Category: Finance

Can the risk of financial instability come from non-banks?

Post author By Olivier Klein
Post date 1 March 2022

Practices, but also accounting rules, have their influence on the behaviour of banks and the non-banking sector, two complementary but competing segments. Regulation also has its role. Hence the need to think about regulation for non-banks.

The financial system, which matches the financing capacities of some with the needs of others, consists of banks and financial markets. These two components of the system have partly identical and partly separate roles. Both help finance economic players. Market finance has seen a sharp increase in its share worldwide since the great financial crisis. It now accounts for around 50% of financing in general, and 30% in the corporate sector. It is also useful that investment funds, asset managers and institutional investors, major players on the financial markets, take part in financing. Because banks alone cannot guarantee the full amount to be financed.

Markets accept risks denied by banks

In addition, they can provide capital to companies that find getting finance from banks more difficult, including start-ups and innovation in general. Explanations: the credit risk of these sectors is generally too high for banks, which must protect the deposits entrusted to them. Investment funds may accept that they may lose more, if on average capital gains on companies that will survive and succeed are greater than losses, with the final risk being taken by end investors who accept it.

The two types of player in the financial system are also different in terms of financial stability. Firstly, because banks record the historical value of the loans they grant on their balance sheets. They must provision for the risk on a statistical basis, but also on a case-by-case basis depending on their assessment of a possible deterioration in each borrower’s ability to repay. However, changes in average opinions on risk quality are not taken into account and do not result in any accounting changes.

A different approach to risk

The approach is completely different for funds: they must record the change in the market value of their financial investments at each point in time, in accordance with fair value accounting rules. This leads to a significant difference in behaviour between banks and funds. Banks choose to grant credit based on their analysis of the borrower’s ability to repay over time. For their part, funds choose to buy bonds, for example, based on what they think about changes in the market’s majority view on the value of the risk premium allocated to the borrower. Why lend if they think the value of the bond will fall in the near future, even if they are not ultimately worried about non‑repayment? Unless strongly conditioned by the prospect of securitisation of the loans granted or the resale of risks by CDS, banks’ behaviour is therefore much more stable by nature than that of funds, whose valuation mechanisms are much more volatile, since they are much more related to self-referential behaviour on the markets.

On the other hand, funds do not take on financial risks themselves. Credit, interest rate and liquidity risks are in fact left in the hands of end investors, households or companies. In the case of banking intermediation, banks bear these risks on their own income statements. And they do so in a professional, regulated and supervised manner. This allows households and businesses not to take these risks if they do not have the competence or the desire to do so.

Increased risk-taking from very low rates

Banks and non-bank financial intermediaries such as funds are therefore both very useful, both competitive and complementary. But the portion granted to each in the global financial system plays a major role in overall stability or instability. We should add a fundamental point, which the major central banks are currently addressing. Since the financial crisis of 2007-2009, the regulation of banks has increased significantly, notably through the required capital adequacy ratios (more equity for identical risks) and the setting of restrictive ratios limiting liquidity risk. There is no such regulation for non-bank financial intermediaries.

However, the monetary policy of very low interest rates for a very long time has gradually led financial players, on behalf of savers, to seek returns by increasingly taking on risk. In terms of credit risk -including increasingly high leverage effects- with squashed risk premiums. And in terms of liquidity risk, by further extending the maturities of credit securities and lowering the expected level of their liquidity. This has made fund assets significantly more vulnerable, as highlighted by all the studies of organisations responsible for supervising financial stability around the world. The risk can thus be pushed out of the banking system and onto non-bank financial agents, without control.

Beware of moral hazard!

The violent financial crisis of March 2020, triggered by the expected impact of the pandemic, was fortunately brought swiftly under control by the central banks. They acted very strongly and very quickly. In this regard, it demonstrated the resilience of banks, but also the vulnerability of many funds. Central banks had to buy very large amounts of securities from funds in difficulty, including high yield. They had to prevent a catastrophic chain of events, due in particular to sudden withdrawals from end investors that these funds could not absorb without incurring excessive losses or without a major liquidity crisis.

