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French lessons on bank nationalisation

Pierre Briancon 

Crédit Lyonnais, the now-defunct French bank, lent its name to what was then called the banking failure of the century – the twentieth, that is. In the public lore, it long stood for the symbol of what can go wrong when the state takes over a bank and politics mixes with finance. But perceptions are changing fast: this century is showing that nationalised banks don’t have a monopoly on failures. Suddenly bank nationalisation is in.

By today’s standards, the losses accumulated by Crédit Lyonnais in a decade of senseless risk-taking and political cronyism – some E15bn – look paltry. A “Lyonnais” could even be just the yardstick of current banking losses. Citigroup’s losses last year? About 1.5 Lyonnais. The amount of tax-payers funds used to bail out AIG? Eight Lyonnais.

Ironically, in the current crisis France remains – so far – the largest big Western country not to nationalize any of its private banks. The US, the UK and Germany are currently all going down that path, at different paces. All the same, there might be one or two lessons to draw from the French experience.

France’s three major banks – Banque Nationale de Paris (BNP), Société Générale and Crédit Lyonnais – were taken over by the state after the Second World War, and remained nationalised for half a century. President Francois Mitterrand’s socialist government nationalised the rest of the banking system in the 1980s.

Less than a decade later, the nationalisations started to be reversed. After a long campaign of privatisation and partial de-mutualisation, France banking now has more shareholder-owned banking than ever in its history.

Lessons from the French experience should be drawn cautiously. The world has changed. Globalisation was hardly a word in the early 1980s. Economies were still run within national borders. The French central bank hadn’t gained its independence from the government, so monetary policy and interest rates were just tools of the latter’s overall economic policy.

This insular nature of the experience – French banks didn’t compete much then with their foreign counterparts – may explain why, according to the former chief of one of France’s big nationalised banks at the time, “nationalisation overall wasn’t the disaster it could have been, nor did it help in any way. It was just pointless, and useless”.

The paradox is that the Socialist government that nationalised all banks was the same that embarked on a sweeping liberalisation of financial markets. The idea was to bring France in line with the rest of Europe, as a prelude to the creation of the eurozone. And the irony is that the major financial accidents happened when the government tried to push banks to expand aggressively to take advantage of their new freedoms.

Reckless expansion lay behind the Crédit Lyonnais debacle, and for the period’s second largest disaster – Credit Foncier, a state bank focused in real estate that lost E4bn in the late 1990s. In both cases, the banks operated under a cheerleading finance minister who encouraged them to take risks they shouldn’t have, hoping this would help fill the state’s depleted coffers.

THIS internal conflict between state as cheerleader-owner and state as responsible manager is built into nationalised ownership, say French bankers who have worked under both the all-state and the current private system.

At the micro level, the government wants to encourage the growth of credit to boost the economy – but not take on too much risk. At the macro level it wants banks to be much more active – but not so active that inflation heats up. Regulation is another problem. It takes a seriously independent regulator – not just in law, but in practice – to control banks that are owned by the government. And it takes a seriously self-constrained government to abide by the rules dictated by that regulator.

There’s also the issue of politics. A state-owned bank that wants to expand abroad will quickly run into political opposition as it will be seen as just an arm of its home country’s government. In many countries, the financial sector is still seen as strategic. A US-government-controlled Citigroup, for example, might be seen as a tool of Washington. That would scotch acquisitions in many parts of the world.

Finally, there’s the question of the end game. Once the time has come for a return to private ownership, how can such mammoth privatisations be arranged? Just dumping the shares on the stock market won’t do. It took about 10 years for French banks to overcome the initial suspicion on the way they were privatised – mainly through friendly sales and sweetheart deals. This is why the road map on the return to normal has to be drawn way ahead of time.

First Published: Tue, March 24 2009. 00:20 IST