Transcript of interview with Jean-Laurent Bonnafé

1. Emerging Markets: Will economic growth in the West be hindered by tough bank capital regulations?

Bonnafé: Based on what we already know about banking regulation the effect is already built in. So I don’t believe it adds additional pressure on the economy, at least not for large corporates and mid-caps in economies where the banking system is strong. In this case, these companies can go to the market and secure a reasonable cost of funds. But for SMEs and individuals it is different, and especially for those that are in an economy where banks are not strong enough to build up their required capital base.

2. Emerging Markets: What can be done either at the European level or perhaps at the national government level to help those SMEs or individuals?

Bonnafé: If you are looking at the eurozone the key step is to build an integrated market in terms of regulation and banking systems. This is what is going to be done in the Eurozone with the banking union. It will allow an optimal allocation of liquidity across the member states, without the risk of fragmentation of borders. It should unleash some potential for growth.

3. Emerging Markets: So you unequivocally support banking union?

Bonnafé: This is one single currency, this is one single market, one single central bank, one single monetary policy — so you need this type of banking integration. It has to be done. Of course it will take some time, because we are talking of integrating up to 17 different banking regulators. But they are on their way, and by the end of next year we should be close.

4. Emerging Markets: One thing that has been said that banking union will create is perhaps more consolidation in European banking, especially perhaps in the periphery. Do you expect that to happen because of banking union?

Bonnafé: Once the banking union is complete, let’s say in two or three years’ time, we will have additional efficiency, more transparency, and a better understanding of the global and regional economy. Then the strongest part of the banking system could be part of some form of consolidation — either through an acquisition or through organic development plans. In the end, consolidation will just take out the weaker players who were unable to strengthen their positions either because of their own situation or because of their jurisdiction.

5. Emerging Markets: So, essentially banking union will be good news for the core European firms, at least those with strongest banking institutions such as Germany and France?

Bonnafé: I think so, yes.

6. Emerging Markets: Including BNP Paribas?

Bonnafé: It won’t be handed to us on a plate but there is an opportunity for us to benefit, yes, in the mid-term.

7. Emerging Markets: We’ve talked about Europe so far; but what about on a global basis and with Basle III? Can we expect a truly level playing field or do you suspect that the US will basically try and pick and choose what it likes and thus try and gain advantage?

Bonnafé: Well, if we are looking at capital requirements then it is going to be pretty much the same regulation worldwide. If you are looking at liquidity it might be slightly different. The US banking system is very different from the European one — three quarters of the economy in Europe is funded through bank balance sheets while only one quarter is in the US. On that basis, the starting point is very different. In fact Eurozoneregulators have in mind a way of funding the economy close to the capital markets model which is well developed in the US and the UK. The continental economies can adapt to this, but it will take time. The speed of the implementation of the new liquidity rules should be compatible with this. It would not mean complacency, but rather respect for the specificities of the strong job creating SMEs. In addition, we need to keep in mind that accountancy rules are different in the US and Europe (US GAAP versus IFRS), which impacts the leverage ratio.

So, to some extent yes, we should see a global approach that we will all benefit from; and to some extent there will remain some differences, especially in terms of liquidity and maybe stress tests.

So, I’m not one of those people who believe that either the Europeans or the US are going to get some unfair advantage. In the end, US and European regulators are on their way to adapt Basle III regulation to the local reality of their banking systems, in a pragmatic way, and they are right to do so.

8. Emerging Markets: Just going back to my original question which was about tough capital regulations, and you said: ‘well, the world pretty much knows what to expect now’. But just take us back a couple of years: if you were the regulator would you have done things differently in terms of bank capital regulation? Would you perhaps have gone at it with a slower pace perhaps? With lower targets? Because it’s been said a lot for the last couple of years that economic growth has perhaps been hindered by what some people have called over-zealous capital regulations.

Bonnafé: I’m just a commercial banker and a manager so it’s very difficult to answer that question.

9. Emerging Markets: You’re better placed than most though.

Bonnafé: Talking of Europe, and based on my commercial experience I would have prioritised taking care of troubled banks.

