Pascal Emmanuel Gobry

France Doesn't Need Bank Consolidation

As the world watches to see if Emmanuel Macron succeeds in shaking France out of its statist torpor, it should bear in mind that he would first need to somehow bypass the country’s entrenched mandarins, the elite-educated cadre that run France's most important bureaucracies and whose cohorts tend to have leadership roles throughout French industry; they often have the biggest stake in the status quo. A case in point is banking.

François Villeroy de Galhau, governor of the Bank of France, argued in a little-noticed end-of-year speech that "Europe still suffers from excess banking capacity, and cross-border consolidation is necessary." In the United States, the top five banks have about 40 percent market share; in Europe it's barely 20 percent, he noted.

He's certainly not the first to make the claim. The case for consolidation is generally weak, but it's particularly weak in the case of France -- and the way de Galhau (one of the candidates tipped to be the next European Central Bank president) made it recently is revealing of the frustrating shortcomings of France's bureaucratic class, which threatens to frustrate the reforms begun by President Macron.

We are reaching a level where [banking consolidation] would improve financial stability. Banks would diversify their risks better, generate economies of scale and increase efficiency. Since we increased oversight and resolution authority for large banks, we should not fear a 'too big to fail' problem. Cross-border consolidation would ensure savings are more efficiently allocated to productive investments in Europe and would improve European banks' position in terms of international competitiveness.

The problem is that bank concentration in general increases the risk of the dreaded "too big to fail" scenario. In a throwaway line, de Galhau brushes off that argument by asserting that the ECB's new regulations have solved the problem. Regulatory reforms have gone a long way toward mitigating risks, it's true. Higher capital ratios and stress tests and "living wills" help, of course, but they are no ironclad guarantee against systemic threats.

The case for consolidation is particularly weak when it comes to de Galhau's own country. France's banks are an oligopoly. The biggest French banks benefit from "too big to fail" guarantees which work as an implicit subsidy.

Major banks' fees for the average consumer are 14.5 percent higher in France than the European average, according to a 2016 report, "Getting rid of corporate welfare for French banks," by Generation Libre, a French free-market think tank. If the biggest actors in a market have sufficient pricing power to charge 15 percent more for the exact same service as their competition, the problem isn't exactly under-concentration; more likely, it is the opposite.

Economists have long complained that the French banking oligopoly, which squeezes French mid-size companies out of the funding market, is a major drag on economic growth. Because the banking market is uncompetitive, French banks will not lend money to small businesses, which are presumed to be too risky. They do well enough charging above-market fees to consumers and extending credit to only those businesses with a big enough balance sheet that they don't need credit.

A highly regarded 2009 report by the French Economic Analysis Council reviewed the academic literature on credit rationing to small businesses. The review, which remains relevant today, is useful for international comparisons: it found that, over the same period of time, the number of small and medium-sized enterprises suffering from credit rationing is 8 percent to 10 percent in the US, 9 percent in the United Kingdom, and a whopping 40 percent in France. The last thing France needs is for its biggest banks to get bigger, or for its smaller banks to get snapped up by large banks in neighboring countries, who, if nothing else changes, would simply join the cartel.

De Galhau, like virtually all of the French elite, is a graduate of ENA, France's top civil service school. He spent the decade before being named to the Bank of France in very senior positions within BNP Paribas, France's biggest bank, which would surely be among the biggest beneficiaries of a euro-zone-wide consolidation wave. This isn't to cast doubt on de Galhau's motives; the overwhelming majority of France's enarques are honest. They also, as a group, have the unspoken but sincere belief that whatever happens to be in their caste's interest is also in the interest of the country and the world at large. It is this lack of self-awareness that has been killing France, rather than corruption and self-dealing as such.

A banking concentration might be bad for the economy, but it would be good for the elites as a class, since they happen to occupy the top rungs of the major French banks. Macron should resist de Galhau's cries for consolidation. He has better things to do this year. But let it serve as a warning that France's de facto ruling aristocracy, to which Macron is deeply beholden, might not always be the best source of advice.