Bailing out the Planet

Dollars to the European Rescue

WSJ Editorial

The world's central banks rode in on their Brinks trucks yesterday to stem the global run on European banks, creating new vehicles for access to U.S.-dollar liquidity. European bank stocks promptly soared, and now it would be nice if Europe's political and financial leaders finally used this reprieve to address their solvency issues.

The central-bank move is a de facto admission that dollar funding has been drying up for many European banks. We warned on June 27 ("Money-Market Mayhem") about the dangers to U.S. money funds from their lending to banks heavily invested in Greek and other sovereign debt. The money-fund lobby said we were exaggerating, but the funds have since cut their lending dramatically. This is prudent, since the world doesn't need a repeat of 2008 when a U.S. money fund broke its $1 net asset value.

The problem is that this withdrawal by money funds reduces the options for European banks to finance their dollar-lending operations. Moody's downgraded two of the three biggest French banks on Wednesday, citing liquidity and short-term funding needs. The CEO of Societe Generale—one of the downgraded banks, with Credit Agricole—said his bank was "adjusting to the reduction in the money-market fund exposure."

We received our own immersion in the issue this week after we published an op-ed Tuesday by contributor Nicolas Lecaussin quoting an unnamed executive from BNP Paribas as saying the bank had lost its access to dollar funding. BNP immediately said it was "fully able to obtain USD funding in the normal course of business, either directly or through swaps." It also acknowledged a "reduction and shortening of resources" from U.S. money funds.

In its official statement, BNP Paribas said only that its borrowing from U.S. money funds had recently declined to €36 billion outstanding from €46 billion, so we asked the bank to support its claim that it was "fully able" to meet its dollar needs. BNP's treasurer, Michel Eydoux, elaborated in an interview that "some of the money market funds have not renewed" their loans and others are of shorter maturities—generally one month instead of three to 12 months previously.

He said BNP is thus relying more on foreign-exchange swap contracts for its dollar needs. The counterparties to these swaps are, according to Mr. Eydoux, "banks and corporations who want the same maturities" that BNP is seeking and can no longer obtain from the money markets. The bank is also trying to expand its dollar deposit base among corporations and governments in Asia and Middle East that need someplace to keep their dollars.

Much to our surprise, BNP Paribas also requested that the French equivalent of the SEC, the Autorité des Marchés Financiers, "open an investigation into the publication of erroneous information about its funding in dollars in an article in the Opinions section of the Wall Street Journal."

The AMF is "tasked with safeguarding investments and maintaining orderly financial markets in France" and it can also conduct investigations, although by its own account its jurisdiction does not normally extend to the press. An official at the AMF declined to say how often newspaper articles lead to investigations.

Meanwhile, a senior French government official called us "as a reader," he said, to express his shock that we had published Mr. Lecaussin's op-ed. The article, he said, "was quite damaging to this bank and to French banks generally." At least he conceded that perhaps he was "abusing his position" as a top government official to express his displeasure.

We certainly hope the French government and BNP intention isn't to shut down reporting on French bank problems. We can't imagine, say, White House chief of staff Bill Daley calling us about a story on Bank of America, or BofA siccing the SEC on us. Relations between banks and the government are closer in France than they are in the U.S., but we'd have thought French politicians had enough problems without picking a fight over press freedom.

All the more so because we're far from the only messengers. In a report last week, JP Morgan analysts argued that French banks as a group had one of the lowest ratios of highly liquid assets to short-term funding needs in Europe. JP Morgan pegged BNP's so-called liquidity-coverage ratio at 70%. When asked about that figure, one BNP official sputtered that JP Morgan's own coverage ratio was only 52%. Under the Basel III international banking standards, banks are required to achieve a 100% liquidity-coverage ratio by 2015.

The funding status of French banks is news because fears of 2008 are still fresh and Europe's woes could spill into U.S. banks and the larger world financial system. Europe's banks have done far less than American banks since 2008 to strengthen their capital base, own up to their bad assets, and generally clean up their act. Until they do, the world's lenders will treat them with well-deserved wariness.