10. Emerging Markets: So, you might have done a European TARP?

Bonnafé: Looking at an industry, let’s say the chemical industry, if you have a plant that is on fire because of a technical problem, first of all you should take care of that specific situation. And then you need to pay attention to the kind of new regulation that is needed to prevent it happening again. Maybe at a certain point of time we were not totally respectful of this sequence. And to some extent maybe even the strongest banks had to pay too much attention to building up additional capital instead of focusing on helping economic development. It’s just like in any crisis, two or three years after the event you tend to look at the situation and say well, it could have been handled differently.

In absolute terms maybe in the end this regulation is the one we should have. But perhaps the planning, motivations and intensity could have been slightly different.

11.Emerging Markets: Would you have gone down the US route and instigated a European version of the TARP that they did in the States, for example?

Bonnafé: The way the US handled the crisis was by leveraging a lot on their strongest banks and they took advantage of the fact that they had a banking system that was already integrated. So they could act at a regional and national level through both the FDIC and the Fed. With the FDIC they have a scheme that allows the resolution of failed banks through sales to other institutions, often with government guarantees and loss sharing arrangements. Other banks received TARP funds to increase their capital and had access to other support from the Fed.

We were not able to do that in Europe because we did not have the same mechanisms in place — bank regulation was not integrated. We did not have a European FDIC that could take care of regional banks. This is why it’s so important to build this European universe with European schemes, a European regulator and European mechanisms that can take care of such situations, in the same way as in the US.

12. Emerging Markets: Are you confident that we’re building the right mechanism, so that come the next crisis Europe will be able to deal with its banking system much like the US did?

Bonnafé: First of all I hope not to see another similar crisis. But on the one hand we’ll have the ability to move locally, let’s say for regional banks; and you will have also a mechanism that will be able to deal with more global situations. And in any case the amount of capital that is being asked to the industry is just huge. Looking at BNP Paribas: we have more than doubled the capital base just to do the same level of business.

13. Emerging Markets: Do you agree that that’s the right level?

Bonnafé: Deciding the appropriate level is about taking a tough but balanced view. It should be high enough to grant protection, but also affordable enough not to damagethe real economy. Regulators have probably set the level on the tough side. It would be wise to stay there.

14. Emerging Markets: It’s nearly seven years since the crisis began. Since then banks have taken a lot of stick, but there has also been an enormous amount of regulation drawn up to make the system safer. With the passing of time and these new regulations, is banking as an industry out of the dog house?

Bonnafé: I believe that on average the industry has started to restore some of its reputation. But it’s not finished — it’s going to be a long process. It will take some additional years before the public truly believe that this industry has changed and that it’s a new cycle. Not all banks were guilty of bad practices of course and on the whole I like to think that our customers know that BNP Paribas acted properly throughout.

But there is no doubt that the industry as a whole went too far and now it has to prove collectively that it is working properly and servicing the economy the way it is supposed to.

15. Emerging Markets: Has there been enough of a change to warrant this change in attitude?

Bonnafé: All the rules are new; they are quite strong. Let’s not forget that there has been massive change. You can only wait to see what happens and how those new rules bed down but we should start to see the positive results in three, four or five years’ time.

But again, you also need to be careful — if you keep on adding more and more rules then that could be dangerous for the global economy.

16. Emerging Markets: For a couple of years after Lehman collapsed there was a lot of talk about the need for banks to become more utility-like. Is that happening?

Bonnafé: I don’t think so. While there will always be some businesses in the banking industry that will be close to a more utility-type industry there will also always be room for innovation in terms of products or channels. It’s an industry that will keep its own DNA. So, there is room for innovation, room for growth. In that respect it is not a utility-type sector.

17. Emerging Markets: Is it coincidence that more and more banks are run by people who have come from the commercial part of the bank?

