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18 March 2019

Financial Times: France tells banks to set aside more capital

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France has told its banks to put aside more capital as it fears credit in the country might be growing too quickly and the financial system needs to hold more ammunition in the face of growing risks.

Acting on a proposal from the Banque de France, the country’s High Council for Financial Stability raised the so-called “countercyclical capital buffer” from 0.25 to 0.50 per cent of a bank’s risk-weighted assets in proportion to their French exposures.

“French banks are healthy and have done their work in providing credit to the economy but we are using this precautionary instrument to provide a cushion when the cycle turns. We will be ready to ease these counter cyclical requirements when necessary,” said François Villeroy de Galhau, governor of the Banque de France, to the Financial Times after the decision.

The council, which is chaired by French finance minister Bruno Le Maire, said that in the face of geopolitical uncertainty, “the risk of a re-pricing of financial assets remains elevated”.

The increase in private sector debt in France to more than 130 per cent of GDP also weighed on the council’s decision, with bank lending to non-financial companies growing at 6 per cent a year, according to the central bank.

“The momentum observed in recent years has led France to a high level of indebtedness of non-financial private actors, which is higher than the average for the euro zone and those of our main partners,” said the council in its statement published after the market had closed on Monday evening. The central bank has forecast French economic growth for this year at 1.4 per cent.

France used the countercyclical capital buffer for the first time last June when it raised it from zero to 0.25 per cent. The buffer is a way of forcing banks to set aside capital in good times in order to keep lending to the wider economy at a steady level, even during an economic downturn.

The increase in the buffer is not intended to directly slow down the growth of credit, but it is instead meant to operate as a rainy-day fund in the event of a future crisis. Crucially, it can be “turned off” during bad times.

In 2017, the Bank of England also used this so-called macroprudential tool, as have Hong Kong, Switzerland and Sweden.

Full article on Financial Times (subscription required)

© Financial Times

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