France Société de prise de participation de l’État (SPPE)

In response to the Global Financial Crisis, the French government created two schemes, the Société de financement de l’économie française and Société de prise de participation de l’État, to aid their banking sector through refinancing assistance and capital injections. The SFEF was a special purpose vehicle majority owned by France’s leading banks that provided financing in exchange for collateral.^FNSee Fang (2020) for more information on the Société de financement de l’économie française (SFEF). In order to fund itself, the financing vehicle issued bonds guaranteed by the French government (BdF 2009). The SPPE, a limited liability company wholly owned by the French government, was financed by short-term debt guaranteed and issued by the French government and subscribed to subordinated debt or preference shares issued by banks (BdF 2009; SPPE 2010).

On October 10, 2008, the Group of Seven industrialized nations created five principles to guide government action during the financial crisis. One of the guiding principles that directly applied to the SPPE involved “recapitalising public and private financial institutions where required” (BdF 2009). Following the G7 meeting, the French presidency of the European Union hosted a summit of the euro area on October 12, 2008, where euro area leaders collectively agreed on the need for emergency measures (Jabko and Massoc 2012). The French government then convened an emergency legislative procedure on October 16, 2008, to pass its own plan. Article 6 of the Law no. 2008-1061 of October 16, 2008, to rectify finance for the financing of the economy was adopted within one week and allowed for the creation of both a recapitalization and a refinancing program (Conac 2010; L’Assemblée nationale et le Sénat 2008).

Prior to approving the SPPE, the European Commission was required to determine whether the scheme represented State Aid (State Aid N/613 2008). If the EC concluded the SPPE was state aid then it would have an anti-competitive impact on the common market and require further legal scrutiny. According to Article 87(1), State Aid is defined as below:

"any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market (EC 2008)." 

Although the French government argued that the scheme did not constitute State Aid, ultimately the EC disagreed.

As a result, the SPPE had to be approved under Article 87(3)(b), which affirms that State Aid “may be considered to be compatible with the common market: (b) aid […] to remedy a serious disturbance to the economy of a Member State.” The EC determined that the SPPE was permitted under this provision as the program was well targeted (“in the case in point, to remedy a serious disturbance in the economy of a Member State”), necessary, and proportionate (EC 2008). The French government initially allocated €40 billion for the SPPE, but the EC revised this budget to €21 billion following its approval of the plan (BdF 2009). Furthermore, the EC implemented a two-stage intervention that allowed the second injection only if markets conditions warranted it, along with a six-month application window. The EC described these measures as an “additional safeguard against excessive intervention by the State” (EC 2008).

On October 19, 2008, the Dutch government announced that it would inject €10 billion of nonvoting preferred shares into ING. This followed the announcement of the Troubled Assets Relief Program, a $700 billion package announced by the United States. ING described the funds as “a strong buffer to navigate the current market and economic environment” (Jolly 2008). As a result, markets expected comparable schemes aimed at improving capital ratios by other countries (Conac 2010). In particular, these injections from various national authorities had “raised the bar for capital ratios” and led people to believe “there are new capital standards in the market” (Jolly 2008).

Christine Lagarde, the French minister of the economy, industry, and finance, testified on October 22, 2008, to the French National Assembly Finance Committee that the impetus behind announcing the plan on October 20, 2008, was the Dutch intervention. She explained that market expectations for similar plans by other European countries following the Dutch government’s October 19 announcement weighed heavily on banks’ share prices during the morning of October 20, 2008. In response, the French government decided to remove the uncertainty and announce the plan that night. Lagarde clarified that the plan had been in the works for several days and the Dutch announcement did not affect the details of the plan, but changed the application schedule (Lagarde 2008).

The SPPE communicated its operations through the issuance of annual reports and the Agence des Participations de l’État (APE), the French government shareholding agency, absorbing its financial statements (SPPE 2010). The SPPE also had to report on the implementation of the bank rescue plan to the legislature and the EC after the first six months (EC 2008; L’Assemblée nationale et Sénat 2008).

