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Indeed, if it is legitimate for an institution to attempt to maximise returns on its assets (in the event, the excess deposits held in its Belgian and Swiss subsidiaries), serious consideration should also be given to the current fragility of the European banking sector. It has arisen and been amplified to a large extent by assuming transnational risks, financed by resources from domestic or third party countries.
These credit portfolios were accumulated during the first ten years of EMU, a period during which the financing of assets by resources both denominated in € was considered to be fully protected from any “exchange risk”. The potential withdrawal of Greece from the eurozone – openly envisaged by some, considered unavoidable by many or even recommended by others – together with the fear of contagion leading to the implosion of the euro has radically changed the situation.
In order to forestall the consequences of such developments, banks have resorted recently to what is described as “repatriation of risks”; the aim is to match receivables and payables within in each country of operation, whether incurred directly, through branches or affiliates. In a previous paper, I had already mentioned the dangerous implications of this trend which, clearly, flies in the face of the timid efforts, endorsed by the Brussels summit, to create a “Banking Union” within EMU.
The spreading of this practice, justified in the name of prudent risk management, (which banks have previously been accused of neglecting), reveals starkly their own judgement on the chances of survival of the euro! These policies contribute to the lack of confidence in the banking sector as a whole, already severely shaken by the recent revelations of the LIBOR market manipulations. Without restoring basic trust in banks, any exit of the crisis will prove impossible.
Two remarks are in order, as far as the specific operations that BNP is alleged to be considering:
a) At group level, the internal transfer of the Italian and Spanish credit portfolio has no impact on the country mismatch between the assets and the source of funding. It is a simple transfer of risks between France and Belgium, camouflaged in the jargon of optimisation of available resources.
b) It behoves the Belgian Government (and the Belgian National Bank as Regulator) to impose on BNP the following choice: either BNP ”borrows” from BNP-Fortis the deposits need to fund its Italo-Spanish credit portfolio, or it guarantees the credits transferred to BNP-Fortis.