French banks have low levels of liquidity relative to other large European banks, according to S&P Global Market Intelligence data, and their reliance on less "sticky" wholesale funding may exacerbate risk amid the coronavirus pandemic.

In a sample of European banks with assets of more than €100 billion, the liquidity coverage ratios of French behemoths Société Générale SA, BNP Paribas SA and Crédit Agricole SA were all in the bottom five, with ratios of 119.0%, 122.8% and 129.8% at the end of 2019. Those of Crédit Agricole and Société Générale had declined year over year.

Paris-based Groupe BPCE, which owns retail networks Banque Populaire SA and Caisse d'Epargne, and investment bank Natixis, reported that its LCR for the period was an average of 141%, compared to the regulatory minimum of 100%.

The liquidity coverage ratio measures banks' ability to withstand cash outflows. It is calculated by dividing a firm's stock of high-quality liquid assets by total net cash outflows over a 30-day period.

As the global crisis worsens, companies across the continent are issuing profit warnings, with some moving to draw on revolving credit facilities that banks will have to honor. For example, Air France-KLM Group said March 13 that it had drawn €1.1 billion from a revolving credit facility.

That will put strain on lenders' liquidity, and S&P Global Market Intelligence data shows that the LCRs of many major European banks worsened in the run-up to the coronavirus crisis. The French banks' reliance on wholesale funding, whereby they source money from other banks, governments and other large institutions, exposes them to the whims of the market.

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Crédit Agricole, Société Générale and BNP Paribas are quite heavily reliant on the wholesale funding market, with retail deposits making up a lower portion of their funding, Johann Scholtz, an analyst at research and investment management firm Morningstar, said via email.

"Retail deposits are viewed as much more sticky than short-term wholesale funding," he said.

French banks rely on more "expensive, market sensitive" wholesale funding because most of the deposits from regulated savings accounts, known as Livret A, go to the state-owned Caisse des Dépôts et Consignations, Daiwa Capital Markets said in a research report in May 2019. The money is then used to pay for social projects such as public housing.

Wholesale funding, capital

In a report on the French banking sector in July 2019, the IMF said French banks' reliance on wholesale funding was "sizeable," potentially putting pressure on lenders' liquidity buffers in the event of an economic shock.

SocGen's wholesale funding as a percentage of total liabilities stood at 37.95% at the end of 2019, while BPCE's stood at 39.31%. Crédit Agricole Group's was 25.14%, and BNP Paribas' was 29.91%. Other large European banks are less reliant — U.K.-based HSBC Holdings PLC's ratio was 22.24% and ING Groep NV's 21.64%.

"While aggregate [French] bank liquidity buffers appear adequate, the supervisory authorities are encouraged to consider imposing additional liquidity buffers in all major currencies to minimize risks related to potential disruptions in wholesale funding in case of severe shocks," the report said.

French lenders were able to tap wholesale funding markets due to strong credit ratings but "high reliance" on such funding might make them "vulnerable to changing market conditions, especially for the short-term market."

Crédit Agricole can draw on the "ample retail deposits" of its larger, unlisted parent Crédit Agricole Group, should it need additional liquidity, so it is less of an issue for this bank, Scholtz said.

But more generally, lower liquidity is a risk especially if it goes hand-in-hand with low capital adequacy and asset quality concerns, the analyst said.

"Both BNP Paribas and SocGen have, however, bolstered [their] capital over the last few years, but the true test will come once impairments start to hit the balance sheet," he said.

In a March 19 report, rating agency Moody's said French banks' credit losses are likely to increase in spite of government support measures designed to stem a wave of corporate bankruptcies. Fellow rating agency DBRS Morningstar said in its own report that the 2020 outlook for France's lenders "looks increasingly challenging as asset quality is set to deteriorate."

Capital concerns have plagued French lenders such as SocGen in recent times, and the bank has boosted its capital ratios by shedding non-strategic assets. BNP Paribas has also increased its capital ratios and its 2019 common equity Tier 1 ratio stood at 12.1%, above the 2020 goal of 12.0%.

Investment bank Berenberg said in a March 18 note that it thought "French banks are weaker than many perceive" due to their potential exposure to loan loss shocks and capital levels.

Regulatory response, market volatility

SocGen CFO William Kadouch-Chassaing told investors March 17 that the bank had a liquid asset buffer of €190 billion and was well above liquidity stress targets. Recent moves by the ECB, the U.S. Federal Reserve and other central banks to boost liquidity would "prove very helpful to sustain the liquidity in the market," he said.

The ECB's decision to raise the amount of money banks can borrow under central bank auctions, called targeted longer-term refinancing operations, or TLTROs, to 50% from 30% of their stock of eligible loans, and the Federal Reserve's decision along with other central banks to offer U.S. dollars at very low rates for up to 84 days would help, he said.

BNP Paribas said March 17 that its immediately available liquidity reserve stood at €309 billion, and its "room to maneuver" represented one year in terms of wholesale funding.

Moreover, in an interview with Les Echos, Bank of France Governor François Villeroy de Galhau said French banks were in a "much more favorable" position in terms of solvency and liquidity than they were during the 2008 financial crisis.

Tomasz Walkowicz, vice president for European financial institutions at rating agency DBRS Morningstar, said French banks had maintained adequate levels of liquidity, well above regulatory requirements, and had highly liquid assets. They have also reduced their exposure to short-term U.S. dollar funding since the financial crisis, which is a positive, he said.

The current market volatility could represent a challenge not only for French banks, but also for the global banking sector, and regulators will take measures to reduce funding and liquidity risks, he said.

The ECB on March 18 launched a new but temporary program to buy €750 billion worth of debt.