## _wp09201 - References ## Source details **Canonical URL:** [_wp09201 - References](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09201.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09201.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09201.pdf.json) --- ### I. INTRODUCTION — Key observations and scope - Global financial crisis posed great challenges to financial systems and governments, including France. - Crisis and government bailouts highlighted: - importance of having a sound system and an appropriate policy response. - value of having a good grasp of financial sector performance and government support measures of systemic importance. - Purpose: - To analyze the performance of French banks and the financial support measures taken by the French government. ### Importance of the French financial system - France accounts for ten percent of the global banking system. - France accounts for five percent of the global capital markets. - France hosts the second largest mutual fund industry. ### Structure of the paper - Section II: Overview of the French banking and supervision structure. - Section III: International comparative analyses of profitability, asset quality, capital adequacy, leverage, quality of capital, funding profile, and liquidity. - Section IV: Analysis of business lines, potential spillovers, writedowns and losses, new capital raised, and market perceptions of risk. - Section V: Analysis of the government support plan for banks and an event study of the market impact of the measures. - Section VI concludes. ### Figures (listed) - 1. Profitability - 2. Asset Quality - 3. Capital Adequacy - 4. Leverage - 5. Capital Quality - 6. Funding - 7. Liquidity - 8. Business Lines - 9. Foreign Exposure - 10. Emerging Market Exposure - 11. Writedowns, Losses, and Capital Raised - 12. CDS Spreads - 13. Impact on Debt - 14. Impact on Equity - 15. Share of Capital Injections into Debt ### II. BANKING AND SUPERVISORY STRUCTURE — Key features - System composition: - Small number of large universal banks spanning a wide range of business functions. - Organized along commercial, mutual, and cooperative lines. - Private commercial banks: asset value about five times that of mutual and cooperative banks. - Institutional linkages: - Close ties among banks, life insurance companies, and asset management companies (sometimes via cross-shareholding) blur divisions among institution types. - International integration and market structure: - Home banks’ external claims well exceed host banks’ external claims. - Foreign banks have made few inroads into French mainstream retail banking, except for HSBC; strong presence in wholesale banking and securities trading. - Nine largest banks account for 75 percent of total banking assets. - Top five banks represent half of total deposits and more than a half of total lending. - Banking concentration stabilized over the last three years, but expected to rise with the merger between Groupe Caisse d’Épargne (GCE) and Groupe Banque Populaire (GBP) this year. - Supervisory framework: - Functional approach with some twin peaks elements; financial oversight reformed in 2003 and substantially simplified. - Monetary and Financial Code does not distinguish commercial banks and investment banks. - Prudential supervision of banks and investment firms falls under the Commission Bancaire (CB). - Governor of the Banque de France (BdF) serves as chairman of the CB; BdF provides budget, human resources, and other support to the CB. - Board of financial sector authorities provides domestic coordination framework. ### III. INTERNATIONAL COMPARATIVE ANALYSES — Methodology and indicators - Comparison group: 48 large banks in advanced Europe; only banks adopting IFRS included. - Data sources: Bankscope and Thomson Financial; composite indicators weighted by size constructed for comparison group and nine major French banks. - Select soundness indicators: - Profitability: operating ROAA and ROAE. - Asset quality: non-performing loans (NPL) ratio and coverage ratio. - Capital adequacy: Tier I ratio. - Leverage: assets over shareholders’ equity. - Capital quality: share of Tier II capital in total capital and core Tier 1 ratio. - Funding profile: share of wholesale funding in total funding and share of short-term wholesale funding in short-term funding. - Liquidity: deposit-to-loan ratio and liquid ratio (liquid assets over liquid liabilities). ### III.A Profitability — findings - 2006: French banks’ operating ROAA and ROAE below peers due to narrower interest margins and less exposure to profitable, risky non-traditional activities. - Net interest margin erosion from intense competition. - 2008: both French and peer banks registered plummeting operating performance and net income. - Profitability of European banks turned negative in 2008, while French banks overall remained slightly positive because the majority still earned modest profits in 2008. ### III.B Asset quality — findings - NPL ratio: - Declined in 2007 for both French banks and peers, reversed