Modern Banking

[ 599 ]

C A S E S T U D I E S

Harberer was described as authoritarian, brilliant and intimidating. He was virtually friendless but was the Socialists’ favourite banker, with long-standing ties to Pierre Ber´egovoy´ (Minister of Finance, later Prime Minister) and Jacques Delors, President of the European Commission until 1994. On his appointment to CL in 1988, it was soon made clear that Harberer wanted to implement grandiose schemes which would not have survived board scrutiny or shareholder reactions in privately owned financial institutions. He was not popular in the banking world, where he was thought of as a gambler, who adopted ‘‘go for broke’’ tactics. It was thought that in the event of a Conservative victory in March 1993 he would be replaced – he was still disliked by the Right, for serving as a tool of the Left while at Paribas in 1982.

10.6.3. The French Banking Scene in the 1990s

The French domestic market for financial services in the 1990s had been a highly competitive one, characterised by both compartmentalised universal as well as specialised institutions, each targeting different financial activities, despite the fact that deregulation had removed many of the legal barriers. The French banking structure consisted of:

žThe caisses d’epargne: dominated the liquid savings deposit market, accounting for over 30% of this type of deposit.

žThe banques cooperatives: originated as a coop system, these banks are found primarily in the agricultural sector, especially Credit´ Agricole.

žThe banques de dep´ots:ˆ active in short-term industrial finance, notably BNP and Societ´e´ Gen´erale´. Credit´ National was involved in longer term loans, and Credit´ Foncier in mortgage credit. In March 1989, BNP and UAP had sealed a bancassurance alliance, including a 10% share swap, which gave BNP a FF5.3 billion capital infusion and UAP 2000 French banking outlets from which to sell insurance.

žThe banques d’affaires: these banks’ principal focus was on corporate finance, and they were both aggressive and competent, Paribas being a good example. They have more in common with large financial conglomerates than with traditional British merchant banks or US investment banks.

žThe banques etrangers:´ these foreign banks were mounting fairly effective challenges in specific niches. Barclays Bank had moved into private banking; JP Morgan into the wholesale sector. Numerous foreign firms, including Deutsche Bank and Union Bank of Switzerland, were attracted to dynamic French markets.

žNon-bank competitors: the French postal savings systems, finance companies such as Compagnie Bancaire (an affiliate of Paribas) and the large insurance companies fall into this category. They were stepping up their challenges to the large universal banks.

The most intense battle Credit´ Lyonnais faced at home was to attract retail deposits. Interest-earning chequing accounts had been prohibited since 1967, so SICAVs monetaires´ were used as instruments to attract savings – French banks had been pushing this form of investment aggressively. However, the result was that the cost of funds had approached the money market rate, severely penalising banks which had lived off cheap, unremunerated

[ 602 ]

M O D E R N B A N K I N G

conduct of business rules will vary in each EU country. Financial firms which locate in other states will have to comply with the rules imposed by the host country. It will mean firms will have to deal with 16 different sets of rules (the 15 EU countries plus the euromarkets). This could raise costs of compliance to regulations for pan-European firms, and leaves open the possibility that host country regulations will be used to favour domestic financial firms over firms from other EU states. However, the general view is that these rules will converge over time, creating a level playing field throughout Europe, and creating the competition necessary to make Europe a key world financial market.

It was expected that the regulatory regime would evolve along the lines of a universal banking model. All types of financial institutions could compete in each others’ financial markets geographically, cross-client and cross-product, including insurance, real estate and various areas of commerce. This environment could, in turn, provide a platform for European institutions to mount serious challenges in North American and Asian financial markets.

Indeed, some observers considered financial services one of the few sectors of the European economy where the regulatory bodies were sometimes well ahead of business in promoting competitive change. Though often resisted by market participants themselves, financial services deregulation in Europe, by the early 1990s, had produced intense competition and pricing rivalry in many markets, an erosion of boundaries between types of financial establishments, a proliferation of new technologies and improved access to capital markets, which shifted the balance of power away from banks in favour of their customers.

10.6.6. The Pan-European Building Blocks

By late 1992, Harberer had already developed the beginnings of a pan-European bank in the retail sector via an extensive cross-border branch network. He had been making systematic moves towards this goal since 1988. This was needed to meet his target of capturing between 1% and 2% of total retail deposits in Europe, to provide the cheap funding CL needed to finance all its other growth initiatives.

Several acquisitions and purchases of stakes in other banks had been undertaken in quick succession as CL bought local medium-sized financial institutions in Belgium, Spain, Italy and Germany. Between 1987 and 1992, the number of CL branches in Europe had increased threefold. By 1991, 47% of the bank’s profits came from outside France, compared to 30% in 1987. It major acquisitions included the following.

