"Universal banking is perfectly suited to support the CMU"

What is the Capital Markets Union's purpose?

The new Commission made the following observation: to stimulate economic growth, which is in great part generated by SMEs, they must have a simpler access to capital markets in order to diversify their sources of financing and support their growth. The goal is not to reproduce the Anglo Saxon model in which dis-intermediated financings are predominant, but to rebalance their sources of funding. Our universal banking model and culture is perfectly suited for this evolution. It provides a good link between local companies - thanks to our close relationships with a network of SMEs - and the corporate and investment banking activities that can support these companies in the markets and offer institutional investors the diversification and yield they seek.

Did you have to change the universal banking model to make this link possible?
The universal bank is totally adapted to support the CMU as it offers its clients both classic banking loans and an easier access to capital markets. Indeed, the universal banks benefit fully from the synergies that it is capable of creating between its various business lines. This is what we have been doing for several years, in particular by creating the Mid-Cap Investment Banking department, with our French network and the CIB. We innovated by launching initiatives to facilitate the diversification of financing sources for SMEs and mid-size companies. In 2012 we set up a partnership with Axa to co-originate loans for Mid-size companies. This partnership is still active. We were also a major player in developing EuroPP-type private placements for which we now have a market share of nearly 30%. Companies like Sonepar, Neopost, Lactalis and more recently OVH were able to take advantage of this offering through issues of 60 million euros on average, for maturities that are quite long, around 7 years. One of the subject that the CMU will have to handle in fact is the replication of this model at the European level. The idea is to promote financial arrangements like these in other European countries, but above all to encourage foreign investors to buy French corporate debt and vice versa.

Is a bank's intermediation essential for this type of financial arrangement?
Beyond structuring, the bank's intermediation is essential. It knows the market and the investors with an appetite for these kinds of transactions. It knows how to present the company to them. A mid-size company does not have the capability to maintain a pool of institutional investors for a placement. This role of introducing the various parties to each other is the CIB's added value.

Do you capitalise on the knowledge you have of SMEs because of your commercial banking role?
Our knowledge of mid-size companies was one of the interesting aspects of our partnership with Axa. We do have a closer relationship with these companies with which we have daily discussions. We also have the information provided by the Bank of France. Nevertheless, a private European rating system for SME/mid-size companies will have to be set up at some point to increase the information available to investors.

What are your expectations in terms of the regulatory environment required to make this CMU possible?
In France we have the highest dis-intermediated financing rate in continental Europe. At 38 %[1] it is twice as high as in Germany, Spain and Italy. One of the main reasons for this is that France has first class banking players in CIB activities within universal banks that understand the local industrial fabric. Mid-size companies need local banks to support them.
But for capital markets to work efficiently, the banks' ability to offer market-making activities that provides investors with liquidity must be maintained. The structural reform of the banking sector that is currently being discussed at the European level, or the FTT[2], might hinder the fluidity of market mechanisms and encourage players to relocate their activities in countries where the tax is not applied.

What are the obstacles to cross border investments on which the CMU could act?
The CMU can encourage greater harmonisation. As I mentioned previously, setting up a shared framework agreement for private placements would free the investor to systematically study the discrepancies between both contracts. Then there is the issue of bankruptcy law which is regularly mentioned, but this is an area in which the harmonisation work is much more significant because of the legal and micro-economic issues that it raises for each state. I nevertheless believe that it is possible to move towards greater convergence without having perfectly harmonised bankruptcy laws.

Is the securitisation of SME receivables a significant way forward?
It can be useful but it will not form the market's core. With increasing dis-intermediation, mid-size companies can now obtain financings directly on their own behalf. Their need is therefore already met. There might be opportunities for securitising portfolios of SME receivables at a more granular level, but banks can currently access cheaper and abundant financings elsewhere. I expect more from high quality securitisation for asset classes such as real estate or consumer credit. This is consistent with financial centre initiatives to label issues, in order to bring transparency and regain investors' trust. It would also be a good idea to review the prudential controls of banks that carry these securities: they can of course use them to manage their liquidity, but if because of this they are penalised with large capital costs, the market will not take off again. The idea is to fine tune regulations that were set up just after the crisis.

Is infrastructure finance an important axis for you?
It is indeed a significant activity for us. In 2012 we decided to reposition our financing franchise on an origination to distribution model, in particular with project bonds, which we were among the first to use. Among insurance companies and certain asset managers there is indeed a real appetite for these kinds of assets that offer recurrent cash flows and suitable risk profiles. Furthermore the Juncker plan, by labelling the projects, will re-launch the infrastructure finance market. Finally, the development of long term investment funds (ELTIF[3]) is also interesting, as long as the issue of liquidity pockets and exit constraints are dealt with in a balanced manner: a fund that is too closed will not find its market.

Is a single supervision of capital markets a good idea?
In time, without going as far as a single supervision, I think that a greater convergence in this area will be necessary. Today, ESMA's role in terms of defining level 1 standards is mostly confined to rating agencies. It could have a wider role. Greater coordination between national agencies would also allow banks to make substantial gains in terms of reporting, under EMIR and MIF in particular.

Translated from a Revue Banque article, interview conducted by Séverine Leboucher