in 2008 reflecting economic/credit cycle turn and rising defaults. - Coverage ratio: - Dropped appreciably in 2008 for both groups, indicating less provisioning relative to problem loans. - French banks had less coverage initially but experienced less marked deterioration and ended up with a higher coverage ratio in 2007-08. ### III.C Capital adequacy — findings - 2006: Tier I ratio of French banks about 100 basis points above peers. - 2007–08: crisis eroded buffers for both French banks and peers. - 2008: government recapitalization efforts shrank the French banks’ edge and led to convergence with peers. ### III.D Leverage — findings - Leverage levels and evolution of French banks mirrored European peers. - No signs of deleveraging from pre-crisis levels for both groups. - CB’s 2008 annual report: banks continued to expand intermediation business, though at a slower pace; leverage stabilized; no aggressive reduction in outstanding loans or restriction of riskier loan distribution observed. ### III.E Quality of capital — findings - Global debate emphasized higher quality capital (core Tier 1). - French banks had higher capital quality initially, but lead eroded after global recapitalizations in 2008. - Both French banks and peers increased the share of Tier II capital in 2008; the increase was somewhat smaller for French banks. - Core Tier 1 ratio: - French banks about 15 basis points above peers in 2007; on par with peers after 2008 recapitalizations. - Liability management operations undertaken by several European banks (including some French banks) to buy back lower Tier II capital. ### III.F Funding and Liquidity — findings and key statistics - Wholesale funding reliance: - During 2006-08 average funding profile for French banks: wholesale funding represents 58 percent of total funding. - Short-term (ST) wholesale funding accounts for about 35 percent of ST funding for French banks; for European peers the comparable figures are 47 percent and 28 percent, respectively. - Role of money market funds and life insurance products in diversified bank funding despite high national savings ratio. - ALM liquidity perspective: - Deposit-to-loan ratio: - Rose to 75 percent in 2007 for French banks, slid in 2008 but remained above European peers. - Liquid ratio: - Declined by half to reach a similar level as peers in 2008. - Potential improvement: generalization of Livret A and Livret Bleu at the beginning of 2009 may encourage banks to attract more deposits. ### IV. ANALYSES OF BUSINESS AND EXPOSURES — business lines and geography - Business line contributions (2006–08): - Domestic business share climbed modestly to 46 percent (low risk, high saturation). - International banking contribution to operating income rose from 18 percent in 2006 to 27 percent in 2008. - Corporate and investment banking (CIB): contribution fell from 24 percent pre-crisis to 10 percent in 2008 due to impairment charges and fair value losses from RMBS, CDO, ABS, monoline and CDPC exposures. - Asset management and private banking (AM & PB): combined contribution fell back to pre-crisis level; asset management hit by outflows and performance issues. - Foreign exposure: - Foreign claims on immediate borrower basis: 34 percent of bank assets and 128 percent of GDP at end-2008; ultimate risk basis slightly lower. - Exposure distribution: 86 percent of foreign claims to mature markets; exposure to U.S., Italy, U.K., and Germany accounts for more than half of mature market exposure. - Exposure to emerging markets: about 4 percent of bank assets and 14 percent of GDP at end-2008. - Exposure to offshore financial centers: even smaller than emerging market exposure. - Emerging market regional distribution (end-2008): - Central and Eastern Europe (CEE): about 36 percent of total exposure to emerging markets. - Africa and the Middle East: 28 percent. - Asia and the Pacific: 24 percent. - Among CEE exposures, Czech Republic, Russia, and Poland account for half of total exposure to CEE. - Losses, writedowns, and capitalization: - French banks’ total losses and write-downs account for about 3 percent of global losses and write-downs since the crisis onset. - Comparatives: U.S. 55 percent, U.K. 12 percent, Germany 9 percent, Switzerland 7 percent. - CB’s international comparison of direct cost for large international banks: direct cost for French banks about 18 percent of Tier 1 capital (lower than Germany about 33 percent, U.K. about 37 percent, U.S. about 86 percent, Switzerland about 87 percent). - Recapitalization: total capital raised by French banks accounts for about 4 percent of aggregate capital raised around the globe. - State capital injections represent about one-third of new capital and play an increasing role over time. - Market perception (CDS spreads): - Senior CDS spreads of French banks rose from less than 10 basis points pre-crisis to more than 100 basis points recently. - Junior CDS spreads rose from less than 30 basis points pre-crisis to more than 150 basis points recently. - Throughout most of