(Repeats for additional subscribers)
* Socialist government would not favour Vickers option on
* 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 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
"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
"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