The French government created the SPPE as a simplified joint stock corporation (Société par actions simplifiée) and limited liability company with the French government as its only shareholder (Conac 2010; SPPE 2010). It had no employees and awarded no compensation to its directors or executive management (SPPE 2010). In order to manage its assets, the SPPE delegated roles to government and external agencies. For example, Ernst & Young performed an external audit of the SPPE financial statements in accordance with applicable French law for the year ended December 31, 2010 (SPPE 2011). The Agence France Trésor (AFT), the government agency responsible for managing public debts, managed debt issuances by the SPPE, including the handling of margin calls and hedging foreign exchange exposures. As previously mentioned, the APE absorbed the SPPE financial statements onto its balance sheet (SPPE 2010). The Commission Bancaire, the primary regulator for both banks and investment firms, performed functions such as assessing potential participants and approving bank applications for exiting the program (EC 2008).

The EC approved the initial injections along with the option for a second installment of an identical amount under matching conditions should market conditions continue to deteriorate (EC 2008). Approximately a month and a half after the EC approved the initial plan on December 8, 2008, the French government notified the EC of a second installment on January 21, 2009. The EC approved the second installment on January 28, 2009, noting that the market conditions that led to the first installment still prevailed (EC 2009a). The CB calculated both injection amounts to increase the Tier 1 ratios of participating banks by 0.5%. In total, the two installments brought the initial budget to €21 billion (EC 2008).

In addition to adding preference shares to the second injection, the French government increased the budget by €500 million to bolster the merged Caisses d’Epargne and Banques Populaires’ Tier 1 ratio by 50 basis points (EC 2009b). Although Caisses d’Epargne and Banques Populaires individually received €1.1 billion and €0.95 billion, respectively, the French authorities felt further capital was required as the merged entities would consolidate all of their risk-weighted assets but only a portion of their share capital (BdF 2010b). The EC approved the increase in budget, and the merged BPCE entity received the additional €3 billion following its merger on July 31, 2009 (EC 2009b).

The SPPE funded itself by issuing debt guaranteed by the state. These bonds were irrevocable, unconditional, first demand (an added form of protection in which the creditor is guaranteed repayment regardless of other transactions), ensured through the Caisse de la Dette Publique (French Public Debt Fund), a fund that backs the creditworthiness of the French government in financial markets, and available in any currency of the Organisation for Economic Co-operation and Development (EC 2008; SPPE 2009). The minister of the economy dictated the specific characteristics for each funding operation, such as duration and guarantee size (EC 2008). SPPE bonds primarily consisted of short-term notes because yields on short-term debt were significantly lower, and therefore cheaper, than those on longer-term debt. Also, banks had a strong motivation to redeem capital injections quickly (Conac 2010).

The French authorities outlined a set of criteria for credit institutions, including foreign subsidiaries operating in France, in order to qualify for capital injections under the SPPE (EC 2008). The criteria were based off of the Article 87(3)(b) provision (see Key Design Decision regarding Legal Authority from the European Commission) that the program was approved under. The credit institutions satisfying the following criteria were eligible to apply for recapitalization by the SPPE:

1. Authorized in France and supervised under the French Monetary and Financial Code;
2. In compliance with the own funds [regulatory capital] requirement in the French Monetary and Financial Code;
3. In a financial position to be able to guarantee its long-term viability and to present a positive economic situation in accordance with the criteria normally used in the banking sector;
4. Previously concluded an agreement with the state fixing the consideration provided for by law; and
5. In such a position that a severe and sudden reduction in its activity would have a serious impact on the French economy (State Aid N/613 2008).

The CB examined and approved individual bank applications based on the above qualifications. Ultimately, six French banking groups applied to receive funds, and all were approved (EC 2008).

The SPPE focused on providing funds to a large number of financially sound banks rather than rescuing near-bankrupt institutions (Jabko and Massoc 2012). The intervention was a precautionary measure to shore up capital ratios and spur lending to the French economy (Conac 2010). Therefore, there were no legal requirements or sanctions enacted to compel banks to receive funds (EC 2008; Jabko and Massoc 2012). The CB was responsible for reviewing and approving these applications. The participants, which represented more than 80% of France’s net banking income, included Société Générale, BNP Paribas, Groupe Crédit Agricole, Groupe Crédit Mutuel, Groupe Caisses d’Epargne, and Groupe Banques Populaires. HSBC France was eligible to receive funds through the scheme but declined to apply (EC 2008).