Prudential and macro-prudential regulation cannot do everything, but it is essential to mitigate the natural procyclicality of finance and to prevent the risk of financial instability as much as possible. It must now be extended and adapted to non-banking financial intermediaries. It is also essential to combat moral hazard, because without preventive regulation and with bail-outs during major crises, risk-taking may be ever higher, with no limit or almost, thanks to a free option given by central banks against serious incidents. Finally, the proportion between banks and non-banks in the financial system as a whole must also be subject to adequate analysis and policies to determine the most favourable balance for both growth and financial stability.

Finance Innovation

Crypto-assets – Facebook’s Libra: currency or colossal marketing tool?

Post author By Olivier Klein
Post date 15 October 2019

The Libra coin announced by Facebook is not a run-of-the-mill cryptocurrency. Its value will be supported by a basket of assets that will make it virtually stable. The project and its potential future raise questions about the risks of banking disintermediation.

The announcement of the creation of a cryptocurrency managed by a conglomerate of large companies led by Facebook – i.e. Libra – has relaunched the debate over these digitally native currencies that trouble many public and private actors. Economists, regulators, public officials and finance actors have raised questions about the risks and potentialities of Libra which, upon close examination, is not a run-of-the-mill cryptocurrency.

“Cryptos”, the “currencies” that are a product of a Libertarian utopia

Are these 2,000-some “cryptocurrencies” actually real currencies? They are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost. These currencies would pass through intermediaries, and their value could not be manipulated by governments or central banks. They would be subject to private, decentralised management. They would guarantee the anonymity of transactions, and their guardian would not be a central bank but a supposedly infallible algorithm. In short, a form of anarcho-capitalism…
To accurately define cryptocurrencies and evaluate their potential instability, we must take a look back at the history of money issuance. The first banking currencies were issued in quantities that were increasingly high multiples of bank assets in precious metals, gold and silver. They circulated and were regulated freely by supply and demand. It gradually became clear that this system was unstable and was creating financial and banking crises. This led to the creation of central banks, to homogenise the monetary field and ensure the role of lender of last resort in the event of systemic crises.

Currency was subsequently issued not as a proportion of assets in gold or silver but from scratch, consistent with the development of the economy. Banks created money from credit. This system was supervised by an external institutional authority: the central bank, which, by pursuing a monetary policy, created the possibility of stability and demonstrated the usefulness of institutions and rules.

A hyper-speculative asset

Cryptocurrencies have no counterparty, be it gold or silver or the needs of the economy, since they are issued by private individuals according to arbitrarily set rules. These “currencies” are therefore not currencies at all, and are highly unstable. It is, in fact, conceptually impossible for anyone and everyone to create their own currency, since to be considered as such, currencies must be globally recognised as a payment method that releases the debtor from debt in order to pay the creditor or supplier. If everyone can issue their own currency, none of these “currencies” can win the necessary confidence from everyone to be accepted by all economic agents as a discharge payment method. The value of these “currencies” varies in a totally speculative and even erratic manner, without the basis of trust tied to the institutional role of issuers. Cryptocurrencies are in essence hyperspeculative assets, as created by the financial world from time to time when it completely loses sight of the real economy.

That said, while these pseudo-currencies do not contribute to the common good (in the words of Jean Tirole), the encryption technology on which they are based, i.e. the blockchain, opens a field of interesting technological possibilities.

A UFO on planet Crypto: Libra

Libra is different from other cryptocurrencies for two major reasons. First, the potential number of users. With 2.4 billion accounts, Facebook has the capacity to convert a considerable number of loyal users. This cryptocurrency could therefore eventually be used on a massive scale.

Moreover, and contrary to other cryptocurrencies, the value of the Libra will be backed by a basket of sovereign currencies and assets – on the basis of the 1-for-1 principle – which will make it virtually stable. Each Libra created will have its counterparty. Facebook will therefore not issue currency, in the strict sense of the term. Everything will unfold as if via a “currency board”, or a payment method internal to a system, such as casino chips or balls in the ancient system of Club Med villages.

What would be the consequences for banks, regulators, States and citizens if Libra came to be used on a massive scale?

Payment and money transfers

If major players in the payment and money transfer industry, whether established or up-and-coming, have decided to join Calibra (the foundation that will manage Libra), it is because in the short or medium term, this currency represents a disintermediation risk for them in this market. Indeed, the size and number of customers of the actors forming Calibra makes an “uberisation” scenario plausible.

