-voluntary deposit insurance mechanisms. The Commission Bancaire wielded authority in the Compensation Chamber of Financial Instruments of Paris, which was wholly-owned by MATIF, the futures market. This mechanism was brought into play first in July 1988, when the stock brokers lost FF614 million on the MATIF following the 1987 crash. The newly reorganised Stock Exchange was required to cover the losses.52 On wholesale markets, the Banque de France took a consistent line that AFB banks should indemnify depositors and clients of failed institutions. In November 1988, it ordered banks to help bail out the Al Saudi bank, followed by four other Arab banks. It took a similar hard line on the AFB banks paying indemnities in 1991 for the clients of BCCI.53

                                         Reform of the Paris Securities Markets

The Stock Exchange-the symbol of “le grand capital”-remained a backwater after 1945, under the tutelage of the Ministry of Finance which named the “agents de change” and regulated their operations. The agents had been granted a monopoly to trade in stock by Napoleon in 1807, and their firms had become hereditary. They were too small to trade significantly on their own account, and were undercapitalised. Market regulations required them to assemble all orders to buy and sell, and then clear them during the mid-day opening hours in order to establish an equilibrium price. A security could be quoted only on one central marketplace.

The Bourse had experienced a modest revival in the 1950s, but had stagnated under the Fifth Republic’s state-led credit system. Firms had little incentive to list, as their owners or managers could borrow cheaply and feared losing control through a dilution of ownership. About 59% of French equities were not even listed.54 Market regulations allowed cross-shareholdings and gave priority to existing shareholders in the purchase of new shares. Total bank credits in the 1970s were more than double the value of quoted securities, and bonds on average amounted to only 25% of bank credit¾although the value of bonds outstanding exceeded equities market capitalisation by 50%.55

The revival of the Stock Exchange began in the 1970s, in the midst of the party political battle over the direction of change to be taken by the overdraft economy. France’s smaller firms were badly hit by the combination of lower growth and higher taxation. Their troubles were not alleviated by the conservative government’s response to their complaints¾it simply multiplied complex administrative channels to distribute credit, and also had a law passed in July 1976 which introduced a capital gains tax designed to woo centre-left voters from being drawn into the socialist-communist camp. The measure prompted the resignation of Prime Minister Chirac, widened the fissures among the conservative parties, and deepened the gloom enveloping the exchange. But the Bourse perked up after the “divine surprise” of a conservative victory in the general elections in March 1978. The capital gains tax was shelved in favour of a measure to reduce taxes on savings invested in equities. The number of shareholders rose from 1 to 1.5 million by 1981.

Paradoxically, it was François Mitterrand’s election that launched the exchange’s revival. On the one hand, the recession of the early 1980s saw bankruptcies rise to a rate of 20,000 per annum. On the other, Mitterrand’s nationalisations had temporarily deprived the main listed market of its blue chips, and the agents de change saw an opportunity to champion the cause of France’s capital- starved small and medium-sized companies.

The brokers found allies abroad and in Finance Minister Jacques Delors. In September 1981, the International Federation of Stock Exchanges ostentatiously held their meeting in Paris. In January 1983, Delors introduced into the Banking Act (for the savings bank sector) and an offer of tax reduction calculated as a function of the savings invested in French shares. A second market was opened in February alongside the official stock market. London’s Unlisted Securities Market, and especially Nasdaq in the U.S.¾served as an example. Listing conditions were made relatively undemanding, as firms were only asked to sell up to 10% of the capital, compared to the 25% required for a listing on an unsuccessful over-the-counter market launched in 1977. That market had only attracted 22 companies, but the new market was reckoned as capable of attracting between 300 to 600 firms. The initiative achieved its major successes at Paris and in Lyons between 1983 and 1987, as a mood of confidence gripped investors. But they were discouraged by the 1987 market crash, and turned away.56 Small family firms, too, remained hostile to public listing. By 1990, only half of one per cent of French small and medium sized companies had turned to the market for external financing.57 Of the 287 firms listed, about 100 were subsidiaries of large firms. French investors’ conservatism was reflected in their preference for the CAC-40, whose shares attracted 55% of the Stock Exchange capitalisation, and 90% of transactions volume.58

