BNP Paribas: The model that worked

THE EMERGENCE OF BNP Paribas as one of the clear winners from the credit crisis offers intriguing insights into how the global banking industry might reshape itself in the years ahead. It is a universal bank that has determined ever since the merger of BNP and Paribas 10 years ago to keep the balance of its business mix tilted towards retail. Retail banking accounts for half its earnings. Whenever organic growth in its two other businesses – corporate and investment banking (CIB) and asset management (called investment solutions at BNP Paribas) – disturbs that balance, the bank hunts for retail bank acquisitions to restore it.

In 2006, on the eve of the crisis, it acquired Banca Nazionale del Lavoro in Italy and quickly rolled out the retail banking products and customer relationship management tools it had built in France to revitalize a tired Italian bank that had underinvested in both.

In 2009, it completed the acquisition of Fortis, adding Belgium and Luxembourg to Italy and France as eurozone countries in which it enjoys large shares of the domestic banking market, averaging 10% across all four.

Right now it is searching for smaller acquisitions in the US, exploring the possibility of picking up small local banks from the Federal Deposit Insurance Corporation in Los Angeles or elsewhere in California to bolster its currently troubled San Francisco-based Bank of the West, which ranks among the top 25 commercial banks in the US.

At a time when many risk-averse banks are retreating back within their national borders, often at the bidding of home governments that have spent huge amounts of taxpayer funds to prop them up and now require payback in lending to their own economies, BNP Paribas, thanks to its strong management and good record of overseeing its risk, is able to buck that trend.

Since 2006, it has transformed itself from a predominantly French bank into a predominantly European one. Only one-third of earnings now come from France, compared with more than two-thirds just three years ago. Following the Fortis deal – the largest cross-border takeover in Europe to result from the banking system seizure – BNP Paribas becomes the number-one bank in the eurozone by share of deposits. Fortis brings 4 million new customers, taking the enlarged bank to 14 million retail network customers in Europe. It has also become the number-one private bank in the eurozone, with €237 billion of assets under management and, for good measure, the region’s fifth-largest asset manager, with €511 billion of assets under management.

BNP Paribas’ corporate and investment bank, long established as a leader in the euro fixed income and debt capital markets, is growing market share of its established franchises and increasingly in equity markets and M&A as well.

The bank’s executives are proud of all this, as they are also of coming through the crisis with what they say is a very strong capital ratio – 7.8% equity tier 1 – given the moderate risks and resilient earnings of their underlying businesses, achieved with minimal dilution to shareholders.

A €4.3 billion rights issue, announced and swiftly completed last September to repay French government investment made at the height of the crisis, has been BNP Paribas’ only large capital raise. To maintain their ownership of the bank’s earnings at existing levels, investors had to buy just one new share for each 10 they already owned. Many other banks, by contrast, now have many more shares in circulation than they did up to the summer of 2007.

Looking further ahead, the broad outline of the next challenge for this bank already looms. Michel Pébereau, chairman of BNP Paribas, who joined the old BNP in 1993 when it was still owned by the French state and led it through first privatization and then the audacious merger with Paribas that quickly followed the launch of Europe’s single currency, sees it falling to the next generation of the bank’s leaders.

"Baudouin Prot [chief executive of BNP Paribas and a protégé of Pébereau] has succeeded in establishing this European bank that was always the target after we created BNP Paribas," Pébereau says. "The longer-term challenge will be to become one of the top five at the level of profitability and, in the short term, to rank consistently in the top 10. That longer-term step will be for the coming generation of leaders and international management. When Fortis has been fully integrated, in the next one or two years after that, then the time will come to think of the next stage."

He adds a quick qualifier that size itself is not the target. "The maximum size is that at which it is still possible to maintain the unique culture of this organization and to manage our risks."

Culture is the key

And what is the culture that has emerged over the past 10 years, rather against the odds, at this unlikely combination of a state-owned national retail and commercial bank and a private-sector international investment bank?

