First, the authorities are supporting the refinancing of banks by providing them with guarantees so that they can, in turn, properly finance the economy. Second, very significant reforms of accounting rules are in the process of being finalised. The first reform aims to bring the current framework in line with what is best practice in the world today: it will allow banks to transfer instruments hitherto booked at market value to portfolios where that will no longer be the case. The second will introduce greater flexibility in markedto-market accounting rules, allowing assets, whose market is no longer active to be valued at amortised historical cost. This will ensure that the valuation of these products is better suited to the market conditions that have prevailed for the last few months. Lastly, governments have confirmed their support for the recapitalisation of banks. In the case of France, the Government and Parliament very quickly fleshed out these European principles as follows: New legislation provides for the creation of a funding vehicle, created to guarantee the refinancing of banks for medium-term maturities (up to five years). This vehicle, which is strictly supervised by the French Government and the Banque de France, has a credit capacity of EUR 320 billion. The guarantee is granted for a fee, so that the banks requesting it pay costs corresponding to normal market conditions. The law stipulates that a state-owned company has the possibility of subscribing to subordinated debt issues or preferred shares.
The increase in leverage has appeared everywhere: in the expansion of banks’ balance sheets; in the proliferation of off-balance sheet vehicles that for the most part operate without own funds, i.e. with infinite leverage; lastly, as I have said, in the use of the limited capital of monoline insurers to guarantee a large volume of structured products. One well-known feature of leverage is that it amplifies both gains and losses. For many years, the US property boom provided substantial returns on investment. But with the turnaround in the market, very considerable depreciations have been recorded on structured products, which, for many banks, have exceeded their level of capital. Their inability to recapitalise has led to the failure of some of them. How, in this environment, can we assess the state and performance of our banks? They are, of course, not immune to the crisis. They have direct or indirect exposures (notably via US monolines) to structured products. They have had to make write-downs, sometimes substantial ones. They are also suffering the impact of the drying up of liquidity, the seizing up of some markets and, more generally, the rise in their refinancing costs. That said, our banks are sound and profitable. It is worth recalling four facts that, in the current turmoil, are sometimes overlooked: First, the solvency ratios of French banks are high, well above the minimum requirements set by prudential regulation and the levels of their European competitors; Second, overall our banks remain profitable: over EUR 7 billion in the first half of 2008.