France’s financial market reforms too were designed to serve the financing interests of the state. They were launched in September 1984 by the new Finance Minister Pierre Bérégovoy and pushed through by a determined team within the Trésor against opposition from colleagues and bankers.59 Bérégovoy visited the Stock Exchange in November in a bid to focus public attention on the new direction of policy, the first such visit by a Finance Minister since 1962.60 His prime objective was the constitution of a “unified capital market, covering short to long term instruments and all economic agents.”61 Paris was to develop as an international financial centre, and French corporate financing moved towards the model of Anglo-American financial markets.62 The reforms entailed wholesale importation of U.S. methods to French conditions:

•           The number of instruments, such as certificates of deposit and short- term commercial paper, was increased, standardised and open to all market participants. The money market thus enabled large firms to reduce dependence on bank loans, while bank loans linked to the money market rate rose from 1.4% of the total in 1984 44% in 1993.63 The banks entered the market actively, so that by 1993, the money market accounted for half their profits.64 The success of the money market made long-term corporate funds difficult to come by.65

•           Special provisions were made for specific sectors. Mortgage institutions were provided with their own refinancing arrangements.Specialised financial institutions were allowed to issue bonds to replenish their resources.

•           Major changes were introduced in the functioning of the market. In January 1986, the Trésor’s adopted the auction method for the sale of bonds through a system of primary dealers  and on a monthly basis. This ended the placement of non-negotiable bonds with bank syndicates, which continued to prevail in Germany. The issue of state bonds greatly increased market liquidity, although further measures were taken in 1989.66

•           In January 1985, the French authorities moved away from quantitative controls on the money supply towards more reliance on interest rates and on bank reserve requirements. But the quotas were retained in the form of reserve requirements, indicating reluctance in the Banque de France to abandon residual control over the bank cartel. A full departure from quantitative controls would have meant applying monetary control to a banking system in which all banks competed amongst themselves.67 To assure against this, the Banque de France in December 1985 modified the definition of the money supply in order to keep pace with financial innovation, and tied the franc’s exchange rate more tightly to the DM. “France, the Governor declared, now accepts the exchange rate constraint.”68

Another key element of the Trésor’s reforms was the opening in February 1986 of the MATIF, the Paris futures market. The MATIF served many purposes. It provided a market enabling institutional investors to hedge against the risks of volatile interest or exchange rates. It represented France’s response to London’s creation of LIFFE in 1982. It brought the Paris market into the world web of futures markets. Above all, MATIF was a central element in modernising issuing of state paper. All its major derivative products originated with the Trésor, starting with the state bond contract launched in January 1986, the less successful Euro-DM contract launched in May 1989, and the long term ECU contract floated in October 1990 to develop Paris as the centre for trade in ECUs.

Paris rapidly became the second market for futures in Europe, after London. This was consolidated by the Trésor’s creation of specialistes en valeurs du Trésor with the task¾like primary dealers in the U.S.¾of ensuring the placement and liquidity of state paper on the secondary market. The specialists were selected in 1987, initially numbering 18, and included the CdC as well as six foreign firms. They joined the Conseil du Marché à Terme (CMT), set up to approve regulatory measures under the law covering futures markets. These specialists accounted for nearly all transactions on the market, and helped the MATIF to become the central core of the French bond market.