Some of the six participating institutions, including Société Générale, publicly expressed hesitation regarding the capital injections. Conac cited this reluctance as evidence that the program was not necessarily voluntary—in other words, the government was pressuring banks to accept the funds. He stated, “By forcing all major French banks to participate into the scheme, the Government prevented the market from identifying a weaker one and creating a panic” (Conac 2010). This issue also arose during Christine Lagarde’s testimony on October 22, 2008, when Dominique Baert, a member of the French National Assembly Finance Committee, expressed concern about providing funds to nonstruggling institutions. He questioned whether providing capital to all institutions hid those that really needed it from the markets (Lagarde 2008).

On December 11, 2008, the SPPE injected €10.5 billion into six French banks through a subordinated-debt security called Titres super subordonnés à durée indéterminée (Conac 2010; EC 2008). TSS were hybrid debt securities with a maturity of 99 years (or perpetual) and were commonly issued by French banks prior to the crisis (EC 2008). Lagarde characterized them as halfway between debt and capital in her testimony (Lagarde 2008).

For these securities to qualify as Tier 1 capital, they had to fulfill Basel requirements of permanent type, subordination ranking placing the bearers just before shareholders (including preference shares), and ability to absorb losses. The CB categorized TSS as noncore Tier 1 and set a ceiling of 35% of total Tier 1 capital (EC 2008).

Additional requirements included:

1. Maturity of 99 years or perpetual;
2. Two-phase remuneration;
3. Subordination level over shareholders and to holders of the issuer’s equity securities;
4. Subordination level below holders of bond instruments;
5. Obligatory interest payments following remuneration of capital shareholders;
6. Loss absorbing; and
7. Reimbursement at any time, pending approval by the CB (EC 2008).

There were a number of reasons behind the French government’s decision to limit injections to TSS instead of more subordinated securities such as ordinary or preference shares. Since participating banks were solvent and healthy, injections of better-quality capital were not necessary; it also could have sent a negative signal to the markets that the banks receiving capital were in a worse situation than initially disclosed. In addition, ordinary and preference shares would have been more expensive and required an extraordinary shareholders meeting, and French banks did not commonly use preference shares (Conac 2010).

Lagarde explained that the decision to use TSS was because the injection of higher-quality capital was not justified, as the recipients were strong, well-managed, well-supervised banks that had the added support of robust retail businesses. Therefore, the increased costs and negative signaling effects associated with higher-quality capital would be counterproductive. She also highlighted that TSS closely aligned with the goals of the program as it facilitated financing of the economy without taking equity stakes and attempting to reorient activity (Lagarde 2008).

The Banque de France used the below formulas to calculate interest payments; they paid the fixed rate for the first five years followed by the variable rate (State Aid N/613 2008).

1. Fixed Rate: Bond du Trésor à taux fixe et à intérêt annuel (BTAN)^FNBond du Trésor à taux fixe et à intérêt annuel (BTAN) = average rate on the five-year government bonds during the 20 days preceding the issue. five years 300 bps 5 x credit default swap (CDS);^FNCredit default swap (CDS) = average value of the five-year CDS spreads for the specific beneficiary institution over the period from January 1, 2007, to August 31, 2008 (if unavailable, the average five-year CDS in the beneficiary institution’s credit rating category was used). or
2. Variable Rate: EURIBOR 250 bps 5 x CDS (EC 2008).

Given the BTAN was approximately 3% prior to the December 11, 2008, issuance, the rate dictated by the above fixed-rate formula was around 8%, varying slightly depending on the participating bank (EC 2008). According to Lagarde, 8% was the approximate rate that French banks paid during 2008 to raise this type of debt (Lagarde 2008).

