How Safe is your Money in a French bank?
22nd May 2023
Recent banking failures in the USA and Switzerland inevitably beg the question about the resilience of French banks.
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Such speculation is not common-place in France, where in a recent Harris poll nearly 70% of French nationals expressed confidence in their bank. Indeed, banks in France consistently enjoy one of the highest ratings of any institution in the country.
This confidence is also shared by rating agencies. In their latest review of the French banking system, Fitch report that: 'The six largest French banks have sound liquidity buffers to absorb potential liquidity pressures that could come from the current volatile market conditions, and they are well-positioned to absorb the short-term negative impacts of higher interest rates."
Their view is also shared by ratings agency S&P Global, who state that: "French banks enjoy robust balance sheets and diversified banking and insurance activities, which will support their creditworthiness amid deteriorating operating conditions."
The ultra cautious IMF has also given the sector a clean bill of health: "The banking sector has weathered the crisis well and supported the economic recovery, but global financial stability risks are increasing. The authorities recently decided to raise the counter-cyclical buffer, a capital requirement, to increase the cushion against any sudden deterioration of financial conditions. Continued vigilance will be required to guard against any emerging weaknesses in banks’ lending portfolios."
The positive outlook for French banks has much to do with changes made to the banking system in Europe after the 2007-2009 global financial crisis.
Since then, a far stronger supervisory and regulatory system has been put in place, with the European Central Bank (ECB) at its apex. All banks are required to hold high levels of capital and liquidity and adopt prudential standards and ratios. They are also subject to very substantial supervision. In France, banks have tripled their capital base since 2008 and all banks across Europe are obliged to hold minimum amounts of equity and bail-out funds to absorb losses. Unlike in the US, their business model is generally based on wide and diversified funding and ring-fencing speculative activities.
Deposit Guarantee Schemes
More prosaically there are also several deposit guarantee schemes that protect depositors in the event of a bank failure.
The schemes operate across Europe; the one in France is called the Fonds de garantie des dépôts et de résolution (FGDR).
The FGDR was created in 1999, and since 2014 forms part of European wide legal framework under which all countries in the EU are obliged to have such a scheme.
The FGDR is funded directly by a levy on the banks; it is not public money.
In the event of the failure of a banking institution, the scheme will compensate up to €100,000 per depositor, per bank and for all official currencies. That rule operates across the EU.
Accordingly, if you held €200,000 on deposit in two different banks, your funds would be protected by the scheme.
A couple with a joint bank account are each considered to be depositors, with total cover of €200,000 per bank.
The same applies for business accounts with a separate legal entity when you will be identified as two different customers.
That figure increases to €500,000 for temporary high balances (dépôts exceptionnels temporaires) received from an inheritance, gift, the sale of real estate, or redundancy/compensation payment, provided the sum was received within 3 months of the bank failure.
A separate scheme is in place for funds deposited in regulated French bank accounts, such as Livret A, the LDDS (Livret de Développement Durable et Solidaire), and the LEP (Livret d'épargne Populaire). The sums in these accounts are guaranteed by the State, and not by the FGDR deposit guarantee mechanism. The guarantee is a maximum of €100,000.
The FGDR also provides an investor compensation scheme for holders of shares, bonds or units of investment funds housed in a securities account up to €70,000 euros for each client, by an investment service provider, such as a bank, other than portfolio management companies. The FGDR will only intervene if the securities are no longer available or have disappeared, and the provider is in default of payment.
There is a separate personal guarantee scheme in place for life insurance policies (assurance vie) sold by life insurance companies. The scheme is called the Fonds de Garantie des Assurances de Personnes (FGAP). It protects up to €70,000 per person, per insurer.
In total therefore, several hundred thousand euros are covered by guarantee schemes in France.
On-Line Banks
In recent years there has been a substantial growth in on-line banks operating in France. Several of the banks are foreign based, whilst others are French.
The general rule is that provided they are granted a banking licence by the French bank regulator, Autorité de Contrôle Prudentiel et de Résolution (ACPR), they automatically become members of the FGDR, offering the same level of protection as the main retail banks. This applies whether it is a French bank or a French subsidiary of a foreign bank.
Many of these on-line banks are in fact subsidiaries of French retail banks. That is notably the case for Boursorama Banque (Société Générale), Fortuneo (Crédit Mutuel), Hello Bank! (BNP Paribas) and BforBank (Crédit Agricole) Eko (Crédit Agricole) and Ma French Bank (La Banque Postale).
Others include N26 which has a banking licence in Germany, with funds therefore guaranteed by their home country, Germany. It is the same for Bunq (Netherlands) and Revolut (Lithuanie) in the EEA. The telecoms providor Orange also has an on-line bank, which it owns jointly with insurer Groupama.
The profitability of these new 'néobanques' is far from being an established fact, and the ease with which it is possible to open an account with them is also potentially a structural weakness.
Alongside the growth of on-line banks the market has also seen the development of several major payment services companies, such as Wise, Nickel and Lydia. Such companies are unable to offer credit or overdrafts, and although both are approved by the regulatory authority in France, they are not part of any deposit guarantee scheme. They have a separate ring-fencing scheme, in which deposits are lodged with a credit institution which is part of the deposit guarantee scheme that would operate in the event of bankruptcy of the company.
You can verify if your on-line bank is in the deposit guarantee scheme on the website of FGDR and clicking on 'Vérifier la protection de mon établissement'.
Is it Enough?
The deposit guarantee schemes are in place to reassure savers and investors that their money is safe.
In reality, however, in the highly unlikely event of the systemic failure of the banking system the funds available through the FGDR are woefully inadequate, representing less than 1% of all deposits held by the banks. As FDGR themselves state, they only hold funds "proportionate to the risk."
However, the prospect of a complete collapse is largely theoretical, for other national and European mechanisms would come into play. As FDGR state "In the event of difficulties for a systemic institution, resolution mechanisms at national or European level would then be triggered." The toolbox includes an €80 billion emergency fund held at a European level called the Single Resolution Fund (SRF), which can also offer bridging finance. The European Commission also recently published plans to increase the mutualisation of risk amongst Member States.
In addition to funds at a European and national level, it is also likely that there would be direct government intervention, such as nationalisation (Northern Rock in the UK), or action for the failing bank to be backed into a competitor bank, as occurred with First Republic bank in the US recently, which was acquired by JP Morgan.
Where banking failures have occurred in Europe in recent years, they have been well contained. In 2016, when the Spanish bank Banco Popular collapse, it was purchased by Sandander for a symbolic euro, with all funds of depositors protected. Similarly, in the collapse of several Italian bank in the recent past (Paschi di Siena, Veneto Banca, Banca Popolare di Vicenza) the government put its hand in its pocket to rescue them.
In the end of course, nothing is guaranteed, but the safeguards now in place mean that the risk to depositors is very remote.
Those who remain sceptical about the strength of the banking system in France might be best advised to adopt the strategy used by professional investors, which is not to put all of your eggs in the same basket!
If you have substantial cash savings, then deposit them with more than one bank, potentially across more than one country, and consider reducing your exposure to cash risk by investing in tangible assets, such as real estate and precious metals, neither of which are likely to disappear in a total meltdown.
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