The bank’s leaders like to talk of their people’s tenacity in sticking to a business mix that now appears validated by the most severe stress test imaginable. They also highlight their responsiveness to both dangers and opportunities. "The way we reduced market risk inside CIB so quickly at the end of 2008 and the start of 2009 showed that responsiveness," says Prot, "and so did our speedy reaction to the opportunity to acquire Fortis. The opportunity was suddenly here, but we had to move quickly."

He might also have mentioned the bank’s prompt response at the very start of the crisis, in August 2007, to the impossibility of calculating fair values in discontinuous markets for structured triple-A-rated assets inside its money market funds. When senior management learnt of the problem it investigated for a couple of days and then disclosed it to the market. It was the start of the crisis. It has since been forgotten that the bank reopened redemptions from the fund within three weeks, allowing investors to withdraw at just a 1% discount.

But what is more striking to the outsider than tenacity, responsiveness or innovation is something much more fundamental that emerges clearly from every conversation with senior management at BNP Paribas: sheer level-headedness.

Georges Chodron de Courcel, the bank’s chief operating officer and key risk manager, one of the cadre brought forward by Pébereau in the years after privatization to lead the bank alongside Prot, tells the story of a three-hour presentation in his office. Euromoney had asked how the bank avoided the worst of the problem assets in this crisis. The presentation was by those proposing that the bank get into the US sub-prime mortgage market. "I am older [he is 59] and so I can get away with asking difficult questions. And when I don’t understand the product I just keep asking people to explain things to me. So on this occasion I said: ‘So these people can’t afford normal mortgages and that’s why they pay much less for the first two years. But after that they have to pay much more? Explain to me, how will they do that if they couldn’t afford it in the first place? Are they all going to win the lottery?’"

When the people in front of him ran out of answers, Chodron de Courcel decided that the US sub-prime market was not for BNP Paribas. This was not brilliance, he suggests, but simple common sense.

It’s also worth noting that Pébereau, pressed for some colourful memories of the atmosphere inside the bank in the aftermath of the hostile merger that created it, and its subsequent emergence as a European banking leader, recalls a lot of humour.

Chodron de Courcel makes a serious point, though. "It is too easy to say this was a crisis for everyone in banking. But there were good students and bad students. Many that survived and thrived – JPMorgan, HSBC, Santander – were like us, being well-managed and with a large retail base. They, also, had to renounce some revenues to keep the poison out of their balance sheets, and perhaps, as a consequence, management got lower bonuses."

A glance through the annual report shows that Chodron de Courcel himself received €718,000 in total remuneration – fixed salary, variable bonus and benefits all combined – for 2008, down from €2.5 million in 2007 and €2.3 million in 2006. Prot took home total remuneration of just €1 million for 2008 after €3.3 million in both 2007 and 2006. Pébereau received €731,000 for 2008, €1.6 million in 2007 and €1.8 million in 2006.

That might sound a lot to the family in the banlieue but by the standards of the global banking industry it is low. Offer it to the chief executive of any large US bank and he might ask why there was a zero missing and still complain that it was insultingly meagre. Yet this team of men has stuck together for the long haul at BNP Paribas and its shareholders have benefited from their experience and commitment. "We are unlikely to put on risky assets in 2009 to boost earnings," says Chodron de Courcel, "because it’s very likely we’ll still be here and having to explain ourselves in 2012."

No time for dreamers

These are not individuals prone to declaring wildly ambitious plans or indulging in what management consultants might call stretch targets. They are too grounded for that.

"I tell my people to be ambitious but not to dream," says Alain Papiasse, head of CIB. Other investment banking leaders, if they headed a division delivering large profits and growing market share at one of the strongest banks in the world to have emerged from the crisis with its capital intact and its management’s reputation enhanced would be beating their chests and throwing down the challenge to allcomers – but not Papiasse.

In a business given to swagger, his ambitions come across as modest. He wants to jump a few places in equity and M&A in Europe, for example. The bank is number one in equity capital markets in France but ninth in Europe. He would be happy with sixth, he says.