This remuneration structure provided stability, included a market rate, accounted for each institution’s individual credit profile, and represented a penalty remuneration rate in comparison to an improved market. In order to classify the issued funds as Tier 1 capital, there could not be a leap in rates for these securities compared to market conditions. Therefore, the French government implemented an initial fixed-rate period to provide the required stability. As EURIBOR is a widely accepted market benchmark, its inclusion expanded the liquidity for these securities on the secondary market. The rate reflected each participant’s risk profile by referencing the CDS spreads for the beneficiary institution while multiplying that spread by five to account for the subordination level of the security. These high rates also motivated beneficiaries to withdraw from the scheme quickly as the rates would likely prove relatively higher than those available in improved market conditions (EC 2008).

An additional feature of the injections was a nominal annual increase of the amount to be redeemed. Similar to the remuneration rate, this yearly increase acted as an incentive for banks to exit the scheme quickly once market conditions improved (EC 2008). Under this arrangement, the nominal amount increased to 1% if redeemed between the first and second year and to 3% between the second and third years. It then increased by an additional 2% annually until the seventh year, reaching a maximum of 11% (Conac 2010; EC 2008).

On January 21, 2009, the French authorities submitted an amended capital injection scheme to the EC. Under this updated proposal, the CB allowed banks to choose between two different securities for the second round of capital injections: the TSS securities approved on December 8, 2008, or newly introduced preference shares. These preference shares were on equal footing with ordinary shares in terms of liquidation as well as on a going concern basis and were not subject to Tier 1 capital limits due to their core Tier 1 capital classification (although they were limited to 50% of share capital for unlisted companies and 25% for listed companies). However, the preference shares were nonconvertible, nonvoting, and had priority for dividend payments over ordinary shareholders. The issuing bank could buy back these shares, subject to the consent of the CB, at the higher of either 110% of the current price of the shares or the 30-day average price of the shares prior to the buyback date (EC 2009a).

The CB introduced preference shares during the second round of capital injections due to logistical reasons that centered on Tier 1 capital limitations. Partly due to the first round of injections, most banks had reached the 35% ceiling of Tier 1 capital imposed on noncore Tier 1 securities, therefore limiting the beneficiaries’ ability to issue more TSS. The preference shares solved this issue by increasing Tier 1 capital overall and subsequently allowing more TSS to be included in the Tier 1 ratio (Conac 2010). They also allowed banks to increase their core Tier 1 capital ratios, which was positive for the banking system over the long term (EC 2009a).

In order to allow participants to take full advantage of the amendment, French authorities gave banks that received the first injection the option of repaying TSS with the proceeds from issuing preference shares (EC 2009a). BNP Paribas pursued this strategy by issuing €5.1 billion of preference shares and using approximately half of those funds to repurchase TSS from the first injection (BdF 2010b).

The French government notified the EC of an amendment to the updated January 28, 2009, scheme on March 16, 2009, prior to any issuance of preference shares under the plan. It created a more powerful incentive for banks to exit the program quickly. The changes were twofold, increasing remuneration and creating a jump in redemption costs on June 30, 2013. The remuneration on preference shares was the higher of two rate formulas (see “Key Design Decision No. 13”). The amendment modified the first rate, adding the dictated 0.25% premium from 2009 instead of 2010 (EC 2009b).

Previously, banks were able to repurchase their preference shares at the higher of two rates regardless of redemption date (see “Key Design Decision No. 12”) (EC 2009a). The revised plan created a jump in redemption costs on June 30, 2013, through the below structure.

Prior to June 30, 2013 (higher of the below two values):

1. The current value increased by the accrued coupon, or
2. The average stock market price over the 30 days preceding the repurchase.

Following June 30, 2013 (higher of the below two values):

1. 110% of the current value increased by the accrued coupon, or
2. The average stock market price over the 30 days preceding the repurchase (EC 2009b).

The remuneration for preference shares issued during the second capital injection was set at the higher of:

1. Entry (fixed) rate for TSS increasing 25 bps annually, applied to the actual number of preference shares; or
2. The rate equal to 105% of the dividend per ordinary share for the 2009 financial year, divided by the unit issue price for preference shares (increasing to 110% for the 2010 financial year, 115% for 2011–2017, and 125% for 2018) (EC 2009a).

Based on market conditions at the time, the above formulas resulted in an entry rate of 8%.  Although the entry rate was equal to TSS, these rates were deliberately costlier over time to reflect a greater degree of subordination and. In comparison to the TSS’s average annual return for the first five years, the preference shares remuneration was higher by at least 0.85% (EC 2009a).

