As Moody's downgraded the credit ratings of Crédit Agricole and Société Générale, BNP Paribas – the biggest bank in the eurozone – led the French fightback. On the face of things, it was an impressive effort. Capital? No problem, our core ratio is already 9%-plus and we're generating healthy profits. A Greek default? Easily manageable: the exposure is €4bn, we've already written down €500m, and even a 50% haircut wouldn't hurt terribly – it would merely wipe out a couple of months' profits. Funding? We'll get smaller, by shedding €70bn of assets and head off any difficulty in getting hold of dollars.
This apparently reassuring narrative was greeted with a 4% fall in BNP's share price, even after a 40% fall over the past couple of months. What's the problem? It's threefold. First, even a hint that US money markets are not lending freely to big European banks is alarming. Second, and more importantly, even radical moves to address funding pressures only buy time – nobody believes the eurozone crisis can be solved happily within six months, so French banks, heavily reliant on wholesale markets, could be running up a "down" escalator. Third, as everybody knows, French banks' exposure to southern Europe doesn't end in Greece; the fall-out from default in Athens is the bigger worry.
The obvious answer, as with most banking crises, is more capital. No need, says the French finance ministry. On bald numbers, that reluctance is understandable. But the real world is a different place. Yes, BNP and others could easily weather a Greek hit. But if Germany is unwilling or unable to throw its protective arms round the rest of the eurozone, French banks will need more capital, if only to improve sentiment. It would have been better done last year, but it's too late for regrets. To use Tim Geithner's phrase, we're in territory where investors look only at "overwhelming force". BNP's plan – logical, detailed and coherent – was not overwhelming.