the crisis, both senior and junior CDS spreads of French banks were lower than peers (iTraxx Euro indices). - At the peak in March 2009: - Junior CDS spreads of French banks were 36 percent below iTraxx Euro Junior index; in June they were 24 percent lower. - Senior CDS spreads of French banks were 17 percent and 8 percent below iTraxx Euro Senior index in March and June 2009, respectively. - Interpretation: markets may put a premium on national champions. ### V. EVENT STUDY OF THE FRENCH BANKING SECTOR SUPPORT (October 10–14, 2008) - Context and global measures: - Lehman bankruptcy intensified contagion; governments implemented recapitalization, guarantees, deposit insurance, asset swaps/purchases, direct lending, liquidity facilities. - French support architecture: - Société de Prise de Participations de l’État (SPPE): - Fully state-owned; recapitalization (Tier 1 instruments); earmarked €40bn. - First tranche: €10.5bn of deeply subordinated debt securities injected into six banks, boosting Tier 1 ratios by about 50 bps. - Additional €3bn supported merger between GCE and GBP. - Introduced preference shares as new core Tier 1 instruments with characteristics: non-cumulative dividend, no voting rights, non-convertible, preferential but capped remuneration, limited dilution, loss-absorbing capacity. - Société de Financement de l’Économie Française (SFEF): - Owned by French state (34 percent) and seven leading French banks (66 percent); provides government-guaranteed refinancing. - Can issue up to €265bn of guaranteed term debt (maximum maturity five years); debt must be issued before the end of 2009. - SFEF bonds enjoyed ‘AAA’ rating; issuance second only to the U.S. and about one third denominated in U.S. dollars; represents 20 percent of global issuance of government guaranteed bonds. - Guarantees: - Government issued guarantees on Dexia’s obligations (maximum of €55bn) prior to SFEF creation. - Event-study methodology: - Event window: October 10–14, 2008 (one day before and after October 13 announcement). - Objectives: - Gauge market impact on debt using senior and subordinated CDS spreads linked to maturity structure. - Gauge market impact on equity using CAPM. - Control for contemporaneous events by measuring relative (adjusted) impact. - Reverse-engineer Black-Scholes-Merton (BSM) to measure proportion of equity injection transferred to debt holders. - Debt-impact calculation steps: - Back out default probability from CDS: DP = 1 - RR - CDS/10000 (expression as presented in source). - Gross impact on debt: difference between present value of debt before and after the plan (formula presented in source). - Adjusted impact: subtract debt changes in Scor Group, a reinsurance firm not receiving government money but experiencing narrowing spreads (formula presented in source). - Event-study results — debt: - Gross appreciation of debt value across banks: range from 21 percent to 38 percent. - Adjusted appreciation (controlling for contemporaneous events): positive effects remain at least 9 percent. - Subordinated debt benefit greater than senior debt: - On average, subordinated debt value increased 35 percent gross and 25 percent adjusted. - Senior debt increased 26 percent gross and 14 percent adjusted. - Event-study results — equity: - Gross impact: equity values experienced modest increases of 2–7 percent. - Adjusted impact (CAPM abnormal returns): negative across the board, with equity value losses ranging from one to 23 percent. - Using estimated betas generally produced larger equity value reductions than assuming beta = 1. - Interpretation: differential impacts on debt and equity suggest possible transfer of equity injections to debt holders (Myers (1977) mechanism). - BSM reverse engineering — transfer estimates: - Model: asset value follows geometric Brownian motion; equity as call option and debt as put option on assets. - Calibration: back out implied asset value and volatility from market equity and volatility; compute ex-ante market values after announcement. - Results for three largest French banks: proportion of transfer ranges from 13 to 56 percent. - Correlation: transfer correlates with bank credit risk (average of CDS spreads of senior and subordinated debt): the riskier the debt, the higher the share of capital injections into debt. - Policy implication: capital injections may benefit debt holders at expense of shareholders, arguing for the necessity of government injections. ### VI. CONCLUSIONS — assessment and policy implications - Overall assessment: - French banks have demonstrated relative resilience to the global financial crisis to date. - The universal banking model with diversification across business lines, funding, and geography helped contain risk to manageable levels. - Comprehensive supervision, proactive regulation, and timely information sharing among authorities contributed to better initial conditions and relative withstanding of the crisis. - Ongoing challenges and risks to earnings: - Subdued CIB activities. - Potential losses and writedowns from risky assets. - Still low interest margins. - Rising counterparty risk and cost of risk. - Policy response: - Recapitalization and refinancing measures have stabilized the system by reducing risk and decreasing financing costs considerably. - Continued vigilance and enhanced risk management required. - International debate on capital adequacy is evolving; the impact of reduced comparative advantage in capital buffers for banks remains to be seen. *Source: _wp09201 - References (PDF chapter/section).