žBelgium: CL had rapidly expanded its local presence via aggressive branching. It tripled the number of retail and private banking clients in 18 months with a new higher yield account called Rendement Plus. This offered 9% on savings deposits, compared to 3 – 4% offered by local banks. CL could offer these rates mainly because it did not have the cumbersome and expensive infrastructure of Belgian banks – it had just 960 employees for 32 branches in the country, three per branch. The three big Belgian banks had at least 10 employees per branch in over 1000 branches.

žNetherlands: CL had raised its stake in Slavenburgs Bank (renamed Credit´ Lyonnais Bank Nederland NV) from 78% to 100%. In 1987, it had acquired Nederlandse Credietbank, a former subsidiary of Chase Manhattan Bank in the USA.

[ 603 ]

C A S E S T U D I E S

žIreland: CL held a 48% stake in Woodchester, renamed Woodchester Credit´ Lyonnais Bank, a leasing and financing company, which intended to acquire a total of 40 to 50 retail banking outlets.

žCL reinforced its position in the London market by buying Alexanders, Laing and Cruickshank after Big Bang in 1986. In 1989 it was renamed Credit´ Lyonnais Capital Markets.

žSpain: CL’s branches had been merged with Banco Commercial Espanol,˜ and renamed Credit´ Lyonnais Espana˜ SA, complemented by the acquisition of the medium-sized Banca-Jover in 1991.

žGermany: CL completed a deal in 1992 to purchase 50% of the Bank fur¨ Gemeinwirtschaft (BfG), ending a 5-year search for a viable presence in the most important European market outside France.

Harberer viewed the acquisition of BfG as a key achievement. Not only was Germany the largest European banking market, it was also the most difficult to penetrate. Others had tried, and many had failed. Those who succeeded had done so by buying niche-type businesses, often with indifferent results. None was taken seriously as major contenders alongside the three Grossbanken, the large regional and state-affiliated banks, and the cooperative and savings bank networks. With the acquisition of the BfG, Credit´ Lyonnais expected to break the mould.

In 1990, the second largest German insurance group, AMB (Aachener and Munchener¨ Beteiligungs GmbH), had negotiated with the state owned French insurer AGF (Assurance Gen´erales´ de France) about a partnership arrangement. Besides the attractiveness of the German market, AGF was watching strategic moves by its arch-rival, the state owned insurer UAP – its expansion into Germany had come by way of the acquisition of a 34% stake in Groupe Victoire (from Banque Indosuez), a major French insurer which had earlier purchased a German insurer, Colonia Versicherungs AG.

AGF had bought 25% of AMB stock, but it was limited to only 9% of the voting rights by the AMB board, using a special class of vinculated shares. It was clearly concerned that a French company, twice its size, was out to control and eventually swallow it. Alongside the AGF acquisition of AMB stock, Credit´ Lyonnais had bought a 1.8% stake in AMB as well. As part of its defensive tactics, AMB arranged for an Italian insurer, La Fondaria, to acquire a friendly stake, amounting to 20% of AMB shares. AGF then fought a historic shareholders’ rights battle in German courts against the AMB board and a German industrial establishment instinctively distrustful of hostile changes in corporate control. The defence was further bolstered by the fact that 11% of AMB stock was held by Dresdner Bank, and 6% by Munich Re. Allianz, the largest German insurer, was a major shareholder in both Dresdner Bank and Munich Re. Harberer took it as a sign of the times that AGF had prevailed in the German courts and, with the help of CL’s AMB shares, was able to obtain AGF recognition of its voting rights – no doubt the basis for future AGF share acquisitions, possibly the La Fondaria stake.

The AGF – AMB battle provided Harberer with the opening he was looking for. AGF proposed that Credit´ Lyonnais buy AMB’s bank, the Bank fur¨ Gemeinwirtschaft, which AMB was keen to dispose of and which had been up for sale for some period. BfG was the bank of the German Labour movement, plagued by poor management, periodic large

[ 604 ]

M O D E R N B A N K I N G

losses and scandals, and a down-market client base. Nevertheless, BfG had some 200 well-situated branches throughout the country and presented a rare opportunity to buy a major German bank. AMB had already made great strides in turning BfG around, but a loss of 400 million Deutsche marks in 1990 and a meagre profit of only 120 million Deutsche marks in 1991 indicated that a major capital infusion would be required in 1993. AMB was hardly interested in supplying it, and a takeover by Credit´ Lyonnais was seen by AMB as a welcome opportunity to divest itself of an albatross. CL valued BfG at 1.8 billion Deutsche marks; AMB valued it at 2.6 billion Deutsche marks. AMB suggested part of the deal could be the 1.8% AGF stock held by CL. In November 1992, it was agreed that CL would buy 50.1% of BfG for 1.9 billion Deutsche marks, effective at year-end.