Establishing Paris as a major financial centre meant modernisation of its infrastructure as well. An efficient market which ensured minimal delays for delivery and settlement was essential. The government and Stock Exchange therefore cooperated closely to update facilities for both bond and equity transactions. All operations on state bonds were dealt with through the Saturn network, under the direction of the Banque de France, and tied into the international clearance and settlement houses, Cedel and Euroclear. In July 1986, a system of continuous computerised quotation (CAC), modelled on the Toronto system, was substituted for the open outcry floor. The floor had been unable to deal with the growth in business and back-office costs had become exorbitant. CAC’s introduction in effect condemned the traditional role of brokers. The CAC was complemented by the a system to automatically channel orders (RONA). In 1990, the Exchange started the new automatic settlement system, RELIT, which covered most actively-traded shares and was based on a standard settlement time, set initially at 5 days and brought down to 2 days in 1992. This was seven times faster than settlement operations in London, and 5 days faster than Cedel or Euroclear.

France’s financial market reforms spelled a freeing-up of commissions, entailing an end to the Napoleonic status of brokers. London’s “Big Bang” in October 1986-and the prospect of its capturing business from Paris, added to the Trésor’s sense of urgency. The registered banks were anxious to move into the securities business to compensate for losses in their traditional activities. Insurance companies and corporate treasurers joined the lobbying. The end of the brokers” monopoly on the stock exchange was finally agreed in March 1987, following discussions between Finance Minister Balladur and Xavier Dupont, the syndic of the brokers. The reform, put into effect in January 1988, was presented as necessary to fend off London’s challenge.69 It was predicated on three principles:

•           Substitution of the brokers for Sociétés de Bourse (SDB) with the sole right to negotiate securities. The brokers monopoly was to be phased out between 1988 and 1992. French and foreign credit institutions were allowed to buy into their capital until 1991, and then set up their own operations.

·           Preservation of the principle of centralisation, whereby transactions occurred on an organised market. The Trésor resigned its direct tutelage of the market in favour of two bodies: (1) the Sociétés des Bourses Françaises (SBF), owned by the firms, and that worked with COB in supervising the market; and (2) the Conseil des Bourses de Valeurs (CBV), composed of the firms and a stock exchange representative to make the rules regarding licenses and discipline.

•           Establishment of a transparency rule, whereby traders of securities had to disclose the price at which they did deals. This measure was designed to secure the public’s funds invested in the Trésor’s long-term savings instruments. Such a regulation had the advantage of treating small savers orders equitably. But its inconvenience was that the market lacked liquidity, and block trades migrated to London.

Inexorably, internationalisation pulled the French economy into the slipstream of the Anglo-American financial markets. France’s extensive overseas banking network was redeployed out of Africa into Europe, the U.S. and Asia Pacific.70 In the EU, London and Luxemburg proved most attractive to French institutions, accounting respectively for 28% and 20% of total turnover, compared to only 6% for German markets.71 Of the 55 brokerage firms, 13 were owned by U.S., Japanese or U.K. houses. These accounted for 30% of trading in French equities.72 Turnover in French shares was heavily located in London.73 Little could be done, since the COB insisted on preserving the centralisation and transparency principles. The SBF then launched a fruitless campaign to create a Europe-wide network of “organised markets” to counter London’s leadership,74 on the grounds that the EU’s investment services directive was drafted to serve the Seaq interest.75 But once Mitterrand had ceded the principle in early 1991 that state enterprises should semi-privatise, the professionals became convinced that their problem was not just stock exchange turnover taxes and the regulations on concentration and transparency.76 Without funded pensions, as in the U.K., France lacked the raw material to make Paris a major financial centre.77

Opinion in the Finance Ministry had not been unanimous that investors needed the protection imposed by the COB.78 The reformers of 1984-88 had recognised the urgency of developing funded pensions. Reforms, though, had been tentative and  controversial. Funded pension institutions would be exigent with regard to shareholder rights. This challenged managerial prerogatives. Trade unions were opposed to losing their position as co-managers of social spending. Banks, insurers or brokers were in competition as to  who administered the funds. Political parties were disagreed over their end-use. It was the coincidence in 1993 of a conservative government with an ambitious FF360 billion privatisation programme with the awareness that the social security system had to be reformed in depth that prompted a near unanimous conservative consensus that the move was essential:

•           To provide the liquidity required to preserve Paris position as international centre.