The obvious growth markets now for BNP Paribas’ CIB division are the US and Asia. A plan is being written to grow in Asia alongside the bank’s asset management division and he is unwilling to say much about it before the second quarter of this year but talks of being top six in fixed income across Asia. Another source lets slip that the real target might be to get as high as top five.

In the US, Papiasse plans to build distribution among long-only investors so as to take advantage of BNP Paribas’ strong counterparty credit rating and expand the bank’s rates business – even while acknowledging that in doing so only now it might have missed the best profits there already. That will require maybe 100 or more new hires. He hopes to build US M&A and equity capital markets capability focused on just one industry sector, energy and commodities, where the bank is a leading provider of finance to finance-dependent companies and where Fortis has brought a physical commodities trading capability.

Papiasse senses a radical change in the competitive landscape in his business that is playing to BNP Paribas’ strengths as a universal bank lender with strong capabilities in capital markets.

Companies that already did business with BNP Paribas before the banking system crisis now testify as to how well the bank has served them through it. Anheuser-Busch InBev needed to raise $54.8 billion in acquisition finance to buy Anheuser-Busch in the midst of it all, putting a severe test to its relationship banks.

Felipe Dutra, chief financial officer of AB InBev, tells Euromoney: "After the crisis, only the banks that delivered in this critical moment remained in our core relationship group. The relationship with banks such as BNP Paribas Fortis, that exceeded even the highest expectations in terms of execution in an extensive array of products and services, such as loan syndications, M&A, DCM, ECM among others, has been strengthened."

He says: "Today we do much more business with BNP Paribas Fortis than before the crisis."

The bank has also been de-risking the Fortis balance sheet, as it did its own late last year, reducing low-yielding and illiquid assets and long-dated derivative exposures, and shrinking structured credit and correlation books, for example. With this done, Fortis provides new capital and strengthens group funding through its deposits. That capital can now be put to work in providing funding to several hundred corporations with which the bank already has very close relationships and also winning new ones that might then buy additional services from the bank.

From the depths of the financial crisis in 2008, BNP Paribas has seized chances to increase business with select corporate clients. Priding itself on being a strong bank in the energy sector, it sought to do more with Gazprom just when the Russian energy giant was reviewing its core banks.

In 2008, BNP Paribas stepped into the group of seven banks providing $5.3 billion of finance for the Sakhalin II project and also committed to support the €3.9 billion phase I financing for the Nordstream gas pipeline from Russia to Germany via the Baltic sea in which Gazprom is the lead shareholder. "Gazprom wants cooperation with institutions which provide the whole spectrum of financial services around the world," says Andrey Kruglov, deputy chairman of the management board and CFO of Gazprom. "BNP Paribas meets these criteria."

In April last year, the bank led its first bond deal for Gazprom, a SFr500 million ($491 million) issue. Since then, the relationship between Gazprom and BNP Paribas has increasingly focused on commodity hedging transactions.

"Gazprom Marketing & Trading has concluded several significant value-adding over-the-counter and bilateral commodity deals which have strengthened the relationship between our two companies," says Vitaly Vasiliev, CEO of the UK-based company. "This provides an excellent basis for further cooperation during 2010 and beyond."

"Companies are prepared to commit much more business to their core lenders right now and what’s more I am a happy lender," says Papiasse. "It’s true that in the past a bank might take on a €1 billion loan syndication to a client and expect to sell down €900 million immediately. Now it is more likely to book and hold much larger commitments in club deals. The good news is that, while we feared at the start of 2009 that our risk-weighted assets would balloon as downgrades came in, in fact they dropped because new assets we are putting on are for high-quality names, often with strong covenants and collateral. And what is more we are being paid a better price for these assets that are stabilizing the average quality of the portfolio."

Long-standing US clients are pleased with the bank. Treasurer Edward Ruggiero says that Time Warner pursues the rather old-fashioned philosophy of relationship banking, rewarding its core banks by spreading out business between them to ensure they make a return, using multiple bookrunners in capital markets transactions and multiple advisers on M&A deals. It suffered a key loss because Lehman Brothers was one of its core providers, but Time Warner had carefully selected international banks that were crucial to their national economies and likely to be supported.