Bonnafé: Well, I don’t know. Banking is firstly an activity of the market economy, it is very competitive. Maybe some of those banks that had problems had those problems in the market-related businesses. That might explain why some have chosen chief executives who were not part of that type of business. But remember that the problem that most frequently occurred in the banking industry was about mortgage businesses and related structured products. And you cannot say that mortgages are not part of the commercial banking arm.

In any case, picking people from the commercial side of the business is perhaps a good way to show you are prioritising the relationship with your customer, customer satisfaction and the economy.

18. Emerging Markets: Where do you expect to see your competitors coming from in the future? Emerging markets such as China, Brazil, India or Russia? Or Western institutions that have recovered after being wounded in the crisis?

Bonnafé: It will be a mix most probably. There are global banks that are stronger than before —I’m talking about the US global banks. They’ve benefited from a huge consolidation process. They were supported by the US authorities in a very efficient way. This is one of the main results of the way that the crisis was handled by the US authorities.

There was not much consolidation in Europe. BNP Paribas’ acquisition of Fortis is obviously one of the few examples of consolidation that did occur.

In the emerging markets, yes, you will see newcomers being transformed from pure domestic banks based on internal markets, into more regional players.

I expect some to come from Latin America — the Americas as a whole is going to be a crucial market in the years to come. I also expect one or two Chinese banks to develop internationally — they are not going to stay just domestic.

19. Emerging Markets: Will they start buying up western banks?

Bonnafé: No, in my opinion they will start to support their own corporate customers as they move around the world and develop a branch network accordingly. It’s the right way of going about things — you follow the needs of your customers.

We are the same. BNP Paribas has been in Australia for more than a century because at a certain point of time some of our key corporate customers set up businesses there and we followed them to provide them with our banking services. It’s the same in India where we have been on the ground for 150 years

20. Emerging Markets: What are your plans for China?

Bonnafé: In China we are very much involved in the corporate and investment banking businesses. For instance, we rank number 2 for "dim sum" bond new issues as at the end of the third quarter this year. We also have some partnerships for the retail bank. For example, we have a stake of around 15% in the Bank of Nanjing and we have in particular a partnership with them in consumer lending. We also have a local partner in asset management.

But you cannot today be the majority owner of a local Chinese bank, you can only own up to 20% of it according to the regulations as they stand today. It might come in the long term but it will take some time.

In Asia-Pacific more broadly, BNP Paribas has launched a development plan aimed at growing our revenues there to over EUR 3 billion by 2016. We will do this by leveraging on our long-term and sizeable footprint in 14 countries and with full banking licenses in 12 of those countries.

21. Emerging Markets: What do you think in terms of time?

Bonnafé: Looking at the level that the Chinese economy has reached it could be in five years’ time. But there is no reason why a regional Chinese bank could not be a part of a global banking group. In the BNP Paribas Group we have a lot of local banks that are run locally, often in association with partners, that are very respectful of their local customers and local franchise, to which the Group can bring value providing an additional service offeringand skills. So, why not? There is no reason why this couldn’t happen; but it will take time. And in any case it’s a political decision, and it is the privilege of the Chinese government to decide on this question.

22. Emerging Markets: what are BNP Paribas’ plans for Latin America?

Bonnafé: Well, in Latin America and specifically in Brazil we are very much involved in CIB type products. In addition, we have some key global businesses that are being developed, one being consumer lending and the other being the insurance business. So, these are the two main examples of businesses we are trying to develop in that region. But we are not in the retail banking universe there and there is no way we can enter those markets today.

23. Emerging Markets: Because you’re too late? Or because you don’t want to?

Bonnafé: Because there is no opportunity left.

24. Emerging Markets: Unless you buy someone.

Bonnafé: Yes.

25. Emerging Markets: Is that not on the agenda at the moment?

Bonnafé: No.

26. Emerging Markets: What’s it like to be a bank in France at the moment?

Bonnafé: Well, as far as we are concerned we are in a good position — we are a very profitable domestic bank with a low cost of risk. The bank is very much involved in the best regional markets in France; that is to say the young, urban areas — these are the growing markets within France. But we are above all a European bank and we are in a strong position not just in France, but in Belgium and our other key markets in Europe.