•           To sell French state enterprises into mainly French ownership.

•           To provide in the medium term for the ageing French population.

•           To repatriate the wholesale market from London.

The stamp duty on securities transactions, which had provided an additional disincentive to block trades in Paris, was abolished in December 1994, and French law was brought into line with U.S. and U.K. practice on “netting” of transactions in futures markets.

                                          France’s Sui-generis “German Model”

As noted in Chapter 2, Paris adopted the hard franc policy in 1986-87, alongside the negotiations in the EU on liberalisation of capital movements. At the root of this policy was the requirement to ensure that French savings stayed home, rather than move abroad in response to higher real returns. The hard franc policy was a precondition to maintaining Paris’ credibility. But French refusal to have the DM realigned upwards in late 1989 ensured that, as German long term interest rates rose to attract world savings into government debt to finance reconstruction in the new Bundesländer, French rates were pulled up in their wake. France thus entered into intensified competition with Germany on the international markets for the sale of its securities. Short term rates rose in sympathy. As only 30% of corporate loans were long term, havoc was wreaked on the French corporate sector. World financial markets, dominated by institutional investors, scented blood once President Mitterrand in June 1992 decided to hold a referendum on the Maastricht Treaty on September 20. Mounting pressure on the franc presented the Bundesbank with a renewed opportunity to realign parities. But Chancellor Kohl could not afford to see Mitterrand defeated in a crucial referendum by a de facto alliance of the Bundesbank with international speculators. Bonn therefore pressured the Bundesbank to intervene with the Banque de France in a massive support operation of the franc. As French banks were ordered to keep lending rates unchanged, while money market rates soared, the franc was salvaged, and foreign investors’ faith in French securities was preserved.

This expensive victory for France was followed by a further step to implementing “the German model.” For France to be a viable partner with Bonn in a Maastricht Europe, there was never any doubt that the apparatus of monetary control practiced in Germany would have to be imported wholesale. Growth targets were adopted for monetary aggregates.79 The Banque de France provided the banks with liquidity through open market operations, the counterpart of which was reserve requirements. The Banque thus acquired great flexibility in manipulating banks’ non-interest bearing reserves. Overall, the aim was price and exchange rate stability. This hard franc policy was consecrated by the May 1993 law “on the status of the Banque de France and the activity and control of credit establishments.” The Banque de France was “to define and implement monetary policy” in the framework of the government’s general economic policy.” A Monetary Policy Council was created to supervise the money supply. Appointments of the governor and the two deputies were made by the government, which however was not to give the Banque de France orders and fiscal deficits were not to be financed by money creation. The Banque de France was given control of the banking system. The government, however, was to determine exchange rate policy. The Banque de France thus reverted in modern guise to its independence lost in 1936, and to splendid isolation from public opinion.

There was nevertheless a major muddle at the heart of the French “German model”applied to France, the model failed to separate powers and functions of the state in the workings of the economy. The French democracy had truly become an oligarchy.80 At its centre was the grands corps whose members held the levers of economic policy and of corporate governance in the board rooms of the major corporations.81 As in Germany, corporations owned each others’ shares and shared each others membership board. But unlike Germany, the French political marketplace straddled the pinnacles of state and corporate positions. It operated as an exclusive spoils system, where appointments were parcelled-out in part by partisan considerations but more importantly through membership in the élite. Entry to this inner circle required placing a premium on personal contacts.82 Privatisations made no difference as the denationalised corporations formed the cores of  the keiretsu-type groups which emerged from the battles over private or state ownership. No external control was exercised over this club, as the case of Crédit Lyonnais illustrated. The bank’s difficulties had first became evident in spring 1991, but it was only in November 1993 that Haberer was dismissed. Bérégovy, Balladur and Trichet¾as Director of the Trésor¾shared his aspirations to create “German-style” bank-industry relationships and pan-European presence. That did not prevent the French financial élites from distancing themselves from the bank’s discomforture, once the true dimensions of its plight had become public.