"The good news is that we didn’t have to restructure our bank group as a result of the crisis, but you have to take a good look at those you intend to do business with in future and BNP Paribas is in that top group," says Ruggiero. "We have been doing a fair amount of business with them for a while now and not just as a credit provider, but also debt capital markets and financial advisory work to name a few areas. They were an adviser on the separation of our cable business last year."

He adds: "The primary relationship coverage people have been consistent for some years now and the good thing is that they bring a mix of product people who have been there for years but also new product people who can look at things in a fresh way. And because we try to ensure that our banks earn a fair return over the long run, they don’t try and sell us things we don’t really need. At times, BNP Paribas has advised us not to do something and that advice might hit their pocketbook in the short term, but we appreciate it. Their way of doing business, which is a traditional relationship, partnership approach, is important to us."

Papiasse has been visiting US corporations and encouraging his staff to make calls on those where the bank is now a second-tier provider, telling these customers that its lending capacity is intact and it is ready to offer other services as well.

The message coming back is clear. "A lot of US corporate treasurers tell us that lending capacity available to them has been reduced by about one-third, so they need us. They are delighted to hear that we are open to do more business with them and they are prepared to reward us. And if you ask these treasurers what is most critical to them, aside from funding, they tend to say regular banking services such as cash management and trade finance where we are also very strong. So, if the market was telling us that to succeed we need to look more like Morgan Stanley, say, or Barclays Capital, I would be worried. But that’s not what the market is telling us."

And yet, invited to say that the bank might one day become a top-five global investment bank, Papiasse lowers his sights to top five in Europe and maybe top 10 in the world. He talks of moving the bank up from the top of the second tier of global investment banks into the bottom places among the top tier. Why not aim higher?

"It is absolutely not a question of our financial capacity to absorb volatility and manage risk, rather it is entirely a question of culture," he says. "In our business, you have roots and a culture, and you cannot suddenly change from being one thing to being another." And while some competitors have disappeared, he adds: "We need to be humble because, despite reports, a lot of our competitors are not dead and those getting through this will probably emerge stronger."

Prot is similarly disinclined to take on the world in investment banking. "We’re coming out of this crisis even stronger and that can be measured in our market capitalization as well as our market share and in our ability to attract both customers and talent, which has never been greater.

"Is this a once-in-a-life-time opportunity? Yes, it is. But it’s important not to get complacent and it’s important also to keep a cool head. In growing, CIB must remain focused on customers first and what they want. Our own egos must be kept in check."

It is hardly something to be ashamed of. It is this culture that enabled the bank to survive the horrors at the end of 2008 and start of 2009 without recording losses that would have eaten into its capital. Prot says of the bank’s return on equity through this period that the 6.6% it recorded for 2008 was in some ways even more valuable than the much higher returns it achieved in more benign years for financial markets and the global economy.

The only problem with being level-headed is that it can sometimes come across as being a little dull and maybe unambitious.

The master plan

At the start of December, the bank assembled its management in Brussels to outline their new industrial plan for Fortis. That acquisition became hugely complex last year, with some dissenting Fortis shareholders striving to block it and with the Belgian government eventually supporting BNP Paribas as the best acquirer of Fortis in return for certain undertakings. The most notable of these was that it should remain a strong local lender for the Belgian economy and maintain employment in Belgium where the bank will now headquarter certain businesses, including its network to provide corporate banking and transaction services to European subsidiaries of large multinationals and some larger mid-cap domestic companies.

The Belgium government took a stake of just under 11% in BNP Paribas as consideration and the Duchy of Luxembourg took 4.35%. At the same time the French state held a large block of non-voting shares, since redeemed. "This was not at all a nationalization," Prot insists, "but rather a private-sector solution engineered by governments." He adds: "It was wise of the Belgian government to take shares in the new bank rather than a cash consideration, as a way of participating in the upside of a strong bank that stands ready to finance the Belgian economy for decades ahead."