* ### References.............................................................................................................. ### _wp09201 - References ### Figures (listed) - 1. Profitability - 2. Asset Quality - 3. Capital Adequacy - 4. Leverage - 5. Capital Quality - 6. Funding - 7. Liquidity - 8. Business Lines - 9. Foreign Exposure - 10. Emerging Market Exposure - 11. Writedowns, Losses, and Capital Raised - 12. CDS Spreads - 13. Impact on Debt - 14. Impact on Equity - 15. Share of Capital Injections into Debt ### I. INTRODUCTION — Key observations and scope - The ongoing global financial crisis has posed great challenges to financial systems and governments around the globe, including in France. - The unprecedented nature of the crisis and government bailouts highlights: - the importance of having a sound system and an appropriate policy response. - the value of having a good grasp of financial sector performance and government support measures of systemic importance. - Purpose of this paper: - To analyze the performance of French banks and the financial support measures taken by the French government. ### Importance of the French financial system (as stated) - France accounts for ten percent of the global banking system. - France accounts for five percent of the global capital markets. - France hosts the second largest mutual fund industry. ### Structure of the paper (as provided) - Section II: Overview of the French banking and supervision structure. - Section III: International comparative analyses of: - profitability, - asset quality, - capital adequacy, - leverage, - quality of capital, - funding profile, - liquidity of banks. - Section IV: Analysis of: - business lines, - potential spillovers, - writedowns and losses, - new capital raised, - market perceptions of risk. - Section V: Analysis of the government support plan for banks and an event study of the market impact of the measures. *Source: _wp09201 - References (PDF chapter/section).* ### Section VI concludes. ### _wp09201 - Section VI concludes. ### II. BANKING AND SUPERVISORY STRUCTURE - French banking system: a small number of large universal banks spanning a wide range of business functions; organized along commercial, mutual, and cooperative lines. - Private commercial banks: asset value about five times that of mutual and cooperative banks. - Close ties among banks, life insurance companies, and asset management companies (sometimes via cross-shareholding) blur divisions among institution types. - International integration: - Home banks’ external claims well exceed host banks’ external claims. - Foreign banks have made few inroads into French mainstream retail banking, except for HSBC; foreign banks have a strong market presence in wholesale banking and securities trading. - Cross border mergers and acquisitions may blur domestic/foreign distinctions (example noted: Belgian government’s ownership of BNP Paribas after its acquisition of Fortis bank). - Concentration: - The nine largest banks account for 75 percent of total banking assets. - The top five banks represent half of total deposits and more than a half of total lending. - Banking concentration stabilized over the last three years, but will rise with the merger between Groupe Caisse d’Épargne (GCE) and Groupe Banque Populaire (GBP) this year. - Supervisory framework: - Functional approach with some twin peaks elements; financial oversight reformed in 2003 and substantially simplified. - Monetary and Financial Code does not distinguish commercial banks and investment banks. - Prudential supervision of banks and investment firms falls under the Commission Bancaire (CB). - Governor of the Banque de France (BdF) serves as chairman of the CB; BdF provides budget, human resources, and other support to the CB. - Board of financial sector authorities provides domestic coordination framework. ### III. INTERNATIONAL COMPARATIVE ANALYSES — Methodology and Indicators - Bank-based comparison group: 48 large banks in advanced Europe; only banks adopting IFRS included. - Data sources: Bankscope and Thomson Financial; composite indicators weighted by size constructed for comparison group and nine major French banks. - Select soundness indicators: - Profitability: operating ROAA and ROAE. - Asset quality: non-performing loans (NPL) ratio and coverage ratio. - Capital adequacy: Tier I ratio. - Leverage: assets over shareholders’ equity. - Capital quality: share of Tier II capital in total capital and core Tier 1 ratio. - Funding profile: share of wholesale