Public Banks in France: Current Problems and Prospective Issues

The French banking system as a whole has performed poorly since 1992. The commercial banks (members of the French Bankers’ Association) suffered net losses in 1992, 1993 and 1994. Their resumed profitability in 1995 still leaves them with net returns on equity and on total assets lagging far behind those of their US, UK or Swiss competitors. Two major institutions nearly collapsed and needed strong state support to be able to go on operating. Credit Lyonnais has been the most striking case but, more recently, the Credit Foncier de France debacle early in 1996 has also strongly shaken the French financial community and surprised the French public at large. Both institutions belong to the public banking sector, together with a few other loss-making institutions like Societe Marseillaise de Credit or CEPME (Credit d’Equipement des Petites et Moyennes Entreprises), to take only two examples. This may be no accident. After a decade of financial innovation and deregulation the French banking sector is facing a classical outcome of such moves; fierce and sometimes unsustainable competition, overcapacity, shrinking margins, rising bad loans and very poor (even negative) profitability. All players suffer a lot but important difficulties arose in the public sector for at least two major reasons. Firstly, many public banks expanded their lending activity tremendously: they entered riskier external growth and diversification strategies and did not cut operating costs fast enough as they felt backed by some form of public support.