As fund managers and analysts listened to the presentations, no stirring speeches or ambitious plans threatened to rouse them. Max Jadot, head of corporate and public-sector banking at BNP Paribas Fortis, told them: "We want to be the decision-makers’ bank of choice... in Belgium." He added that while Belgians were proud of the country’s beer and chocolate companies, the economy had other notable features, being the world’s 15th-largest trading nation, with sizeable companies in the trade, logistics and manufacturing services sector.

Later, Jacque d’Estais, head of investment solutions for BNP Paribas, boasted that the Fortis deal brought to its securities services division number-one positions in corporate trust and funds administration in Luxembourg and the number-two position in custody in that country.

Maybe it is unfair to suggest that this is an underwhelming way to enthuse investors about a transformational, cross-border acquisition, but Euromoney puts the suggestion to Prot anyway. He’s not overly worried by how it comes across to journalists. "In banking and business, numbers and facts speak louder than words, and when you look at the numbers, at what Fortis brings in its deposit base, customer assets under management, in retail revenues and earnings capacity, it makes a very significant contribution to all of those."

Prot’s undertaking to BNP Paribas shareholders on acquisitions is to be disciplined, to insist most obviously on a return on investment above the cost of capital and earnings accretion within three years. That’s why the bank lost out on many acquisitions in central and eastern Europe, an outcome that might now seem less disappointing than it did earlier in the decade. Expect him to be unwavering in his commitment to extract returns from Fortis. The plan unveiled in December is to achieve €900 million of synergies, taking out 16% of the costs, or €850 million a year, by 2012, at a one-off cost of €1.3 billion.

"Nothing should be allowed to distract us from that in the coming year," says Prot, dousing any question of possible further acquisitions in core Europe or central and eastern Europe where banking assets might come up for sale at low multiples of historically low earnings. If Prot is interested in hunting for more bargains he gives a very good impression of not being so.

"Essentially any company is as good as its ability to grow organically, and if you’re not able to do that it suggests you have problems already," he says. "Banking is a service business that requires constant effort and investment in existing franchises to ensure out-performance. And acquisitions only bring more risk and a lot of work. So for the next few quarters, amid a fragile economy and amid lots of uncertainties for the banking industry, not least around regulation, don’t expect us to do anything but focus very intently on delivering the Fortis synergies and industrial plan."

The integration certainly brings any number of complexities. The bank is trying to present itself to shareholders as a steady and dependable one that is also sprinkled with some attractive growth opportunities in emerging markets. It has retail operations in Ukraine, Poland, Turkey and across north Africa, and both corporate and investment banking and asset management businesses in Asia. Fortis bolsters this. The enlarged BNP Paribas now has two banks in Turkey. It remains to be seen whether the authorities there will allow it to merge them.

Similarly, it now has two fund management operations in India that, if combined, would command 4% of the market. The bank’s institutional asset management business, under the umbrella brand BNP Paribas Investment Partners, illustrates both the potential and the difficulties of making the merger work.

Guy de Froment, vice-chairman of BNP Paribas Asset Management, points out that while the Fortis Investment brand will now disappear, the €163 billion of assets it brings will boost the BNP Paribas Investment Partners business, which had €348 billion under management. "It gives us a broader product set, broader geographic reach and client coverage.

"In particular, having previously integrated large parts of the old ABN Amro business, Fortis substantially reinforces our position in Asia. We feel that we suddenly have critical mass in Asia and we now want to double our assets under management there in the next three years from €50 billion to €100 billion."

He adds: "The old Fortis Investment Management brings a new, more matrix-like organizational structure. It gives more power to the regions rather than to products and asset classes and this will feed into BNP Paribas Investment Partners, now that it is operating on a much bigger scale."

In Europe, Fortis brings expertise in managing European equities to complement the bank’s strong position in managing fixed-income assets. And it adds more expertise in managing local-currency and international-currency emerging market debt. It also brings $32 billion in assets under management in the Netherlands, half being for institutional clients including the large Dutch pension funds generally seen as at the cutting edge of liability-driven investment strategies. The more it deals with such sophisticated clients, the greater will be the firm’s credibility among other institutional customers, so de Froment hopes.