Credit activity and monetary issuance… eventually?

Calibra will not issue currency in the strict sense of the term, due to its perfect attachment to a basket of assets. As long as 1-for-1 remains the rule, the impossibility of creating Libras from scratch, which is what banks do with their national currency, will prevent Calibra and its satellites from playing the role of a traditional banking institution. But it would be, for example, entirely possible for a non-banking financial institution to lend Libras to individuals or companies. The surface covered by the Calibra actors and the 2.4 billion potential lenders and borrowers allow us to imagine the possible scale of such a “shadow banking” phenomenon.
Moreover, the Swiss foundation managing this “currency board” could very well, once Libra is accepted by a larger public, loosen the 1-for-1 constraint it currently wants to impose. Following the historic example of banks vis-à-vis precious metals, the foundation could one day easily start to create its own currency, strictly speaking, by creating Libras in a multiple of the quantities of currency received and invested in counterparty. At that point, the monopoly of the right to issue currency will have slipped out of States’ hands.

A reorientation of savings to the detriment of the private sector

Whether by allowing users to protect themselves from a risk of inflation or exchange in a given country, or to use an advantageous currency when making purchases, etc., Libra clearly raises the question of banking disintermediation risk. The 1 for 1 rule implies that the money exits the banking circuit to purchase Libras, and that the sums exchanged are invested by Calibra, essentially in sovereign debt. There would then be a portion of savings that could no longer be mobilised [locally] by banks in favour of private agents of all sizes [at the national level], from individuals to SMEs and large companies, as these savings would be called in exchange to finance, through the intermediary of Calibra, “safe” States.

A risk for States’ sovereignty

Countries with a weak currency could see a funnelling of money to the Libra, which would be impossible to contain as it would be accessible everywhere and to everyone. This would precipitate the devaluation of the country’s currency and the funnelling of savings outside borders. And when a country loses control of its currency, it loses a part of its sovereignty.

Free financial services are a fantasy; banking is a profession

If Calibra limits itself to putting in place a universal unit of exchange that allows users to buy from a conglomerate of partners and to benefit from commercial advantages, we can imagine that this cryptocurrency fulfils a part of the promise made. It would remain free and the partners would take on the costs (human, technological, etc.) inherent to the management of Libra, considering them to be marketing costs. But if the Libra system begins to move towards selling financial services, there is no doubt that the prices of these services will be the same as those offered by professionals in the sector.

Moreover, both in terms of payment methods and the potential financial services to come, Libra will be the focus of all regulators’ attention. Facebook’s announcement of its aim to develop Libra next year set off a series of reactions and investigations by prudential and monetary authorities in all countries, as well as by US Congress and regulators, generally more inclined to favour the expansionism of the Big Four companies. And if Libra respected the regulations that would have to be imposed on it, the cost in results would preclude the service from being offered free of charge.

A customer experience compatible with the Big Four universe?

Add to this that the “customer experience” will be far from resembling that of the universe Big Four companies offer their customers: services that are apparently free of charge, easy to use and totally instantaneous. The customer will, in effect, have to provide their identity before opening a Libra account, or will have to prove the origin of the money they wish to convert to Libra, in order to address the concerns of fighting the circulation of drug money, crime, arms trafficking, terrorism, as well as fighting against tax fraud, as regulators require banks to do.

Guaranteed compliance?

Nevertheless, the Libra system, even in accordance with the regulations of each country, would allow for such reprehensible uses (money laundering in all forms), as users could simply purchase Libras in countries with minimal or non-existent regulations and circulate them elsewhere.

Finally, in addition to the already vast amount of personal data collected by social networks in particular, providing payment, revenue and spending data to Libra would lead to a society where private lives become even more public. And this additional data would be used to continually boost the pressure of sales via increasingly intrusive targeted advertising.

Banks, however, ensure the confidentiality of this data.

Multi-dimensional risks

Some might think that this is all about protecting the interests of “old world” operators. This could not be further from the truth. In fact, it is strictly a matter of protecting citizens and monetary and financial stability, which is to say, ultimately, their well-being. This means protecting them from the risks of loss of sovereignty for the most fragile States, the reorientation of savings outside the private economy, the opportunities offered to the crime industry by an unregulated currency, and hazardous investments, such as the over-use of their own data for commercial purposes, or even, eventually, political ones.