This bias to insiders was clearly at odds with proclaimed aspirations to develop Paris as a major international financial centre. It penalised outsiders, whether foreign or national, and favoured privileged institutional shareholding over minority shareholders. With the market professionals clamouring for changes, the CBV in two cases in 1991 criticised bidders for not offering to buy all outstanding shares at the same price. This was eventually translated into law in December 1993, whereby majority shareholders should hold no less than 95% of capital and voting shares. The law allowed shareholders to band together and oblige managements to answer questions. A number of dramatic cases ensued, where directors were sacked by irate shareholders, or harassed for not having satisfied minority shareholders rights. Foreign shareholders, too, held about one third of equities and bonds, and actively sought out allies. But the insider institutions continued to predominate. Shareholders mostly held bearer shares, so managers or outside investors could not readily contact them. This enabled boards to hold annual or extraordinary general meetings within two weeks and without a quorum. Also, the  privatisation clusters enabled French managers to muster sufficient votes to fend off attacks. The one hope of maintaining such autonomy was to ensure self-financing levels remained very high.

Policing of the financial market by the French state was in a broad perspective none too different to that of Germany. The Banque de France was independent, and the Constitutional Court was regularly called upon to judge upon the constitutionality of legislation. The National Assembly vigorously used its investigative powers. The COB tightened its cooperation with the various market regulators, and struck up working relations with counterparts in the U.S., the U.K. and Germany. Magistrates became much more active in bringing corrupt officials and politicians to trial. A significant number of policy areas slipped into the realm of joint policy within the EU’s formal and informal networks. The Finance Ministry determined exchange rate policy. The boundaries of political authority and constitutional law were unclear, as indicated in the Constitutional Court’s objections to the extension of the COB’s penal powers. A Council of Competition existed to supplement the powers of the European Commission. But competition policy was reached consensually, together with the Ministry of Finance. Investigations by the National Assembly inevitably were partisan. The COB’s powers were hobbled by the fact that the state was the major insider in the French financial system, both before and after the 1984-86 reforms. The aroma of corruption contributed to the steep slide in standing of elected officials.


At the root of the French problem of financial reconfiguration lay the continuity in the French financial system from the legislation of 1941 and 1945, a potent mixture of corporatism, nationalism, marxism and liberalism. The mixture changed in kaleidoscopic ways, but the ingredients remained the same. In the mid-1980s, the French government made long-debated banking reforms and introduced profound changes in the securities markets. Banking reforms were in the line of Debré’s 1966 “German model.” Securities market reforms drew in particular on U.S. experience. The reforms aimed to reduce the cost of financing state requirements, which included the funding of state-influenced enterprises. But they also required a hard franc policy to ensure that savings stayed home in a more integrated and more competitive EU market characterised by the free movement of capital.

Mitterrand saw salvation for France in a close link with Germany. As the French banker, Henri Ardant, had stated in expressing his hope for a united Europe in 1940 under German leadership¾after the war, Germany should act “to eliminate the tariff barriers within the great economic space and move as soon as possible to a single European currency.”83 A similar programme was now being filtered through the EU. The cost of this prolonged struggle for hegemony between France and Germany in Europe was ascribable to either the mutual lack of internal liberalisation in either of their economies, or to French élites’ determination to use the EU as the vehicle for cracking open the German financial system, while keeping as much control and ownership over their own. Cracking open the German financial system also required the support of the “Anglo-Saxons,” support that clearly was conditional.

Meanwhile, French policy had widened the numbers of “outsiders” among its own citizenry. In the early 1990s, 11.7 million of the 25 million people in the workforce lived in poverty.84 Financial wealth remained highly concentrated.85 Around 70,000 firms declared bankruptcy in 1993 under the hammer of the hard franc policy.86 Anxiety about the social provision of welfare equalled concern about the lack of funded pensions, slow growth, and Paris’ shortage of liquidity. The legitimacy of France’s oligarchy became more, not less difficult to defend.

