Jitka P ANT Ů ČKOV Á President of the Board of Directors Ohridska Banka, Societe Generale Group

BSCEE Conference – 23rd Annual Conference

POTENTIAL IMPACT OF THE BASEL REFORMS ON THE BANKING SECTOR HIGHLIGHTING THE FRENCH BANKING

SYSTEM AND SOCIETE GENERALE

Jitka PANTŮČKOVÁ

President of the Board of Directors

Ohridska Banka, Societe Generale Group

17/06/2010

2BSCEE Conference, Ohridska banka SGG, Jitka Pantuckova, President of Board of Direc tors – June 2010

Basel Committee on Banking Supervision

CONSULTATIVE DOCUMENTS PUBLISHED

Strengthening the Resilience of the Banking Sector

International Framework for Liquidity Risk Measurement, Standards and Monitoring

3BSCEE Conference, Ohridska banka SGG, Jitka Pantuckova, President of Board of Direc tors – June 2010

Basel Reforms

Basel Committee in 2009 began a complete revision of the prudential framework applicable to banks under the impetus of G20.

Revision process started last summer with a paper on enhancements to market risks and continued in December with the two consultative documents on capital requirements and liquidity risk management.

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French banking system and the reforms

French relevant banks integrated via the French Banking Federation (FBF) are in favour of reforms to regulations

in order to promote a more resilient international banking and financial system.

Basel Committee proposals are actively monitored by the French banks, including Societe Generale

considerations include positive and negative impacts on the banking systems especially in France and Europe.

BSCEE Conference, Ohridska banka SGG, Jitka Pantuckova, President of Board of Directors – June 2010

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Priorities

A much more realistic definition of liquidity ratios.

Limiting the use of the leverage ratio to Basel Pillar 2.

Amendments to the proposed risk-based capital deductions.

Revision of the CVA (Credit Valuation Adjustment) technical measure, whose impact as it stands would be as significant as that of all the other measures put together.


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Potential impacts

The Basel proposals should enable continued financing of the economy.

The future prudential regulations should be internationally coordinated and apply to all players to ensure maximum efficiency and avoid any competitive distortion.

It might ultimately lead to inappropriate and excessive global minimum capital and liquidity requirements.

Based on an initial estimation, the strict application of the current Basel proposals would lead to a 1.5% drop in Euro area GDP in the short term and 6% after a few years.


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To Be Considered

To be carefully examined the impact of the measures in order to define the appropriate scale that will be adopted prior to implementation of the consultation.

To take into account the necessary time to accurately assess the impact of a reform which will structure: the global banking industry for a number of years ahead and financing of the economy

Assess the cumulative impact of the measures not only on banks but on the whole economy.


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Overview of the measures

Societe Generale alike the FBF is in favour of a harmonised definition of capital and a target increase of capital requirements for activities which were revealed to be undercapitalised during the 2008

crisis, such as certain market activities, particularly securitisation.

The leverage ratio is a poorly adapted tool because it does not take into account risks and is highly dependent on accounting conventions It should therefore simply be an additional supervision indicator for the

national regulator and, as such, appear in Pillar 2.


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Overview of the measures

It is in favour of building up counter-cyclical capital buffers based on expected losses However, it is not in favour of building up variable capital buffers in order

to combat excessive lending growth, nor is it in favour of capital retention measures which would unnecessarily freeze capital.

It is approved the implementation of internationally harmonised liquidity ratios but there is also a believe that the two compulsory regulatory ratios

proposed are poorly adapted because the assumptions currently used are excessive and would prevent the banks from playing their intermediation and transformation role


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General Comments

The impact of the Eurozone Economy of the Basel Committee Proposals has been conducted by French economists with the following conclusions:

Eurozone credit institutions would face a 40% shortfall in capital ratio, resulting into a €360bn deficit in core Tier

1 capital A shortage of stable funding estimated between €2trn and €3.5trn


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Analysis of the French banks and SG

French banks, accompanied by Societe Generale, have analysed the proposed measures and their impact and suggested amendments to the Basel Committee's proposals: the measures proposed would have a disproportionate impact,

incompatible with what the sector is able to absorb without jeopardising its ability to finance the economy:

For French banks, the liquidity ratios would require the raising of non market absorbable amounts of medium-term debt.