At the same time, all banking actors must thoroughly explain the social and economic role of the bank: to bring its capacities to bear on the financing needs of its customers, and to take these risks themselves, on their own income statement, in a professional and regulated manner; financial risks, whether credit, interest rate or liquidity risks, that the majority of savers and borrowers do not want to take for themselves. It is this global role that allows the economy to finance its growth as robustly as possible. We must reflect on this carefully before finding ourselves, as the case may be, in the midst of a non-regulated banking disintermediation.

Economical and financial crisis Finance

When will the next financial crisis happen?

Post author By Olivier Klein
Post date 23 July 2019

Panel discussion with Lorenzo Bini Smaghi, Chairman of the Board of Directors of Société Générale and former member of the ECB Board; Charles Calomiris, Professor, Financial Institutions at Columbia University; Antoine Lissowski, Chief Executive Officer of CNP; Shubhada Rao, Chief Economist at Yes Bank; Wilfried Verstraete, Chairman of the Management Board of Euler Hermes; and Olivier Klein, Chief Executive Officer of BRED and Professor of Financial Economics at HEC.

The most recent major financial crisis led to a risk of deflation that justified unconventional monetary policies, with zero or even negative short-term and long-term interest rates approaching zero because of Quantitative Easing. Setting long-term interest rates below the nominal growth rate helps those with excessive debt regain their financial well-being more easily. At the same time and in conjunction, it also revives the economy.

Today, we are no longer exposed to the risk of deflation, given our undeniable growth and a sharp recovery in credit, albeit earlier in the US than in the eurozone.

The risk of a financial crisis therefore does not come directly from this, but from maintaining a very accommodating and even exceptional monetary policy, which is no longer necessary once there’s no longer any risk of deflation. In the United States though, this policy has slightly shifted with the Fed raising key interest rates beginning in 2016 and phasing out Quantitative Easing since 2017. Also in the Eurozone, net securities purchases due to Quantitative Easing have stopped since the end of 2018, with stabilisation of the ECB’s balance sheet without any reduction, but its zero or even negative key interest rates have remained unchanged.

In addition, there is now talk in both the US and the Eurozone of going back to rate cuts and possibly resuming net QE purchases.

Why? Because inflation is not where the central banks want it to be. Will it get there in the short term? That is not what we are discussing here, but it is not obvious that inflation will achieve its target in the short term. The effects of globalisation and of the technological revolution, as well as the current regulation in the labor market, seem to induce a flattering of the Phillips curve. Without a significant rise in inflation, can we constantly pursue this goal with near-zero or negative short-term and long-term interest rates?

More likely, the central banks tacit reason to do so is that they fear a rate hike that would end up posing serious insolvency problems for the private sector. But that is also the case for the public sector. The issue of fiscal dominance therefore seems to be coming into view, since the central banks seem to be under pressure to avoid compromising the solvency of States.

There is also the current fear of an economic downturn that explains the desire of central banks to pursue even more accommodating policies.

So, for all these reasons, it is generally agreed that very low interest rates are here for the long haul. In other words, they are “low for long”. I believe that this leads to a dangerous vicious circle, because keeping nominal interest rates below nominal growth rates for too long doesn’t help economic players to reduce their debt. It actually just encourages them to continue taking on even more debt. This also drives borrowers as well as savers and institutional investors to be increasingly reckless in taking risks: some in terms of their financial structure and others with regard to the future value of their investments so that they can gain at least some returns.

This leads directly to increased financial instability and therefore an increased risk of a financial crisis. If we look at all the financial crises historically and analytically, we can very clearly identify the signs of a rather mature financial cycle, which may cause a potentially significant financial crisis to return sooner or later. Of course, we never know exactly when. The three canonical forms of systemic crises are those associated with the bursting of speculative bubbles on wealth assets such as stocks and real estate, those associated with the bursting of a credit bubble, and liquidity crises. And of course, these three forms can combine with each other.

Where could the crisis come from this time? Probably not from a stock market bubble. P/E ratios are not excessive in relation to their past trends, even though indexes are breaking records and certain sectors seem to be overvalued. The real estate bubble, facilitated by extremely low interest rates, also doesn’t seem to have been an extremely serious problem so far. However, housing and commercial property prices continue to rise. Even general price index adjusted, in many countries they have returned to near or above where they were before the crisis, which itself was triggered in 2007 by a bursting real estate bubble tied to a credit bubble.