Complex group

It also brings more old names into an already complex group. BNP Paribas Investment Partners is the cornerstone institutional asset management business inside the investment solutions division of the bank that also includes wealth management, securities services and insurance, now bolstered by a strategic partnership with AG Insurance in Belgium, in which the bank acquired a 25% stake as part of the Fortis deal.

BNP Paribas Investment Partners is itself a new entity, structured in 2007 to reflect the importance of external partners with which the bank’s asset management division had signed joint venture agreements in an effort to present itself as an alpha manager. These include such operations as UK-based Fauchier Partners in funds of hedge funds, Fischer Francis Trees & Watts in global fixed income, Overlay Asset Management in FX and Impax in environmental investments. All want the independence to manage money precisely as they see fit.

"The creation of BNP Paribas IP was a recognition of the fact that the size of the partners vis-à-vis BNP Paribas Asset Management had grown to the point where we had to rethink the relationship," says de Froment. "If you are going to be big in asset management, clients want to see the value that expert fund managers are bringing to products. The relationship between the partners and BNP Paribas Investment Partners had always been at arm’s length, though it does of course help to have a big, strong, AA-rated bank like BNP Paribas standing behind these experts: thus, for example, a central bank might want to use the expertise of the fund managers at Fischer Francis while having its main contract with BNP Paribas Investment Partners."

BNP Paribas has provided distribution to these fund management experts. It wouldn’t teach Fauchier Partners how to manage funds of hedge funds or how to market itself to UK pension funds, for example, but it has helped it break into the Australian pension fund market.

Fortis had not looked outside for expertise in the same way but it adds yet more names to the pot, including Alfred Berg, which brings new relationships with clients in the Nordic countries. "There is great potential for cross-selling and for reaching new client segments," says de Froment. But he acknowledges the need to proceed carefully and thoughtfully in a business where the star fund managers bring all the value and without them a business can evaporate. "A merger in asset management is never easy," he says. "FIM had effectively just been through one and so we realized the importance of both speed and transparency to the process. We have had some departures but these have only marginally affected assets under management. Since June, the integration team members have been given specific responsibilities so as to avoid any overlap: you get a strong sense of empowerment at both the divisional level and at the regional level."

Work to be done

Beneath the surface, much work remains to be done. The FIM brand may disappear but the business will migrate on to its IT platform over the next 18 months. Meanwhile the enlarged group is already on the lookout for new partners to extend its coverage. It is in talks in Taiwan, for example.

If the institutional asset management business offers just one example of the delicacy required to wring all the potential from the merger, Prot and his team will indeed have much on their plates in the months ahead.

A strong motivation will be the chance to unearth and burnish gems buried in the business that the world outside BNP Paribas might not yet fully appreciate. Prot and his team think they have one in the form of 100 corporate business centres spread across 16 countries in Europe, offering daily bread-and-butter services such as cash management and trade finance to the subsidiaries of large corporations that are customers of CIB as well as to domestic companies that BNP Paribas covers through its retail network. Retail banking means something slightly different at BNP Paribas to what it does at many other banks. Of its 14 million retail customers, 13 million are individuals and families, with as many as 1 million being small and mid-cap companies and entrepreneurs running small businesses.

This Corporate and Transaction Banking Europe (CTBE) network is one of the businesses that, as part of its deal with the Belgian government when acquiring Fortis, BNP Paribas undertook to run from Brussels. Fortis has contributed a lot to it, with six centres in Germany alone, for example, devoted to corporate and transaction banking for mid-caps. Prot says: "This is an unparalleled footprint that is not yet well known but over the next three to five years might become a very significant driver for the bank in Europe."

Feeling the strain

Yet as Prot runs through all these positive aspects of the bank’s recent performance and the potential from this latest merger, he appears uneasier than in previous meetings with Euromoney. He often reaches for presentation slides to read from and looks rather strained.