27. Emerging Markets: But has enough been done in your opinion to support the economy or to sow the seeds of economic recovery?

Bonnafé: The key number for France is the unemployment figure.

While we have a similar type of economy to Germany or the UK, France has an unemployment rate of over 10% while the UK and Germany are roughly at 7%. This is not linked to the performance of the economy in terms of growth, private debt or public debt; this is very much linked to labour flexibility. I’m not saying that growth is not important but flexibility in the labour market in my opinion is the key element. In fact I would say it is the key priority if you wish to restore a relevant level of growth in the long-term.

28. Emerging Markets: Is enough being done to bring in more flexibility?

Bonnafé: It’s something that has to be dealt with. A lot remains to be done. It’s not an easy task because it is very much linked to labour practices and traditions that are embedded in the cultural heritage of France. But it has to be done.

29. Emerging Markets: We talked at the very beginning about how Europe has made changes to its banking system. However on a general level, not just the banking system, has Europe learned its lessons and made the necessary changes? Or has economic recovery let the politicians off the hook?

Bonnafé: Well, I do believe that some changes still have to be made at the European level and even more at the local level.

On a European level we have done quite a lot already, such as the progress towards the banking union, and progress towards the economic and monetary union, supervision, installing global regulation and of course there is still quite a lot to be done. But in the end the key changes that are still to be made are at the local level. For example, we were talking of the labour market in France — that has to be done locally. There are some institutional elements to be fixed in Italy. These can only be done locally.

30. Emerging Markets: But now that we’re beginning to see economic recovery throughout the Eurozone is there perhaps less of an incentive to make the changes that need to be done in order to avoid having similar crises in the future?

Bonnafé: Economic recovery is of course crucial but a strong incentive remains to make the long term structural changes that will help reduce unemployment. If you do not bring down your unemployment, you are creating enormous problems in the future.

You can have economic growth of 1% or 1.5% but if you are not creating jobs and you are at 10% unemployment, it is not sustainable.

31. Emerging Markets: So, that comes down to competitiveness with the rest of the world?

Bonnafé: In the end it’s the way to monitor the long-term potential of the country. The level of growth today or tomorrow, or next year or in two years, is something that is very short term. The level of employment is a key long-term indicator.

32. Emerging Markets: So you worry for Spain’s situation with 25% unemployment and 50% unemployment in the under 25s?

Bonnafé: Actually no, because if you look closely they have done a great job. They are now net exporters. They have done a lot to decrease wages and become competitive again. There are companies investing in Spain as a result. And let’s not forget, Europe helped out their banking industry with over €50bn in financial assistance. So, they are on their way back. It will take time but they are on their way.

33. Emerging Markets: But how does that square up with what you were saying about unemployment being a key indicator? Spain has some terrible unemployment numbers.

Bonnafé: Yes, but looking at what they have done, it will go down.

34. Emerging Markets: But it’s going to take a long, long, long time to heal though surely?

Bonnafé: It was an extremely severe crisis that engulfed the whole of the economy. So we are talking about a healing process that is going to take a long time — six, seven or perhaps eight years.

35. Emerging Markets: So Spain has done a good job in terms of rebalancing, and recovery will follow because it’s become more competitive. Are you suggesting that that is a lesson that Europe needs to look at very closely with regards to general unemployment?

Bonnafé: Yes. Of course although on average Europe is nowhere near Spain’s levels.

But in any democracy this is the key element, especially when you are talking of young people.

36. Emerging Markets: Just returning to your point about flexibility in the labour market. If you were to write a letter to Monsieur Hollande recommending what to do here which country model should he be looking at for France?

Bonnafé: You have to be very careful here because something that has worked in another market is not necessarily suitable for the local culture. But in my opinion, you could find a mixture of initiatives taken from some Nordic countries, Germany, a bit of the UK. You have to imagine your own way; you have to imagine it collectively. You cannot just say a certain model is going to be the solution. We need to find a French way in that respect, and also a way for Europe as a whole.