Compared with London's Big Bang, the changes in the rules governing banking and financial markets in France are more like a whimper. Nevertheless, they do represent a major change in the context of the rigidly controlled French banking scene.

Like other profound changes going on in the French economy, the new ground rules in banking are liable to pose daunting problems for banks as they scramble for a competitive edge. In a world of increasing rivalry between

financial markets, Paris has been obliged to adapt to the new climate just to keep its share of business.But these changes, such as getting the state out of the banking sector, are likely, at least in the short run, to weaken the French banks. Among Western states, France is unique in having almost a wholly state-controlled banking sector. The denationalization of the banks, which is soon to begin, will alter banking rules in France. Until now, foreign banks were treated in the same way as indigenous ones in applications for licenses.

Under the denationalization law, foreign banks will be prevented from taking more than 20 percent of formerly nationalized banks. The problem is that most French banks are not attractive under international norms of profitability, capital ratios or return on assets. For example, last year leading French banks registered profit levels extremely low by international standards: 0.41 percent of pretax profits on assets, compared with the U.S. ratio of 0.89 percent, Britain's 1.13 percent and West Germany's 0.5 percent.

If potential foreign investors are limited to taking a portfolio share in French banks, then many might either ignore the market or open their own affiliates, thereby further adding to the competition. By the end of 1986, 24 new banks are expected to receive their licenses, a third of them foreign. Moreover, twice as many new financial institutions not licensed as banks also will get approval by the Bank of France as "maison de titres," a new category of institution created in 1984. This status is particularly appealing to foreign stock brokerages, as they can do almost all investment banking without having to meet the high capital requirements of banks.

French banks have found that foreign institutions were more experienced with options, commercial paper and securitized mortgages, and were able to win an edge in France. Major French banks reacted by creating specialized subsidiaries or removing old barriers between banking divisions. The latest trend is toward centralized dealing rooms operating in money and financial markets as well as trading commodities. Liberalization and deregulation have

put pressure on French banks to reform their own organizations and hierarchies and the unjustified privileges enshrined under cosy state tutorship. During the heyday of expansion of domestic activities, French banks opened branches throughout the country. They are geared up for business they can no longer attract.

It is estimated that over-staffing levels are at a minimum 10 percent, a figure likely to be exacerbated as computerization advances. Around half of French banks' spending before profits goes for wages. Firing employees in France is not easy, but banks are starting to timidly face up to the problem, despite powerful unions. Some banking experts say the "social problem" is one of the principal obstacles to modernization of French banking.

Another problem is one of mentality: the French are reputed to have the largest per capita stock of gold tucked away, often under mattresses. Thus, trying to develop new business as financial counselors to firms and households is an uphill struggle for French banks.

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