funding in total funding and share of short-term wholesale funding in short-term funding. - Liquidity: deposit-to-loan ratio and liquid ratio (liquid assets over liquid liabilities). ### III.A Profitability — findings - Pre-crisis (2006) French banks: operating ROAA and ROAE below peers due to narrower interest margins and less exposure to profitable, risky non-traditional activities. - Net interest margin erosion from intense competition. - 2008: both French and peer banks registered plummeting operating performance and net income. - Profitability of European banks turned negative in 2008, while French banks overall remained slightly positive because the majority still earned modest profits in 2008. ### III.B Asset quality — findings - NPL ratio: - Declined in 2007 for both French banks and peers, reversed in 2008 reflecting economic/credit cycle turn and rising defaults. - Coverage ratio: - Dropped appreciably in 2008 for both groups, indicating less provisioning relative to problem loans. - French banks had less coverage initially but experienced less marked deterioration and ended up with a higher coverage ratio in 2007-08. ### III.C Capital adequacy — findings - 2006: Tier I ratio of French banks about 100 basis points above peers. - 2007–08: crisis eroded buffers for both French banks and peers. - 2008: government recapitalization efforts shrank the French banks’ edge and led to convergence with peers. ### III.D Leverage — findings - Leverage levels and evolution of French banks mirrored European peers. - No signs of deleveraging from pre-crisis levels for both groups. - CB’s 2008 annual report: banks continued to expand intermediation business, though at a slower pace; leverage stabilized; no aggressive reduction in outstanding loans or restriction of riskier loan distribution observed. ### III.E Quality of capital — findings - Global debate emphasized higher quality capital (core Tier 1). - French banks had higher capital quality initially, but lead eroded after global recapitalizations in 2008. - Both French banks and peers increased the share of Tier II capital in 2008; the increase was somewhat smaller for French banks. - Core Tier 1 ratio: French banks about 15 basis points above peers in 2007; on par with peers after 2008 recapitalizations. - Liability management operations undertaken by several European banks (including some French banks) to buy back lower Tier II capital. ### III.F Funding and Liquidity — findings - Wholesale funding reliance: - During 2006-08 average funding profile for French banks: wholesale funding represents 58 percent of total funding. - Short-term (ST) wholesale funding accounts for about 35 percent of ST funding for French banks; for European peers the comparable figures are 47 percent and 28 percent, respectively. - Explanation: role of money market funds and life insurance products in diversified bank funding despite high national savings ratio. - ALM liquidity perspective: - Deposit-to-loan ratio: - Rose to 75 percent in 2007 for French banks, slid in 2008 but remained above European peers. - Liquid ratio: - Declined by half to reach a similar level as peers in 2008. - Potential improvement: generalization of Livret A and Livret Bleu at the beginning of 2009 may encourage banks to attract more deposits. ### IV. ANALYSES OF BUSINESS AND EXPOSURES — business lines and geography - Business line contributions (2006–08): - Domestic business share climbed modestly to 46 percent (low risk, high saturation). - International banking contribution to operating income rose from 18 percent in 2006 to 27 percent in 2008. - Corporate and investment banking (CIB): contribution fell from 24 percent pre-crisis to 10 percent in 2008 due to impairment charges and fair value losses from RMBS, CDO, ABS, monoline and CDPC exposures. - Asset management and private banking (AM & PB): combined contribution fell back to pre-crisis level; asset management hit by outflows and performance issues. - Foreign exposure: - Foreign claims on immediate borrower basis: 34 percent of bank assets and 128 percent of GDP at end-2008; ultimate risk basis slightly lower. - Exposure distribution: 86 percent of foreign claims to mature markets; exposure to U.S., Italy, U.K., and Germany accounts for more than half of mature market exposure. - Exposure to emerging markets: about 4 percent of bank assets and 14 percent of GDP at end-2008. - Exposure to offshore financial centers: even smaller than emerging market exposure. - Emerging market regional distribution (end-2008): - Central and Eastern Europe (CEE): about 36 percent of total exposure to emerging markets. - Africa and the Middle East: 28 percent. - Asia and the Pacific: 24 percent. - Among CEE exposures, Czech Republic, Russia, and Poland account for half of total exposure to CEE. - Losses, writedowns, and capitalization: - French banks’ total losses and write-downs account for about 3 percent of global losses and write-downs since the crisis onset. - Comparatives: U.S. 55 percent, U.K. 12 percent, Germany 9 