“Debt is a potential factor of fragility”
Frédéric Oudéa, CEO of Societe Generale, draws lessons from the 2008 crisis and calls on Europe to complete the banking union. Read the interview published in the French national newspaper Le Figaro, 15/09/2018.
Ten years to the day after the collapse of Lehman Brothers, Frédéric Oudéa, who was already CEO at the time, tells us what the Group learnt from the event.
What memories do you have of 15 September 2008?
The crisis was a shock, but it did not entirely come by surprise. It started in July 2007, and then the pressure gradually began to mount. We were prepared, we had strengthened the management of our market exposure. But after the collapse of Lehman Brothers, the crisis entered a new phase, and became truly systemic.
Did the crisis change you? Do you still feel an impact from it?
Oh, yes, I still feel the impact of it! Remember that at the time I had only recently become Chief Executive Officer. And at Societe Generale, we also had the Kerviel crisis at the start of 2008, which was a ferocious and much more intense experience for our bank. I think the financial markets enjoyed a certain exuberance between 2004 and 2007, probably encouraged by more relaxed regulation and a culture around trading activities that saw managers, who were often traders themselves, motivated by short-term profits that feed into their own remuneration. Over the last ten years, the rules of the game and the culture have changed, with business models and the types of risks taken now profoundly different. We have built a more solid system around the banking industry focused on maintaining robust balance sheets. We have returned to the fundamentals of our DNA: a bank of constructive entrepreneurs serving our customers. The memory of that crisis continues to guide my action and the way I think.
Has the financial system become solid enough to support a new crisis?
We need to be precise in the words we use. Banks, which are only one part of the financial system, are much safer than before. At Societe Generale, for example, even though we take fewer risks, we have doubled the size of the capital - our security buffer - we held before the crisis. And limits have effectively been put on the capacity of banks to increase their balance sheets. In parallel, other financial system players have developed and the debt of economies has increased, and is higher than in 2008. This is a potential factor of fragility because this debt was contracted based on low interest rates. Once interest rates start to rise again, how will it be refinanced? The tense geopolitical climate could also trigger shocks and the value of this debt could decrease. Investors will be the ones that suffer the direct consequences of this, probably more than the banks.
Although the crisis started in the United States, US banks have increased their market share worldwide. Is this a strategic challenge for Europe?
It may seem paradoxical that US banks have emerged stronger even though they were largely at the origin of the crisis. The public authorities in the US took rapid and very vigorous action. And the country emerged quicker from the crisis. Over the last three years, the Federal Reserve has been gradually raising its interest rates without having a negative impact on the economy and without creating any turmoil for the financial markets. Moreover, the banking sector concentrated during the crisis. US banks hold high levels of market share in the US and, in some cases, operate as a virtual oligopoly. In short, the economic and financial environment is favourable and the market has consolidated.
In Europe, the situation is more mixed. The ECB has not yet exited from its exceptional monetary policy, which is a penalising factor. Secondly, we have started to build a banking union in Europe. But this house is only half built. It has walls, but it doesn't yet have a roof or interior fittings. The building work will continue, but it is progressing at a slow pace. And the European banking landscape remains too fragmented.
The European banking sector must therefore consolidate also, by pushing ahead with the cross-border mergers that are so often the subject of rumour, and this includes Societe Generale…
If we are to compete with US banks again, the European banking sector must consolidate. This is consistent with the concept of a banking union with a more integrated market. If we look at Europe five or ten years from now, there will be a few major banks that also operate financing and investment activities, alongside national and regional champions in retail banking. Mergers will initially come at the domestic level, but it will take much longer for cross-border mergers. For now, the conditions are not yet right because there is no political consensus on what the banking sector needs to become in Europe and the necessary regulatory framework is not yet in place. We need a more coherent approach and a more strategic vision! Going forward, we have a clear ambition to make Societe Generale one of the winners of the race for leadership in Europe.
What are the new challenges facing banks?
We were just talking about the exceptional crisis seen in 2008, and we must never forget it. But banks and the financial authorities must project themselves towards the future. The digital transformation is a major challenge in which we are all novices and pioneers. It is taking us on a wonderful, transformative journey over several years to adapt to and anticipate customers’ changing needs and deal with new risks such as cybercrime. We must continue to manage credit risk and market risk, which are currently at low levels. Finally, regulatory and compliance risks need permanent attention in a world in which financial penalties have become a diplomatic weapon. On a broader level, we want to contribute positively to the developments taking place in the world and the new social challenges. All in all, we have plenty to do!
© Bertille Bayart/ Danièle Guinot / Le Figaro / 15.09.2018.
This text has been translated from the French. The original version is available here.