No doubt the merger is all-consuming work. It sounds as if he doesn’t like some of the outcomes much anyway. Some colleagues say he is disappointed that the bank’s losses in Ukraine have so hurt the performance of the emerging market retail banking division that it recorded a €78 million loss for the third quarter of 2009 after being flat for the first half of the year, so delivering an unfortunate comparison with the €547 million of pre-tax income in the first nine months of 2008.

Others say that Prot, as head of France’s banking champion and also president of the French banking federation, now faces extraordinary political pressures at a moment when the country’s president is declaring the defeat of Anglo-Saxon capitalism and a new French internal markets commissioner is set to play a key role in new banking regulation for Europe.

Inside the bank, gossip, even before the announcement of new tax proposals on bankers’ bonuses, held that the bonus pool that was cut savagely in 2008 won’t be much bigger for 2009. Prot must be wary of discontent. Although senior bankers at BNP Paribas are long-serving and committed, talking of the family of the bank, they are a small team. The 12 members of the executive committee have each served on average 17 years at the bank. Beneath them, staff turnover has been substantial. Fully 40% of the bank’s 202,000 employees, two-thirds of them working outside France, were not part of the group five years ago.

Prot has announced a risk academy at the bank to ensure that its new employees grow up like the bankers of his own generation, understanding that taking risk is integral to everything they do and not a matter than can be left to a support team of expert risk controllers.

And Prot might well feel some strain if he is expected to toe the line of French political leaders, given his and his colleagues’ evident concern that regulators are barking up the wrong tree on new bank capital rules.

He says: "It’s good that regulators are taking the time to conduct a quantitative impact study early in 2010 before agreeing a package by the end of the year for implementation in 2012. An early reaction would inevitably have been an over-reaction that might constrain lending and growth. Make no mistake, new banking industry regulation agreed in 2010 will impact the global economy for many years to come."

As other banks rushed last year to push their equity tier 1 ratios up to 8%, BNP Paribas was surprised to find itself being criticized for having weak capital ratios, despite not recording an annual loss, avoiding the worst assets and showing the benefit of decent business lines and geographic diversification of earnings and exposures. It has since taken its capital ratio up from 5.4% at the end of 2008 to 7.8% at the end of 2009.

Senior management at BNP Paribas remains distinctly unimpressed by all the calls for higher capital ratios as a protection against a repeat of the crisis. They are confident of the bank’s capacity to generate capital through retained earnings. But they consider it challenge enough to generate a 15% return across the cycle on the equity they already have.

Their argument is that it is banks’ activities and behaviour that get them into trouble, not weak capitalization. Prot says: "We have found that what is most important is the quality of bank management and the quality of supervision. What we cannot allow to happen again is to have large areas of the financial markets – such as mortgage origination in the US – unregulated. In addition, some individual banks’ managements did wild things that should have been picked up by their supervisors but weren’t. There is no level of capital, no optimal leverage ratio, that will save banks, if they’re intent on going through the wall."

Pébereau, chairman of BNP Paribas, stands shoulder to shoulder with his chief executive on this. "I am afraid of the consequences if governments draw the wrong lessons from this crisis," he says. "And one thing that it has most definitely not demonstrated is that there was insufficient capital at all banks to avoid systemic risk. In fact many large banks did have enough capital for the risks they were taking.

"It is true that, in some cases, capital was insufficient for particular market-risk assets, notably in investment banking but also sometimes in retail, for sub-prime mortgages, for instance. So capital requirements should be raised for these certainly. But there is no case at all that the system needed more capital in total.

"Perhaps more important is that liquidity was not well managed by some banks, which thought the markets would always provide it. And when you think that regulators have just two main risks to monitor at banks and in the system – solvency and liquidity – they must do a much better job on liquidity risk. The Federal Reserve, for example, did not do a very good job on liquidity risk at all.

"So I am afraid that all this talk of whether the system needs another one, two or three percentage points of capital rather misses the point. It is not through more capital that we will make the system safer, or through the separation of retail and investment banking. Bear Stearns and Lehman were pure-play investment banks and Northern Rock was a pure-play retail bank. And nor is the answer to devise special treatment for so-called too-big-to-fail banks. You cannot determine ex-ante which banks cannot fail without systemic consequences.