percent, Switzerland 7 percent. - CB’s international comparison of direct cost for large international banks: direct cost for French banks about 18 percent of Tier 1 capital (lower than Germany about 33 percent, U.K. about 37 percent, U.S. about 86 percent, Switzerland about 87 percent). - Recapitalization: total capital raised by French banks accounts for about 4 percent of aggregate capital raised around the globe (roughly equal to their share of losses and writedowns). - State capital injections represent about one-third of new capital and play an increasing role over time. - Market perception (CDS spreads): - Senior CDS spreads of French banks rose from less than 10 basis points pre-crisis to more than 100 basis points recently. - Junior CDS spreads rose from less than 30 basis points pre-crisis to more than 150 basis points recently. - Throughout most of the crisis, both senior and junior CDS spreads of French banks were lower than peers (iTraxx Euro indices). - At the peak in March 2009: junior CDS spreads of French banks were 36 percent below iTraxx Euro Junior index; in June they were 24 percent lower. - Senior CDS spreads of French banks were 17 percent and 8 percent below iTraxx Euro Senior index in March and June 2009, respectively. - Interpretation: markets may put a premium on national champions. ### V. EVENT STUDY OF THE FRENCH BANKING SECTOR SUPPORT (October 10–14, 2008) - Context: - French government measures prior to deepening of crisis focused on efficiency, competitiveness, and reforms (Paris-Place Financière initiative, Loi de Modernisation de l’Économie (LME)); post-SG trading fraud measures strengthened internal controls. - Lehman bankruptcy intensified contagion; governments implemented large-scale interventions globally: recapitalization, guarantees, deposit insurance, asset swaps/purchases, direct lending, liquidity facilities. - French support architecture: - Two agencies created: - Société de Prise de Participations de l’État (SPPE): fully state-owned; recapitalization (Tier 1 instruments); earmarked €40bn. - First tranche: €10.5bn of deeply subordinated debt securities injected into six banks, boosting Tier 1 ratios by about 50 bps. - Additional €3bn supported merger between GCE and GBP. - Preference shares introduced as new core Tier 1 instruments with characteristics: non-cumulative dividend, no voting rights, non-convertible, preferential but capped remuneration, limited dilution, loss-absorbing capacity. - Société de Financement de l’Économie Française (SFEF): owned by French state (34 percent) and seven leading French banks (66 percent); provides government-guaranteed refinancing. - Can issue up to €265bn of guaranteed term debt (maximum maturity five years); debt must be issued before the end of 2009. - SFEF bonds enjoyed ‘AAA’ rating; issuance second only to the U.S. and about one third denominated in U.S. dollars; represents 20 percent of global issuance of government guaranteed bonds. - SFEF issuance attractive due to pooling liquidity and absence of bank risk exposure for investors. - Guarantees: government issued guarantees on Dexia’s obligations (maximum of €55bn) prior to SFEF creation. - Event-study methodology: - Event window: October 10–14, 2008 (one day before and after October 13 announcement). - Objectives: - Gauge market impact on debt using senior and subordinated CDS spreads linked to maturity structure. - Gauge market impact on equity using CAPM. - Control for contemporaneous events by measuring relative (adjusted) impact. - Reverse-engineer Black-Scholes-Merton (BSM) to measure proportion of equity injection transferred to debt holders. - Debt-impact calculation steps (following Veronesi & Zingles (2008)): - Back out default probability from CDS: DP = 1 - RR - CDS/10000 (expression as presented in source). - Gross impact on debt: difference between present value of debt before and after the plan (formula presented in source). - Adjusted impact: subtract debt changes in Scor Group, a reinsurance firm not receiving government money but experiencing narrowing spreads (formula presented in source). - Event-study results — debt: - Gross appreciation of debt value across banks: range from 21 percent to 38 percent. - Adjusted appreciation (controlling for contemporaneous events): positive effects remain at least 9 percent. - Subordinated debt benefit greater than senior debt: - On average, subordinated debt value increased 35 percent gross and 25 percent adjusted. - Senior debt increased 26 percent gross and 14 percent adjusted. - Event-study results — equity: - Gross impact: equity values experienced modest increases of 2–7 percent. - Adjusted impact (CAPM abnormal returns): negative across the board, with equity value losses ranging from one to 23 percent. - Using estimated betas generally produced larger equity value reductions than assuming beta = 1. - Interpretation: differential impacts on debt and equity suggest possible transfer of equity injections to debt holders (Myers (1977) mechanism). - BSM reverse engineering to estimate