Financial System of France - Essay Example

? Financial System of France Table of Contents Introduction 2 Overview of French Banking System Structure 2 Overview of French Financial System Structure 3 Evidence and Analysis 4 Functions of Each Establishment 4 Banking Risks and Risk Management Techniques 6 Trading Operations and Financial Regulatory Bodies 7 Conclusion 8 Global Financial Crisis on French Banking System 8 Global Financial Crisis on French Financial Market 9 Bibliography 10 Introduction This discussion provides a brief overview of the structure of the banking and financial markets in France. It also includes the role of the central bank within the banking system. In addition, bank’s main activities and risk management techniques in French banking system are discussed. Trading operations of financial institutions together with the role of financial regulatory body within French banking system also form part of the paper. A concluding remark, which briefly discusses the impact of the global financial crisis on France financial system winds up the paper. Overview of French Banking System Structure French banking system is composed of approximately 450 banking business entities, which operate close to 40,000 branches (Chance, 2003). With this magnitude banking institutions, approximately 60 million people are considered as the banked segment. One of the defining characteristics of French banking system is the proximity of financial and non-financial institutions to the customers, which provide adequate banking services and products (Chance, 2003). Nonetheless, all organizations providing banking services operate under authorized establishments. Authorization of establishments defines the scope of banking activities. The establishments authorized include general-purpose credit institutions, investment service providers, and specialized credit institutions. All the commercial banks and other financial institutions within France are regulated and controlled by Banque de France, the French Central Bank. Linked to the European Central Bank, Banque de France has been effective in administering monetary policies and ensuring compliance amongst financial organizations (Chance, 2003). Some of the core functions of Banque de France are formulation and implementation of monetary and credit policies, issuance of currency, ensuring financial stability, monitoring French’s financial markets, and controlling all the foreign reserves. Banque de France is usually administered by a General Council having the responsibility of developing and carrying out all activities that relate to monetary policies. Overview of French Financial System Structure French financial (stock) market has primary and secondary markets. Primary markets provide vistas for introduction of new securities while secondary markets are involved in the actual trading. Paris Stock Exchange market had four markets prior to 2005; first, second, new, and free markets. The trading on stock had to be done across these four markets. Paris, Bruzelles, and Amsterdam Stock Exchange markets merged into Euronext Stock Exchange Market, which led to free market being subsisted and replacement of other markets by the Eurolist market. Due to increasing volume of transactions, Euronext Stock Market expanded to cover Portugal and United Kingdom in 2003 though still under the control of Euronext Paris. Currently, Euronext, having a volume of approximately US$1.9 trillion (Yahoo Finance) by trading, has all the French and foreign companies that subscribe their shares to the public. Importantly, Euronext through merger with New York Stock Exchange in 2006 led to the establishment of the current NYSE Euronext. Within Euronext, the main stock indices relate to either market or activity with the main one being the CAC 40 belonging to SBF 120. Amazingly, CAC 40 makes up 75% of all the stock exchange transactions. On the other hand, blue chips of CAC 40 such as Air France KLM, Arcelormittal, and AXA amongst others are indicated in the appendices. French financial market is composed of public and private companies, financial mediators, and local authorities amongst others. Cash and deferred settlements are the two main modes of payment within the French stock market. Evidence and Analysis Within Europe, French banking system is considered as one of the highly efficient systems given the control and regulation provided by Banque de France. Other than the Banque de France, French Central Bank, there are commercial banks, which are responsible for carrying out the mandates and responsibilities as granted by the central bank (Chance, 2003). Responsibilities, roles, and mandates of commercial banks and other financial institution highly depend on the category or establishment under which the bank or institution is authorized. As identified earlier on, there are three main establishments authorized within French Banking system. Each establishment has particular responsibilities and roles as provided for and directed by Banque de France (Curtis & Klapper, 2005). Nonetheless, there are universal roles that commercial banks within French banking system perform. Such universal roles include accepting of deposits, provision of credit facilities, being custodians of valuable materials, as well as providing financial advice to different customers, either individuals or business entities. Functions of Each Establishment General-purpose credit