But above all, what is disturbing today is the credit bubble itself. It is not specifically a banking issue, because it touches on all forms of indebtedness also permitted by all the financial investors, investment funds, insurers, pension funds, and so on. The global debt ratio has increased dramatically over the last 10 years since the Great Financial Crisis. As we have said, this has been facilitated by interest rates that have been too low relative to the nominal growth rate for too long.

For example, global debt, including both the public and private sectors, was around 190% of global GDP in 2001, 200% in 2008, and 230% in 2018 (source: BIS). Advanced countries rose from about 200% in 2001, to 240% in 2008, and to 265% in 2018.

We therefore have not seen a global debt reduction, including in OECD countries, but there has been debt reduction only for certain economic agents and in certain countries.

However, this higher global debt ratio is not the only reason to fear the next crisis. As always during each identical phase of the financial cycle, it has been accompanied by stronger and stronger risk-taking by both borrowers and investors. These are individual savers or institutional investors (most of the time representing individual savers) who are seeking at least some returns, despite the interest rate structure grinding down to zero. It goes without saying that it is difficult to offer negative returns to savers. Given that, pension funds, insurers, investment funds, and banks are trying in good faith to find bonds and loans that pay off at least a little.

We are fully in the euphoric phase of the credit cycle in the sense that players are ignoring risk with the hope that interest rates will remain low for the long term and that growth will go on forever, so that the risks taken do not prove true. This type of phase is well identified historically, and the cycle even seems to be quite mature. Corporate loans are therefore being granted to firms with declining solvency, which in turn increases their financial vulnerability. Loans and credit are becoming longer and increasingly illiquid. More and more of these loans are granted in the form of bullet loans, with principal repayable on the final maturity date without regular repayments. This is an aberration for both the lender and the borrower, given that the borrower cannot repeat this process each year because of its medium size and “plays on” its ability to renew its loan on more or less favourable financial conditions once its loan or credit reaches its maturity. Even so, everyone is taking on more and more bullet debt.

And there is also more leverage, dangerously increasing the company’s financial risk intrinsically. In addition, the amount and quality of collateral or guarantees have fallen sharply in recent years. As for covenants, which allow contractual limits to be placed on the debt-to-equity ratio or EBIT, they have been completely distorted. Covenants are still quite frequent today, but since they are fixed at such low levels, this amounts to placing a limit that tends towards infinity. At the same time, risk premiums have fallen considerably, further increasing the vulnerability of lenders.

As such, banks, pension funds, investment funds, and insurers have begun to accumulate much more illiquid and much riskier assets with much lower risk premiums. Furthermore, for several years, borrowers have been increasing their leverage and resorting to longer and longer bullet loans with fewer and fewer financial constraints imposed by lenders, making their financial situation even weaker.

So, what are the factors that could cause the bubble to burst? Of course, everyone is talking about rising interest rates. And since the belief is that inflation – and therefore interest rates – won’t rise soon, it can ultimately be assumed that there won’t be any financial crisis.

But I do not agree.

Actually, a rise in interest rates would be detrimental to many players, especially zombie companies, those that would become insolvent if rates were to return to normal. I remind you that in the OECD, they represented 1% of companies in 1990, 5% in 2000, 12% in 2016.

But the risk is not just a potential rate hike that may not be on the horizon. It may also come from a sharp slowdown in growth because we have had coinciding financial cycles and real cycles. When that happens, the crisis is in full swing, and then there is a systemic crisis. In turn, a sharp slowdown may come from causes other than rising rates. For example, geopolitical causes may arise. Lorenzo Bini Smaghi mentioned several possibilities in this regard. Or simply a sharp slowdown may be due to the usual investment cycle, production or real estate investment.

A sharp slowdown in growth leads to a decline in revenues and cash flows. As a result, debt repayment becomes more difficult for both governments and businesses. This same slowdown leads to an increase in risk premiums and therefore an asset value that depreciates sharply, as well as a negative wealth effect that increases depression.