Of course, acquisition battles like BfG were only the first and perhaps the easiest part of the building process. Certainly not all of CL’s acquisitions had been easy to digest. Its purchase of the Slavenburgs Bank in the Netherlands, for example, had been the source of many headaches. Beyond a troublesome clash of corporate cultures, there had been a serious problem in maintaining supervision. Slavenburgs Bank (or CL Nederland) was responsible for making large loans to Giancarlo Parretti for the purchase of MGM shares in the USA (see below) – loans which CL’s Paris head office later claimed it was not aware of until it was too late.

Besides outright acquisitions and aggressive expansion in the important European markets, CL also employed a strategy of engaging in strategic alliances and networks. One of the older of these, Europartners, was set up as a loose association between Credit´ Lyonnais, Commerzbank, Banco di Roma, and Banco Hispano˜ Americano (BHA), based on a plan to extend banking networks into neighbouring countries and set up new joint operations. The idea was to provide a cheap way of allowing each of the partners’ customers access to basic banking services in other countries.

It was not long before strains began to appear in Europartners. Over the years, Commerzbank had tightened its relations with its Spanish partner, and in 1989, BHA agreed to swap an 11% interest in its shares for a 5% stake in Commerzbank. The 1991 merger of BHA and Banco Central into Banco Central-Hispano˜ diluted Commerzbank’s share to 4.5%. At the same time, there was a dispute over CL’s expansion into Spain with the purchase of Banca Jover in the summer of 1991. A year earlier, Credit´ Lyonnais had tried to purchase a 20% stake in Banco Hispano˜ Americano and was flatly rejected. BHA perceived the new action as a threat of direct competition in its home market, and suspended its relationship with CL.

Rebuffed in Spain, CL had also been thwarted in its attempt to deepen the FrancoGerman part of the Europartners agreement. In 1991, CL discussed swapping shares with Commerzbank, the smallest of the three German Grossbanken, thought to have involved 10% of Commerzbank’s equity for 7% of CL’s equity. Discussions broke down over German fears that the French bank had more in mind than cementing the Europartners alliance. Commerzbank did not want to become the German arm of a French bank. There was also the matter of price. Based on comparative figures, Commerzbank wanted a 10% for 10% share swap, even though the French bank was twice its size, because it considered itself to have a much better future in terms of earnings and market potential.

[ 605 ]

C A S E S T U D I E S

By the end of 1991, Europartners was effectively dead, though this did not preclude other strategic alliances as a future option for Credit´ Lyonnais. Other partnerships had been more stable, including:

žThe Banco Santander – Royal Bank of Scotland agreement, cemented by a share swap, to create a link-up through which clients could conduct cross-border transactions at terminals located at either bank’s branches. Credit´ Commerciale de France had signed up to join this alliance.

žThere was the proposed BNP– Dresdner deal, a cooperative agreement that involved 10% cross-shareholdings and each bank continuing to run its existing operations, with reciprocal access to branch networks but with a programme of opening joint offices elsewhere, including Switzerland, Turkey, Japan and Hungary.

10.6.7. The Government Link

Over the years, French economic and financial policy has been highly changeable. When Francois¸ Mitterand was elected President in 1981, his approach was to reflate the economy by increasing the size of the public sector, reducing the number of hours in the working week, and nationalising 49 key industrial and financial firms. These policies led to increased imports and a deterioration of both the trade balance and international capital flows. Under these conditions, the possible solutions were either to devalue the franc and take it out of the European Monetary System’s Exchange Rate Mechanism, or to seriously reduce monetary expansion, reduce the fiscal deficit (which would involve cuts in spending) and stimulate the private sector.

The latter option was chosen. Taxes were cut, capital markets deregulated, and the French economy boomed throughout the 1980s. The Finance Minister, Pierre Ber´egovoy,´ the driving force of fiscal prudence, maintained a franc fort, low inflation policy throughout the period and committed the country to partial privatisation, starting with the sale of minority stakes in Elf Aquitaine, Total and Credit´ Locale de France in 1991.

On the other hand, the Socialists had not only nationalised the big banks in 1981 when they came to power, but had continued to influence their activities since then. For example, in 1992, BNP was asked to acquire an equity stake in Air France, and Credit´ Lyonnais was ‘‘encouraged’’ to buy into the large integrated steelmaker Usinor-Sacilor, both of them inefficient state owned firms making large losses. By linking together the state owned equity portfolio and the equity holdings of state owned banks, the government could maintain control even if the non-financial companies were partially privatised. There was considerable debate whether any new government taking office in 1993 would have a programme of aggressive privatisation with non-intervention in the strategic direction of the operations of banks and industry – that is, whether the micro-intervention of the past was a ‘‘socialist’’ or ‘‘French’’ attribute.

In addition to its direct and indirect equity holdings, the French government kept tight control through ‘‘moral suasion’’, a tradition of political meddling by bureaucrats who considered themselves able to come up with better economic solutions to national needs than the interplay of market forces. On a European level, beyond the tampering with free