RPT-UPDATE 1-Socialists, despite rhetoric, would not carve up French banks

Tue Apr 10, 2012 2:01pm EDT

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(Repeats for additional subscribers)

* Socialist government would not favour Vickers option on banks

* Not in favour of breaking up universal banking model

* Socialists open to Volcker rule, adapted to French reality

* Rules should be known by 2013, Hollande adviser says

By Daniel Flynn

PARIS, April 10 (Reuters) - France's Socialist presidential frontrunner has branded finance his real enemy but his government would be more lenient in carving up banks' activities than regulators in nearby Britain, regarded as a global haven for finance, advisers say.

Francois Hollande, who leads President Nicolas Sarkozy comfortably in polls ahead of France's May 6 presidential runoff, has said he wants to tax banks more heavily and separate their "socially useful" activities from those seen as speculative, in a bid to avoid a repeat of the financial crisis.

That has sent shockwaves through France's bank sector - the second largest in the euro zone by market capitalisation - which has long relied on a universal banking model where investment and retail activities are grouped under the same roof.

More than in so-called 'market-based' economies like Britain and the United States, French banks play a crucial role in financing the real economy, accounting for roughly two-thirds of credit to businesses. In Britain and the United States, bond issues and securitisation make up a larger share.

Supporters of the universal banking model argue that it brings stability. French banks like BNP Paribas and Credit Agricole have benefited from sizeable "cash-cow" retail banks, which balance volatile capital markets earnings.

"This is not about breaking up big institutions which are extremely useful for the financing of the French economy," former Socialist finance minister Michel Sapin, the architect of Hollande's programme, told Reuters.

For French banks, a ring-fencing of their lucrative retail operations of the kind proposed by Britain's Independent Commission on Banking is the worst case scenario.

A less worrying option for France's banks would be the U.S. Volcker rule - a part of the Dodd-Frank financial oversight law named after former Federal Reserve chairman Paul Volcker and due to take effect in July.

That limits proprietary trading activities by banks, including hedge funds and private equity, but exempts trading products that many firms rely on for their core banking activities such as currency or interest-rate derivatives.

French banks have made their preferences plain. In a recent interview, Societe Generale's Chief Executive Frederic Oudea reiterated his opposition to a Vickers-style reform but said banks would accept a European Volcker rule.

Having met with senior French bankers, those close to the Socialist candidate say they also favour that option. "We prefer the Volcker rule," said one Socialist source.

NO BANKING NATIONALISATIONS

Sapin said the Socialists were aware that a swift clarification of the rules was important to remove uncertainty for investors and banking executives, and the aim was to have the legislation clear by next year.

"We need time to negotiate and discuss with people in the profession. At the same time we need to move quickly," Sapin said. "It would be good to have the rules known for 2013."

"We need to adapt this reform...to French reality."

A third source close to Hollande noted that the stated aim of the Vickers report was to prevent a repeat of a costly taxpayer bailout of banks - something that never happened in France.

"The Vickers system is not suited to France," he said. "It's much more the Volcker rule which we have in mind, with a clear functional separation of activities ... The systemic risk from banks can be handled by the Basel III capital rules."

While British regulators have demanded additional capital buffers on top of Basel III requirements, French officials have said that its system of prudential regulation, involving close scrutiny by the regulator of the quality of banks' balance sheets, makes such tough capital limits superfluous.

A Volcker-style rule would hit BNP and SocGen's estimated 2013 profits by up to 6 percent, substantially milder than the 11 to 13 percent hit if a full ring-fencing of capital-markets activity was brought in, according to research from Citi.

French banks already slipped down the league table of global investment banking fees in the first quarter as they shrank their balance sheets. BNP Paribas, which ranked as a top 10 firm in global investment bank fees a year ago, fell four places as its income shrank more than 26 percent.

While all French banks have trimmed their investment banking activities, they remain concerned by what would fall within the remit of a Volcker rule.

Societe Generale, where corporate and investment banking has been the backbone of the business in recent years, has said it aims to preserve its global leadership in equity derivatives.

The area, which BNP Paribas has also targeted in a bid to diversify away from its fixed income business, is seen by some analysts as one of the few bright spots for growth in revenues. (Additional reporting by Catherine Bremer, Matthias Blamont and Matthieu Protard)

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