For French banks, the capital adequacy rules would impose the raising of very large additional amount of capital. The worst case scenario would request French banks to build up another equivalent amount of the Core Tier 1 capital that they have raised or accumulated since their creation within a very short timeframe.


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Analysis of the French banks and SG

Excessive capital and liquidity requirements would bring the economic recovery to a screeching halt.

French Banks share the concern that the timing of the implementation of the measures should be set in order not to jeopardise the economic recovery process.

Is 2012 the appropriate target date for a full implementation?


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Impact on the Eurozone Economy

Eurozone credit institutions would face as mentioned: a 40% shortfall in capital ratio, resulting into a €360bn deficit in core Tier

1 capital; a shortage of stable funding estimated between €2trn and €3.5trn;

Loans to the nonfinancial sector would become costlier and foremost much more limited.

Increased risk of a L-shaped recovery, relative to the U-shaped recovery.

Government debt can no longer be used to compensate a crunch in bank credit supply.


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Minority interests

Minority interest will not be eligible for inclusion in the Common Equity component of Tier 1. This would have a large impact on the European market:It would penalize the business model of cross-border groups, especially in the

context of the EU single market: local authorities sometimes impose for a group not to take control of 100% of a bank in order to have part of the capital owned by local investors or to maintain a meaningful listing on the national stock exchange.

In some instances, historically banks were simply not able to acquire 100% of the capital of local banks as only a controlling stake was offered for sale in the privatisation process.


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Leverage Ratio

One of the underlying features of the crisis was the build up of excessive on- and off-balance sheet leverage in the banking system.

The Committee announced its intention to introduce a leverage ratio as a supplemental measure to the risk-based ratio of Basel II with a view to migrating to a Pillar 1 treatment.


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Leverage Ratio

It is strongly put into question the concept of the leverage ratio as an effective way to control risks or improve the resilience of the banking sector.

Such leverage ratio is opposite to the exit strategies of central banks as, co-mingled with the hardened solvency and liquidity ratios it will create conflicting pressures to reduce balance sheets, especially inter-bank money markets and repos which combine high volumes and low risks.

It will also create a pressure to reduce lending and may thus impact to the economy.


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Procyclicality

One of the most destabilising elements of the crisis has been the procyclical amplification of financial shocks throughout the banking system, financial markets and the broader economy.

Procyclicality measures have four key objectives: dampen any excess cyclicality of the minimum capital requirement; promote more forward looking provisions; conserve capital to build buffers at individual banks and the banking

sector that can be used in stress; and achieve the broader macroprudential goal of protecting the banking

sector from periods of excess credit growth.


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Conclusion

Banks, especially French banks and Societe Generale welcome the Basel Committee on Banking Supervision Consultation Papers supporting the efforts that would lead to a global level playing field in a strengthened financial system.

The liquidity crisis has shown that dependencies between economic agents need to be taken into account: banks, clients, central banks, shadow banking systems, rating agencies – the measures shall parallel interact with all these dependencies.

Should the assumption sets be kept and liquidity risk framework become compulsory by end 2012, banks would have to prepare from early 2011 to the massive changes. This would endanger the fragile economy recovery process that is expected to take years.


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Conclusion

Regulatory framework set up: Ongoing consultation process:

Transparent Analysis of the Quantitative Impact Study, with its consequences on the economy as a whole;

Hearings / Bilateral discussions between supervisors and banks for suggested changes

Feedback on received comments sUpdated liquidity framework subject to a consultation process

New consultation process on an updated proposal Final liquidity framework

Finally, so as not to create comparative disadvantages and uneven playing field between banks, the liquidity regulation should apply to all banks (be they internationally active or not), in all jurisdictions (US, Asia, Europe…), with the same transition process, notably in terms of timing.


Jitka P ANT Ů ČKOV Á President of the Board of Directors Ohridska Banka, Societe Generale Group

Documents

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