transfer from equity injections to debt: - Model setup: asset value follows geometric Brownian motion; equity as call option and debt as put option on assets (equations and variables specified in source). - Procedure: calibrate BSM to market data (equity, volatility), back out implied asset value and volatility, calculate ex-ante market value of bonds and equities after announcement, determine share of equity injection transferred to debt by value difference relative to capital injections. - Results for three largest French banks: proportion of transfer ranges from 13 to 56 percent. - Transfer correlates with bank credit risk (average of CDS spreads of senior and subordinated debt): the riskier the debt, the higher the share of capital injections into debt. - Policy implication drawn: capital injections may benefit debt holders at expense of shareholders, arguing for the necessity of government injections. ### VI. CONCLUSIONS - Overall assessment: - French banks have demonstrated relative resilience to the global financial crisis to date. - The universal banking model with diversification across business lines, funding, and geography helped contain risk to manageable levels. - Comprehensive supervision, proactive regulation, and timely information sharing among authorities contributed to better initial conditions and relative withstanding of the crisis. - Ongoing challenges: - Recapitalization and refinancing measures have stabilized the system by reducing risk and decreasing financing costs considerably. - Going forward risks to earnings and profitability include: - Subdued CIB activities. - Potential losses and writedowns from risky assets. - Still low interest margins. - Rising counterparty risk and cost of risk. - The global crisis remains unfolding and international debate on capital adequacy is evolving; the impact of reduced comparative advantage in capital buffers for banks remains to be seen. - Response required: continued vigilance and enhanced risk management. *Italic: Source — _wp09201 - Section VI concludes.* ### REFERENCES ### REFERENCES ### Regulatory and institutional reports - BIS, 2004, BCBS Compendium of Documents - Volume II: Advanced supervisory methods, Basel. - Commission Bancaire, 2009, Rapport de la Commission bancaire pour l'année 2008, Paris. - Direction des Journaux Officiels, 2008, Loi n° 2008-1061 du 16 octobre 2008 de finances rectificative pour le financement de l'économie, Journal Officiel de la République française. - Federal Reserve, 2009, “The Supervisory Capital Assessment Program: Design and Implementation,” Federal Reserve, Washington DC. - FSA, 2009, The Turner Review, Financial Services Authority, London. - IMF, 2009, Global Financial Stability Report 04/09 (Washington: International Monetary Fund). - Lagarde, Christine, 2008, Le plan français pour assurer le financement de l’économie et restaurer la confiance, Communiqué de presse du Conseil des Ministres, Paris. - Noyer, Christian, and Nouy Danièle, 2009, Audition devant la commission des finances du Sénat, Comptes Rendus De La Commission Des Finances, Paris. - Ricol, René, 2008, Rapport sur la crise financière - Mission confiée par le Président de la République dans le contexte de la Présidence française de l'Union européenne 2008, Paris. ### Academic articles, papers, and memos - Black, Fischer, and Myron S. Scholes, 1973, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81: 637–654. - Merton, Robert C, 1973, “Theory of Rational Option Pricing,” The Bell Journal of Economics and Management Science 4: 141–183. - Merton, Robert C, 1974, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” The Journal of Finance 29: 449–470. - Merton, Robert C, 1977, “An Analytic Derivation of the Cost of Loan Guarantees and Deposit Insurance: An Application of Modern Option Pricing Theory,” Journal of Banking & Finance 1: 3-11. - Myers, S.C., 1977, “Determinants of Corporate Borrowing,” Journal of Financial Economics 5: 147-175. - Veronesi, Pietro, and Luigi Zingles, 2008, “Paulson’s Gift,” Mimeo, University of Chicago. - Gapen, Michael T., Dale F. Gray, Cheng Hoon Lim, and Yingbin Xiao, 2005, “The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer,” in Corporate Restructuring: Lessons from Experience, edited by Michael Pomerleano and William Shaw, World Bank. - Gapen, Michael T., Dale F. Gray, Cheng Hoon Lim, and Yingbin Xiao, 2008, “Measuring and Analyzing Sovereign Risk with Contingent Claims,” IMF Staff Papers 55: 109–148. - Yingbin Xiao, 2008, “Financing and Risks of French Firms,” IMF Selected Issues Paper 08/74 (Washington: International Monetary Fund). ### Industry analyses and country-focused pieces - Choulet, Céline, 2009, “Banques européennes : les plans de soutien à l’épreuve de la recession,” Conjoncture 51, BNP Paribas. - Lagarde, Christine, 2008, Le plan français pour assurer le financement de l’économie et restaurer la confiance, Communiqué de presse du Conseil des Ministres, Paris. 22 *Source: _wp09201 - REFERENCES* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09201.pdf_