Beneficiaries of the SPPE capital injections were expected to commit to the below behavioral requirements:

1. Limitations on compensation to senior executives and market operators (traders);
2. Seeking to maintain an annual growth rate of 3%–4% of overall lending to the French economy;
3. Performing case-by-case solutions for clients that were struggling to repay certain loans;
4. Striving to finance local authorities’ investment requirements;
5. Not engaging in unfair practices (such as using the capital injection as an advertisement);
6. No repurchasing of shares for the duration of the SPPE’s holding of TSS; and
7. Monthly presentation of a report on lending volume and trends (EC 2008).

It is important to note that the CB did not back the credit monitoring and mediation by sanctions. The CB feared that the threat of punishment could harm the market; instead, it relied on the reputational damage of noncompliance (EC 2008). The CB also did not put limitations on the payment of dividends, only ensuring that the participants prioritized dividend payments to preference shares held by the SPPE over ordinary shareholders (EC 2009a).

The participating banks agreed to restrictions on executive compensation prior to the first capital injection. These limits included banning severance payments to executives of failed institutions or individuals who quit and providing a compensation policy to regulators for “market operators,” such as traders (EC 2008). According to the Banque de France, in response to this assistance, “In early 2009, the top managers of the country’s leading banks unanimously waived their bonuses for 2008” (BdF 2009).

The credit-growth requirement was particularly important, as increased lending to the overall economy was a stated goal of the program, along with enhancing Tier 1 capital (BdF 2010a). To facilitate credit growth and ensure compliance, the CB instituted an oversight framework that aligned with the program, including a national credit mediator that arbitrated issues for companies suffering credit issues (EC 2008). The primary goal of this mediator was to “to ensure that no business had to face its financial problems alone, to ensure that banks lived up to their commitments and to provide information and advice to the government.” The network of département^FNThe département is a regional level of government in France; there are 96 in the metropolitan area and five overseas.-level BdF heads acted as regional mediators, performing an initial proceeding that prioritized companies struggling in the previous six months, indicating they were victims of the overall economic downturn (BdF 2010a). If the involved parties did not reach a solution, either the regional mediator or company could appeal the case to the national mediator (EC 2008). The national credit mediator received 2,500 applications in the first two months of its existence and 20,000 by the end of 2009 with an acceptance rate of 84%. From the introduction of the program to the end of 2009, the credit mediation mechanism resulted in more than €2 billion in loans to more than 9,000 business, safeguarding an estimated 160,000 jobs (BdF 2010a).

Additionally, the French government took steps to supervise banks at the local level, ensuring that loan increases aligned with predetermined targets. Two units performed this monitoring, an operational-monitoring unit and département committee for financing the economy (commissions départementales de financement de l’économie or CDFE). The département préfet^FNPréfets are officials who represent the state in each département. was responsible for constructing the operational-monitoring unit, and the regional mediator served on it. The CDFE contained representatives from banking networks in the individual département, the OSEO,^FNThe OSEO, now known as Banque Publique d’Investissement is a French agency that aims to promote small and medium-sized enterprises. BdF, and other local economic agencies. This committee had three objectives: inform local economic agencies of national-level initiatives, evaluate the département-level situation to restore the business lending market, and monitor bank-lending commitments at the local level (EC 2008).

Originally, the application period to receive funds was supposed to last for six months, from December 8, 2008, to June 8, 2009; however, the CB extended the deadline to August 30, 2009. The extension was due to the requirement that a bank hold an extraordinary general meeting of its shareholders to authorize the issuance of preference shares. The French authorities also cited uncertain market conditions as support for the extended application period (EC 2009a).

Banks were able to redeem the TSS or preference shares issued under the scheme at any time, subject to the approval of the CB (EC 2008; EC 2009a).

On November 3, 2008, the CB decided to increase the ceiling of noncore Tier 1 capital to 35% after some banks already reached the previous limit of 25% (Conac 2010; EC 2008). This change allowed banks to take full advantage of the capital injections provided by the SPPE (Conac 2010).