1.         Michael Loriaux, France After Hegemony: International Change and Financial Reform (Ithaca: Cornell University Press, 1991).

2.         Charles-Albert Michalet, “France” in Raymond Vernon (ed.), Big Business and the State: Changing Relations in Western Europe. (Cambridge, Massachusetts: Harvard University Press, 1974).

3.         Charles de Gaulle, Mémoires d’Espoir: Le Renouveau, 1958-62 (Paris: Librairie Plon, 1966).

4.         OECD Economic Surveys, France. 1991.

5.         Stanley Hoffman, “Paradoxes of the French Political Community”, In his In Search of France (New York: Harper, 1963).

6.         Hubert Bonin, L’argent en France Depuis 1880: Banquiers Financiers Epargnants (Paris: Masson, 1989). John B. Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe, (Ithaca: Cornell University Press, 1992).

7.         Philippe Burrin, La France à l’Heure Allemande, 1940-1944 (Paris: Seuil, 1995). Zeev Sternhell, La Droite Révolutionnaire: 1885-1914. Les Origines Françaises du fascisme (Paris: Seuil, 1978).

8.         The Catholic banker, Henri Ardant, went so far as to express his hope for a united Europe under German leadership: After the war, he stated, Germany should act “to eliminate the tariff barriers within the great economic space and move as soon as possible to a single European currency.” Quoted in Philippe Burrin, op.cit., pg. 271.

9.         As an eminent Director of the Trésor declared, “The financial market could not be relied upon for financing these investments, so it was the state that took on the responsibility.” Francois Bloch Lainé, Profession Fonctionnaire, (Paris:  Seuil, 1977), p. 115.

10.      John Zysman, Governments, Markets and Growth: Financial Systems and the Politics of Industrial Change, (Ithaca: Cornell University Press, 1983).

11.      Les Notes Bleues de Bercy, No. 16, 1993.

12.      The law was intended to align the Banque’s statute on the requirements of the Maastricht Treaty. In effect, the government had to draw up the draft bill mindful of Article 20 of the French Constitution, which gives it the sole responsibility for deciding and implementing the policy of the nation.

13.      Raymond Barre, “L’économie française quatre ans après 1976-1980,” Revue des Deux Mondes, September 1980.

14.      Selective Credit Policy and Industrial Policy in France, Britain, West Germany and Sweden, Joint Economic Committee, Congress of the United States, 97th Congress. 1st Session, 1981.

15.      For an analysis of the “Treasury Circuit,” see John B.Goodman, in Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca: Cornell University Press, 1992). Michael Loriaux, France After Hegemony: International Change and Financial Reform (Ithaca: Cornell University Press, 1991).

16.      OECD, Etudes Economiques, France, 1987.

17.      Rapport Bloch Lainé, Les Grands Equilibres économiques, p.229.

18.      “Les Rapports de l’Industrie: Politique Economique et Structure des Interventions de l’Etat,” in Restructuration de l’Appareil Productif Français (Paris: Documentation Françaiise, 1976).

19.      William Coleman,”Reforming corporatism: The French Banking Policy Community, 1941-1990,” West European Politics, Volume 16, April 1993.

20.      Erhard Friedberg, Administration et Entreprises: Ou Va l’Administration Française? (Paris: Editions d’Organisations, 1974).

21.      See François Morin, La Structure Financiere du Capitalisme Français, (Paris: Calmann-Lévy, 1974) La Banque et les Groupes Industriels à l’Heure des Nationalisations (Paris, Calmann-Lévy, 1977). Also, François Bellon, Le Pouvoir Financier et l’Industrie en France (Paris: Seuil, 1980)

22.      Commission Bancaire Rapport 1994, “Dix Ans d’Activité et de Résultats des Banques Françaises.”

23.      Jacques Mélitz, “Financial Deregulation in France,” European Economic Review, 34, 1990.

24.      “Reforming Corporatism: the French Banking Policy Community, 1941-1990,” West European Politics, Volume 16, April 1993.