institutions are the first form of establishments authorized by Banque de France to engage in financial services and products. In this category, the authorization covers general banks as well as mutual and cooperative banks (Valenti, 1998). From the authorization, general-purpose credit institutions are mandated to carry out specific functions, which include receiving of funds from the public for safe custody, engaging in credit operations, and providing customers, both individuals and business entities with means of payments (National financial markets..1994). Other than these three specific activities that general-purpose credit institutions are mandated to carry, the authorization also allows them (general-purpose credit institutions) to provide foreign exchange services to individuals and business entities (Federal Reserve System Board…2011). Transactions involving gold, precious metals, as well as coins coupled with provision of financial advice also fall under the docket of general-purpose credit institutions even though they rarely perform such functions. Specialized credit institutions on the other hand do not have the full authorization to engage in full range of banking operations. Three main activities that specialized credit institutions may comfortably perform include monopoly of issuing of pledge loans especially on the municipal credit banks, provision of different financial services by financial companies, and engaging in some public-interest tasks (Curtis & Klapper, 2005). Some of the public-interest tasks that specialized credit institutions may engage in include regional development, financing of real estate, as well as financing small and medium enterprises. In addition, financial companies in this category are responsible for providing consumer loans, financing lease, corporate loans, guarantees, factoring functions, and sureties amongst others (National financial markets..1994). All these functions or roles are carried out within the regulatory framework as provided for by the Banque de France. Every specialized credit institution must ensure that they adequately comply with such regulations, provisions, or frameworks. Thirdly, the other category of establishment authorized to conduct banking services is the investment service provider. Investment service providers are composed of credit institutions, which offer both banking and other financial services (Federal Reserve System Board…2011). Specifically, investment service providers engage in various services that include receipt as well as transmission of market orders, trading on various forms of portfolios, executing orders with respect to third parties, and managing portfolios on behalf of third parties amongst others (Buchan, 1997). Fundamentally, capital markets are usually operated on the basis of functionality of investment service providers (Gapen, Gray, Lim & Xiao, 2008). French banking system has well-developed capital or financial market, which is made up of several investment service providers (National financial markets…1994). Other than providing aforementioned services, investment service providers are mandated by Banque de France to provide custody for third parties’ valuable materials in addition to financial and administrative advice especially with respect to investments (France Commercial Banking Report 2011). Other investment service providers are engaged in managing wealth through provision of advisory services as well as ensuring that individuals and business entities take part in effective and efficient financial instruments. Banking Risks and Risk Management Techniques Banks in France are faced with four different types of risks; liquidity, credit, market, and operational risks. Whereas liquidity risks refer to scenarios where assets cannot be sold as fast as possible in order to avoid associated loss, credit risks involve failure of borrowers to pay debts. Market risks on the other hand are risks associated with instability of various parameters in the market, which lead to loss (Buchan, 1997). Lastly, operation risks may be direct or indirect loss that arises from lack of adequate, effective, and efficient resources such as staff and internal systems amongst others. Reduction of these risks involves diversification of portfolios as well as markets. In addition, banks are required to comply with prescribed management standards, also known as “prudential limitations”. In this perspective, two prudential ratios of liquidity and long-term liabilities ratios must be considered whilst engaging in various operational activities. Other than prudential ratios, the Basel II is another prudential concept applicable in mitigating risks within the banking sector. Basel II is a tool applied in evaluating the minimum amount of capital that banks and other financial institutions should have as reserves capable of meeting both financial and credit risks (Gapen, Gray, Lim & Xiao, 2008). Basel II through solvability ratios ensures that banks are always ready to fight any financial or credit risks from their reserves. In addition, there is need to join bodies such as l’Association Francaise des Banques, which will provide guidelines to risk management. Trading Operations and Financial Regulatory Bodies Four main categories of operations characterize the French banking system; individuals, companies, treasury, and amongst banks. Operations between banks and individuals on one hand and companies