The problem of abrupt depreciation of assets is probably lower for insurers and pension funds, because the money is in principle locked in for the long term (although this characteristic is now less true for life insurers in France) and because of the protection of accounting rules specific to insurers in particular. Lastly, the prudential rules (Solvency 2) for insurers provide greater protection against this type of risk. However, this risk is much greater for investment funds, which, in the event of a significant downturn, would induce a major negative impact on the rating of their assets, which could lead them to suddenly sell off their assets, and all the funds at the same time. And if there is a sudden depreciation of the value of the assets held, investors could start to pull out of the funds. In addition, funds generally offer liquidity to their investors but are increasingly buying illiquid assets. By the way, I hope that “fund runs” we have seen quite recently are not indicators of a forthcoming crisis. On the banks side, they are much better capitalised than before. So, in my view, they are less risky. And they are better protected against liquidity risk because of the ratio (LCR) that they must respect in this regard.

In my opinion, the next risk of a major financial crisis will instead stem from shadow banking, in the general sense. All the more the case with the macro-prudential policies, which are supposed to stem the risk of the building up of financial instability, because they only target the banking sector and not shadow banking. In addition, the structure of the yield curve with rates flattened to zero, sometimes even with central bank deposit rates below zero and long-term rates very close to or below zero, as in the Eurozone, is gradually weakening banks. They will thus gradually be less able to lend at the same growth rate. But this shouldn’t be felt for a few more years. In the short term, banks are undeniably more secure than before.

In conclusion, the danger is that central banks, which have quite rightly fought catastrophic risks with highly innovative instruments, will want to use these same weapons to cope with downturns and to protect players carrying excessive debt for too long. The monetary policy regime will lead to a long-lasting situation of zero interest rates and will be one of the main determining factors of the financial cycle dynamics. In that case, it would undoubtedly delay the next financial crisis but would considerably increase its force.

Bank Finance

Planet finance or the financing of the real economy

Post author By Olivier Klein
Post date 6 May 2019

Read my talk on the essential role played by regional banks given at a conference organised by IHEDATE in February 2019 on the theme of “Financial players, approaches and territories”.

Through the title “Planet finance or the financing of the real economy”, my aim is not to defend the banking system as a lobbyist but to explain the usefulness of commercial banking. And also to explain that, in France in particular, two banking models exist, each with its own interest and usefulness, though the two are not identical.

First, there are banks with a centralised model, such as BNP Paribas and Société Générale. These groups are listed on the stock market.

The other model is that of cooperative or mutualist banks, including Crédit Mutuel, Crédit Agricole and BPCE, grouping the Banques Populaires and Caisses d’Épargne. These groups have a different organisation structure, with a full-fledged bank operating in each region and territory under their brand. They also have a singular governance system. Each of these regional banks has a local board of directors or supervisory board that controls its executive. Each regional bank has its cooperative members, which hold the bank’s capital. Moreover, these regional banks are the shareholders of the central body of the cooperative and mutualist groups.

This system has regularly acquired market shares in France and delivers high-performance management ratios.

The relational, decision-making and managerial proximity of cooperative banks

What, then, are the key reasons for which the regional-bank system is developing strongly in retail banking? The reasons are quite simple.

The first is decision-making proximity. At regional banks, decisions on credit, even for the most significant amounts, are made locally, in the region. Companies also like working with banks whose decision-making centres are located in their territory.

Another key advantage to my mind is managerial proximity, which is a rather neglected point. At cooperative banks, the executives and managers have long-standing presence in the region. They contribute to explaining the bank’s strategy. The bank’s organisational decisions are also made in close connection with employees. This managerial proximity is crucial because retail banking is all about services. The ability to rally teams to the benefit of customers makes all the difference and stands as a decisive factor in making a difference in terms of results.

The third and equally essential point is relational proximity. This takes a number of forms. The relationship between the customer and the bank must be a lasting one. Our ability to properly perform our advisory business, to create loyalty and achieve profitability over the long term hinges on this relationship. In response to “low cost” banks, which recently were in the spotlight once again, BRED devised a slogan, “Banking without distance”. We can work remotely, by telephone or email, if the customer either cannot or no longer wants to visit the branch, but they can always do so if they like. And they keep their dedicated advisor. We are doing away with physical distance. But we are also doing away with relational distance, by not placing a distance between ourselves and the customer. And we seek to bring the customer added value, by providing them with the best, most appropriate advice possible. Relational proximity is also achieved through a denser network of branches. Retail banking market shares are also revealing regarding the coverage of the branch network. This is irrefutable. Relational proximity is also boosted by long-term relationships between customers and their bank.