25.      Hubert Bonin, L’argent en France Depuis 1880: Banquiers, Financiers, Epargnants (Paris: Masson, 1989).

26.      “La Douteuse Efficacité de la Politique Française de Coopération,” Le Monde , June 30, 1993.

27.      “La France est l’un des Pays les Plus Ouverts à l’Investissement Etranger,” Le Monde, April 22, 1992.

28.      L’Année Politique, Economique, Socialse et Diplomatique, 1982 (Paris: Editeur du Moniteur, 1983).

29.      “Comment les Non-résidents Financent la Dette Française,” La Tribune Desfossés, March 3, 1993.

30.      Dov Zerah, Economie Financière Internationale: Les Interventions du Trésor (Paris: Documentation Française, 1992).

31.      Dov Zerah, Le Système Financier Français: Dix Ans de Mutations (Paris: Documentation Française, 1993).

32.      Bonin, p. 126.

33.      Commissariat Général du Plan, Crédit, Change et Inflation, Tome 11 (Paris: Documentation Française, 1979).

34.      “Le Poids du Service de la Dette Extérieure Interdit pour Longtemps à la France une Politique de Relance,” Le Monde, November 15, 1983.

35.      The Cooke committee on capital adequacy, held under BIS auspices, in part accepted French arguments on the definition of own funds. The committee included general loan loss reserves in its definition of secondary capital. Second tier includes reserves or preference shares. French banks were able to raise subordinated debt which fitted into tier two capital. Primary capital defined as shareholders equity and disclosed reserves, had to amount to 50% of the total by 1992. This was a problem to the major banks, as they could not expect capital injections from the state, and non-voting stock held little credit with the markets.”Many will have to boost their capital base,” Financial Times, November 10, 1988.

36.      Commission Bancaire, Rapport 1994 “Dix Ans d’Activité et de Résultats des Banques Françaises”, pp. 115-156.

37.      Jacques Mélitz, “Financial Deregulation in France,” European Economic Review, 34, 1990.

38.      Rapport du Groupe de Réflexion sur le Développement des Initiatives Financières, Locales et Regionales (Paris: Documentation Française, 1979)

39.      Commission Bancaire, Rapport 1994. “Dix Ans d’Activité et de Résultats des Banques Françaises.”

40.      This section is based on a teaching case by Roy C. Smith and Ingo Walter, with the assistance of Serge Platonow.

41.      A  banque de dépôts had two functions: (a) A banking function¾to collect and distribute deposits and make loans; and (b) A financial function¾to assist issuers and underwriters of equity. The first function implied an active role in making the market whereas the second role was to be an intermediary.

42.      Euromoney, March 1993.

43.      Euromoney Supplement, March 1991.

44.      “Paris to Probe Former Crédit Lyonnais Chiefs,” Financial Times, July 9, 1996.

45.      This had been excluded from the list of credit establishments covered by the EU First Banking Directive of 1977.

46.      Daniel Duet, Les Caisses d’Epargne (Paris: PUF, 1991)

47.      “Taste for Regulation Revived,” Financial Times, November 2, 1989.

48.      Yves Ullmo, the Secretary General of the National Council of Credit, as quoted in “Banques Françaises le Client Fait les Frais de la Crise,” La Tribune Desfossés, December 2, 1992. The net jobs losses of AFB banks during 1978-1991 amounted to one thousand out of a total of over 240,000.

49.      “Banques: ‘l’Impératif Informatique,” Le Monde, October 22, 1992.

50.      The Act reorganised the profession. The Conseil National des Assurances was reduced to a consultative role; a Comité Consultatif was created to assess regulations pertaining to relations between insurers and insured. A Commission de Controle was given significant disciplinary powers.

51.      “Agents Généraux: Un Nouveau Statut,” Le Figaro, November 16, 1990.

52.      “Les Ex-agents de Change ont Perdu 613.7 million,” Le Monde, July 21, 1988.

53.      “Paris Demande à Abu Dhabi d’Indemnsier les Déposants,” Libération, August 3, 1991.

