Interview of Didier Valet about the changes in culture within banks
Translated from La Lettre du Trésorier article, interview conducted by Arnaud Brunet
Interviewed on 25 October 2017
What are most sensitive negotiating points for the last component of Basel III?
Discussions under way on the last component of Basel III, often called Basel IV, are a cause for concern for European banks, which have taken active steps to mobilise. The most sensitive point involves calibrations of internal models: these models could be subject to output floors, which, if the thresholds were too high, would amount to a similar approach to the so-called standard approach advocated by the USA.
The Basel II accords had given legitimacy to internal models and it would be a pity to backtrack to the previous status quo.
Moreover, we need to take account of disparities between business models on either side of the Atlantic: in the USA, for example, banking balance sheets have mostly been stripped of mortgages, which are generally covered by federal guarantees, while the standard approach used to calculate weighted risks encourages a certain amount of aggression in the area of LBOs.
Poorly calibrated output floors would be very disadvantageous for European companies, of which there are many, which make use of structured financings or long-term project financings, two activities in which France holds top ranking positions in the service of the economy.
Is Europe presenting a united front in these negotiations?
We can say that there is a strong convergence of views among European banks. The sticking points, when they exist, are rather related to local regulatory authorities, which, depending on the specificities of their banking systems, may have contrasting approaches. So, for some EU member states whose banks are first and foremost national, the standard approach for calculating risks is probably an appropriate solution. One of the remarkable facts towards the end of the lengthy discussions on Basel IV was the rapprochement between the different European interests in favour of internal models.
From a regulatory point of view, is there equality of treatment between European banks and their major competitors?
At a time when the US Treasury is proposing to set aside some of the Basel III provisions (those concerning risk calculation on trading activities and the minimum 1-year liquidity ratio), we need to insist on the principle which states that the rules must be the same for everybody and hope that the European authorities are aware of this, which seems to be the case.
In less than 10 years, we have gone from a world that was more or less aligned and that sought to act within a multilateral framework with a single supervisory structure, the Financial Stability Board, whose principles were widely shared, to a return to national interests.
The European Union must not abandon the multilateral approach, but it should do so in a manner which is prudent. I can add that the regulatory level playing field, although it is highly desirable, does not alone determine the course of business: over recent years, the Societe Generale’s Corporate and Investment Banking division has continued to gain market share on a worldwide level.
What is the outcome of the regulation that arose out of the 2007-2008 crisis?
Overall, the outcome, which is provisional, of what we often refer to as the “regulatory tsunami” is mostly positive: levels of bank solidity and that of client protection, retail and corporate clients as well as investors, have been significantly strengthened.
There is however one aspect that needs to be kept in mind: regulatory inflation mobilises a large number of employees and requires the constant adaptation of information systems, leading to substantial investment. But it should also be noted, and in my view this is just as important, that recent years have been marked by profound changes in culture within banks, and this at all levels of the banking hierarchy. Those who experienced the crisis learnt salutary lessons, and for those who are emerging now, the industry sets great store by their being very sensitive to responsible behaviour.
At Societe Generale, like at many other banks, our priority is client culture: it is the client that we are required to serve. So we implement ethical principles that guide the manner in which we carry out our activities through our “Culture & Conduct” programme in particular, or also, for example, our decision to stop all coal-linked financings.
To conclude this chapter, I’d say that it would be reasonable to take a regulatory break, to study the impacts of existing rules, in as far as the supervisory authorities, which continue to carry out their missions, act as powerful deterrents to any aberrant behaviour.
What place do banks have in the Capital Markets Union?
There’s been a lot of talk about the Capital Markets Union, on the one hand concerning infrastructure such as clearing houses, marketplaces, etc., and on the other hand the rules, which are very technical: directive covering the prospectus, so-called simple, transparent and standardised securitisation, for example.
Rules and infrastructure are obviously necessary, but they are not sufficient in themselves. We also need players that are capable of sustaining this single market, and here it is EU banks that have access to the capital markets and, more generally, a whole financial ecosystem where know-how, and thus training, must be given pride of place. And Brexit will potentially present the opportunity to strengthen this ecosystem across continental Europe.
Are French corporate and investment banks big enough?
From our point of view, size is not the determining factor in as far as we focus on activities where we can bring value to our clients and accordingly, set ourselves apart from our competitors.
It is important for us to maintain our positions of strength in helping companies to access resources in euros: bond market, private placements, convertibles market, IPOs, capital increases, block trades, and in structured financings, an area in which we are among the top-ranking players in the world. With regard to transactions-linked services, our aim is to strengthen our positions outside France.
Generally, we ensure that our relationships with our corporate clients are long-term relationships. Even though automation has developed significantly over the course of recent years, the personal link that exists between the bank and its clients still lies at the heart of the banking relationship.
In the first half, net income was up by one-third at €2.5bn, return on equity 9.5%, a Tier 1 capital ratio of 11.7%: Societe Generale is in good health?
These results reflect the relevance of our positioning: the bank leverages a diversified and integrated model, by implementing synergies among the various activities, including retail banking, and puts its clients at the centre of the system.
Moreover, the bank has strengthened its positions in some areas such as life insurance or automotive leasing with the decision to put ALD Automotive in the spotlight and to give it room for manoeuvre by selling part of its capital on the stock market.
We have strengthened our balance sheet, our liquidity and our commercial performances; now, we need to work harder at setting ourselves apart so that we are always in a position to bring greater value to our clients.
Which geographies will be the focus in the coming years?
With regard to Retail Banking, our targets have not changed: the eurozone countries in the first circle, Central and Eastern Europe and Russia where our network is already dense, and Africa, which, given its demographics and economic prospects, constitutes a medium-term opportunity for growth.
In the area of Global Banking and Investor Solutions, we are leveraging our presence in the main international financial centres while at the same time developing strong franchises on target markets, for example in developing markets, especially in Eastern Europe or in Africa.
Finally, we consider that our development will also result from changes in the area of organisation, which we would like to be more horizontal and agile: accordingly, we recently removed a layer of management. Operational units are gaining autonomy and responsibility, encouraging the taking of initiative, while general management is focusing on the definition of a framework that is favourable for the development of our business and the relationship with our clients.
What are your views on the new wave of innovations in the financial field?
We are very attentive to the emergence of fintechs and, generally of new technologies, for example blockchain, for which certain applications have already demonstrated its efficiency [international financing of commodities, Ed].
To give just a few examples, we acquired Fiduceo in 2015, which is a technology that is leveraged by the banking network to launch a bank accounts aggregator, or more recently, we invested in Tag-pay, which has enabled us to offer mobile bank apps without a bank account and which we market in Africa under the Yup brand.
Furthermore, we are very interested in what can be done in terms of interface between our clients and us, for example with MyHedge, a 100% digital system that enables treasurers of SMEs and ISEs to monitor their exposure to fluctuations in foreign exchange and to carry out simulations. This service arose out of the initiative of our teams and was developed entirely by us. This innovation is fully integrated into SG Markets, our single access portal which hosts a number of services, such as research, transaction confirmation, reportings, etc. or which enables the automation of a majority of requests for quotes in terms of structured products.
Read the article in French in Societe Generale Group website : Entretien avec Didier Valet au sujet des évolutions profondes de la culture au sein des banques
Sources : La lettre du Trésorier