This relational proximity can also be seen more globally. Congruence between the bank and its region and territories is essential. If we do our job well, we foster the growth of the territory. Which means that cooperative banks are in symbiosis with their territory. If the region is doing well, the bank is doing well. And vice-versa. The interests of the territory and the bank are convergent. Lastly, all regional banks are in one way or another committed socially to each territory. Some of them work in sports, others in culture, education or equal opportunities, all of which serve to improve social cohesion and the attractiveness of the territory.

And in their construction, all of these full-fledged banks are headed by entrepreneurial directors, true leaders of banking midcaps. This contributes to the performance of this type of bank.

In addition, the governance of banks, as I mentioned in my introduction, is vital. Their boards are composed of customer-members living in the same territory. The governance itself of cooperative banks is organised so as to focus not simply on customers, since it is our customers who are on our board, but also on regions and territories, since it is the customers of the region that make up the board of directors.

I would now like to talk about the economic usefulness of territorial banks. As we all know, France is a highly centralised country in terms of its decision-making processes, its ministries, and the headquarters of major groups. The system is very different in Germany, Italy, Spain and Switzerland, and in many other countries. Regional banks are important in these countries. Companies and the major decision-making centres are more evenly spread out across the country.

Regional banks as an antidote to strong centralisation in France

In France, regional banks are a possible, but real, antidote to the country’s highly centralised system.

Regional banks collect savings and grant loans in their territories. It is unthinkable to allocate savings collected in, say, Auvergne to the financing of projects in Alsace, or vice-versa, on the grounds that it would be more profitable in one than the other. This runs counter to our way of thinking, being and existing. Everyone today is championing short distribution networks; I am not sure if this a good thing or not. But whatever the case, we provide a short distribution network. And even BRED, which is present in several territories, works in this way in each one of them. We do not reallocate to the detriment of certain territories. There is no fungibility of savings in the regional banking system that could serve to move and reallocate savings to the detriment of one region and the benefit of another. It is vital to highlight and promote this system, as it serves to support and finance the fabric of SMEs in the regions.

Lastly, I would like to talk about the usefulness of traditional commercial banks, cooperative or otherwise. I say “traditional” because, while they are continuously modernising to address the expectations and needs of their customers, they continue to do the same banking business in essence, i.e. achieving correspondence, through their intermediary, between those with financing capacities (households and companies alike) and those with financing needs. This, quite simply, is working towards the financing of the real economy.

It is sometimes said that the financial markets could very well replace banks. This is an aberration, as it would result in substantial savings not being used to finance the economy. The financial markets work well for a limited number of economic players, because issuers require sufficient critical mass to achieve market listing and borrow, and because savers in their large majority lack the necessary skills to make the right choices. Furthermore, unlike banks, the financial markets do not take risks in the place of players in the real economy. The lion’s share of players with a financing capacity are unable to tap the financial markets in order to finance private individuals, professionals and SMEs because they are unable to manage their credit analysis or monitor them over time. Banks, however, are specialised in the processing of information contributing to that end. And, in a key aspect, banks support credit, liquidity and interest-rate risks on their income statement that would otherwise be borne by the lenders or the borrowers. Banks, then, serve to take risks that companies or natural persons do not want to take. Which is something that the financial markets do not do. The role of banks is thus irreducible.

To conclude, a close look at the current work, led in particular by Nicole Notat and Jean-Dominique Senard, on redefining the company and rethinking corporate governance by taking into account not just the interests of shareholders but also those of all stakeholders – employees, customers, society – demonstrates the refound modernity of cooperative banks. Through their construction – their customers being their shareholders and their representatives their board members – they are integrating into their governance itself the new direction favoured by companies. And as we have seen, they are fully contributing to local and regional finance, by taking into account the interests of the regions in which they operate.

To return to the theme of the conference, the economic momentum of territories requires local financing. Which cooperative banks provide. While they are perhaps not alone, this is their core vocation.