"There is no easy answer. You need banks to be professionally managed, as we were, as HSBC has been. And you need boards of genuinely independent directors and regulators that both understand what goes on inside banks. This is an important moment for regulators."

It’s probably worth regulators’ while taking seriously what people like Pébereau, Prot and Chodron de Courcel have to say about the crisis and the best response to it. Of course this might be self-serving. BNP Paribas will be happy to accept higher capital requirements on market-risk weighted assets in part because these account for just 3.8% of its total. It could double these assets and still easily generate sufficient capital organically to meet any new regulatory requirement.

Look at how well the bank has managed its risks. Its average daily value at risk (VaR) stood at €56 million in the third quarter of 2009, up slightly from €52 million in the second quarter but way down on the €80 million in the third quarter of 2008. Much more important than this reduction is the fact that in the three years since 2007 its actual losses have exceeded the stated daily VaR on only nine days. This comes amid convulsions in the financial markets that have resulted in some banks once renowned as good risk managers suffering losses exceeding stated VaR on 30 days or more, in one case on 50 days. Prot points to another important metric, the bank’s cost of risk in relation to its gross operating income, which at 50% is very much toward the low end of the peer group.

On the funding side the bank looks to have entered a virtuous circle. Its strong credit rating and good risk management brought in a flood of wholesale deposits in the depth of the crisis that have since proved rather sticky, even though it does not pay the highest rates. These deposits and those since brought by Fortis have taken the loan-to-deposit ratio down from 128 to 118. The bank has reduced its dependence on short-term funding to finance that gap, issuing €38 billion of debt last year with maturities of greater than one year and keeping a steady and manageable calendar of redemptions falling due in the years ahead.

French regulators now insist that banks conduct stress tests and manage their finances to be able to survive a month of severe market disruption. BNP Paribas runs stress tests for a particular event at the bank amid a benign economy and for a severe economic downturn. It reckons it could survive a severe crisis unaided for three months.

On its €2.3 trillion balance sheet, compiled under IFRS that does not allow for netting of derivatives or collateralized repos, it carries a liquidity buffer of €167 billion in cash and liquid government bonds.

This is a bank in pretty good condition given the fragile economy. It reduced risky assets swiftly last year and then came up with a plan to further reduce risk-weighted assets in the corporate and investment bank by €30 billion by 2012. It had got halfway there inside six months.

Show me the notional

Chodron de Courcel has been playing the role of the old man asking difficult questions rather a lot this year, especially about long-dated derivatives based on suddenly illiquid underlyings. "I kept asking our people to tell me the notional exposure," he tells Euromoney, with a playful glint in his eyes. "It probably sounded silly, but I really wanted to know and I said that if they couldn’t tell me the notional, then I would be... anxious."

What was the upshot? "Today, we feel a lot more comfortable with the notional," he says.

Chodron de Courcel is an old-school investment banker and former trading floor manager who sets great faith in what he calls proximity management: walking the floor, taking in the ambience, asking people how they feel about their exposures, looking for signs of discomfort or unease in their replies, which may be more revealing than the numbers they mention. Such skills are highly valuable and the next generation of leaders at the bank will need more like him.

What is his take on the raging debate over regulation? He suggests that regulators and government officials are now at least listening to the bankers, which they weren’t in the middle of 2009.

"The real issue is to follow the rules that already are there but that weren’t always being respected by some of our competitors," he suggests. "If you ask regulators whether banks need more capital, then of course they will say ‘yes’. That’s an easy thing to say. But it may be a mistake. Liquidity is really the key. As for capital, yes we can increase our ratios but what happens when the market won’t provide any more capital? Then we will have to reduce assets.

"If we have to increase capital on market-risk-weighted assets that is understandable.

"But if we have to increase it on all risk-weighted assets, that will be a drama. In trying to make the financial system safer, are we going to damage the real economy again?"

Let’s hope someone is listening. He and his colleagues at BNP Paribas have earned the right to be heard.

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