on the other hand are the most common (Buchan, 1997). In addition, French banks engage in treasury operations especially in respect to interventions within money markets. What’s more, there are operations that occur amongst banks themselves. Operations amongst banks include trading on securities, loans and deposits transfers. Other than these principal operations, French banks are involved in provision of equity for industries and engaging in insurance contracts both general and life. Amazingly, banks are diversifying away from their main operations (Gapen, Gray, Lim & Xiao, 2008). A good example is the BNP Paribas that has so far engage on real estate as well as human services. Like many other banks, French banks operate on a definite assets and liability structure. Four main types of assets for the structure include physical, loans, reserves, and investment securities. Physical assets contribute to a smaller portion of revenue while loans contribute to the largest share (Buchan, 1997). On a different perspective, reserves as form of assets are used by French banks to provide security for financial and credit risks while investment securities may form part of such security for financial and credit risks (Gapen, Gray, Lim & Xiao, 2008). Liabilities within French banks on the other hand are three fold; transaction deposits, provisions, as well as other forms of deposits such as certificates, savings accounts, and agreements regarding purchases. As identified earlier on, French banking system has investment service providers that engage in enhancing trading operations. Trading operations in respect to investment portfolios are highly influenced by French banking system through provision of advisory services as well as the required finance (Federal Reserve System Board…2011). Financial regulatory bodies such as CECEI, Commission Bancaire, CCLRF, AMF, and CCSF in conjunction with Banque de Frence provide regulatory frameworks and policies (Curtis & Klapper, 2005). The main reason for engaging in such regulations within the banking system is to protect the economy from recession as well as economic downturn (Buchan, 1997). Conclusion Global Financial Crisis on French Banking System Contemporary global financial crisis significantly affected the operations of French banking system. Various components of the French banking system such as profitability, asset quality, capital adequacy, and leverage were highly affected by the global financial crisis (France: Financial services 2003). Due to the global financial crisis, profitability in terms of ROAA and ROAE significantly reduced thereby affecting operations of banks and other financial institutions. There was a heavy erosion of the net interest margin obtained by French banks, which consequently affected the profitability of such firms (Buchan, 1997). Apart from profitability, the global financial crisis affected the asset quality when the loan portfolios of various banks reached par value. There was a significant decline in NPL of banks in 2007. Capital adequacy and leverage were also significantly affected by the global financial crisis. Global financial crisis caused the buffering of French banks where government had to engage in recapitalization in order to bail out some of the banks, which were showing signs of collapsing (Federal Reserve System Board…2011). There are some financial institutions that experienced shrinking of capital to the extent that they were forced to merge with other financial institutions to enhance continuous operations. In terms of leverage, the global financial crisis did not spare French banking system (Chance, 2003). Before the global financial crisis, there were no signs of deleveraging. However, the resurgence of global financial crisis after the first one led to development of signs of delivering within French banking systems. Indeed, the global financial crisis negatively impacted on the French banking systems. Most banks were forced to reduce leverage in order to avoid further negative effects of the global financial crisis (Buchan, 1997). No doubt therefore, French banking system was highly affected through global financial crisis, which was experienced in the whole global economy. Global Financial Crisis on French Financial Market Like banking sector, the French financial market experienced immediate and considerable impact due to the 2008 global financial crisis. For instance, the global financial crisis led to collapse of Bear Stearns, which caused serious decline in financial market operations. When BNP Paribas could not operate anymore due to the global financial crisis, serious problems were experienced within the same market. CAC 40 lost approximately 1000 points within a period of one month as a result of the global financial crisis (Buchan, 1997). Bibliography "National financial markets: France", 1994, OECD Journal.Financial Market Trends, , no. 57, pp. 124-124. Buchan, D. 1997, FRANCE Centralised system ready for big bang, London (UK), United Kingdom, London (UK). 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Owen, D. 1999, A pillar of the economy: BANKING by David Owen: Much less provincial than it used to be, Monacos system is similar to that in France, London (UK), United Kingdom, London (UK). Valenti, S. 1998, Call for reform of commercial law courts France Report Says Company Liquidation System Needs Overhaul, London (UK), United Kingdom, London (UK). Read More