54.      Antoine Coutiére et al. “La Concentration du Patrimoine des Foyers,” Economie et Statistique, No. 137, October 1981.

55.      Jacques Mélitz, “The French Financial System: Mechanisms and Proposition of Reform,” INSEE, 1980.

56.      French savers remained ambivalent about equities¾78% of those polled about their attitudes to the 1993 privatisations expressed no interest in subscribing. “Sell-off Generates FF360 billion Shares,” Financial Times, June 30, 1993.

57.      “Un Second Marché Trop Elitiste,” Le Monde. October 5,1990.

58.      “L’Inquiétante Panne du Financement de l’Industrie,” La Nouvelle Usine, November 18, 1993.

59.      “Crédit Lyonnais: Le Scandale Bancaire du Siècle,” Le Point, April 7, 1994.

60.      Philip C. Cerny, “The ‘Little Big Bang’ in Paris: Financial Market Deregulation in a Dirigiste System,” European Journal of Political Research 17: 1989.

61.      Ministère de l’Economie, des Finances et du Budget, Le Livre Blanc sur la Réforme du Financement de l’Economie, March 1986.

62.      Dov Zerah, op. cit.

63.      Commission Bancaire, Rapport 1994, “Dix Ans d’Activité et de Résultats des Banques Françaises.”

64.      Ibid p. 132.

65.      Ibid, p.142.

66.      Commission Bancaire, Rapport 1990. “La Surveillances des Operations Inerbancaires,” pp. 309-332.

67.      Christian de Boissieu, “La Suppression de l’Encadrement du Crédit,” Le Monde, December 18, 1984.

68.      Le Monde, December 7, 1985.

69.      “Paris Riposte,” Le Monde, October 20, 1987.

70.      Bonin, op. cit.

71.      Commission Bancaire, Rapport 1991, “L’Implantation des Principaux Etablissements de Crédit Français à Vocation Internationale dans les Autres Pays de la Communauté Economique Européenne.”

72.      “Small Bang Fall Out,” Financial Times, December 12, 1991.

73.      “France Presses on with Liberalisation,” Financial Times, September 26, 1991.

74.      “If I were the London Stock Exchange, “the chairman of the French exchange was reported as saying, “I would have made the same proposal that they did. But London frightens the other eleven countries of Europe.” “In Year of Quiet Change,” Financial Times, November 2, 1989.

75.      “Doubts About Tax Burden,” Financial Times, October 22, 1990.

76.      “The Battle of the Bourses,” The Economist, February 1, 1992.

77.      “France Presses Ahead with Liberalisation,” Financial Times, September 26, 1991.

78.      “London’s Irresistible Lure,” Financial Times, October 22, 1990.

79.      Jacques Mélitz, “Financial Deregulation in France,” European Economic Review, 34, 1990.

80.      “Un Entretien avec François Furet,” Le Monde, May 19, 1992.

81.      Michel Bauer and Bénédicte Bertin-Mourot, Les ‘200’ en France et en Allemagne: Deux Modèles Contrastés de Détection-sélection-formation de Dirigeants des Grandes Entreprises, (Paris: CNRS/ Heidrich and Struggles, 1992).

82.      “En France, les contacts personnels ont primordiaux,” Mr. von der Burg, chairman of Allianz Europe was reported as saying, in “Navigation Mixte: Retour au Calme Relatif après les Grandes Manouevres,” Les Echos, October 18, 1989.

83.      Quoted in Philippe Burrin, La France à l’Heure Allemande, 1940-1944. (Paris: Seuil, 1995).

84.      L’Année Politique, Economique, Sociale et Diplomatique, (Paris: Editeur du Moniteur, 1994).

85.      OECD Economic Survey, 1994, France. At the end of 1987 only 1.1 % of all individual securities accounts held 35.5 of total asset value, according to a Banque de France study.

86.      “L’Année Terrible des PME,” Le Monde,, July 6, 1993.

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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