Regular readers know that modern banks are designed not to require state bailouts. Their access to deposit guarantees and central bank funding assures that they can operate and support the real economy for years with negative book capital level.
The deposit guarantee effectively makes the taxpayer the 'silent' equity partner for the bank. Without the need for a bailout, the state is effectively putting up the capital so the bank can continue to operate.
Naturally, for taking on this risk, the state is going to require more from the bank than would be the case if the bank's management had not wiped out the bank's book capital.
Regular readers also know that so long as French banks are not required to provide ultra transparency the French government will always choose to bailout the banks to avoid panic in the financial markets.
Had the French government required all of its banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details, market participants would be well aware of exactly what was happening with each bank.
More importantly, with this information, market participants could adjust the amount and price of their exposure to reflect what they could afford to lose given the risk of each of France's banks. This exposure adjustment eliminates both the possibility of contagion and the fear of panic bailout justification.
As reported by the Guardian,
France's government has stepped in to rescue the floundering banking group Crédit Immobilier de France after the search for a buyer failed.
The move came after the credit-rating agency Moody's downgraded CIF, which has been up for sale since May after what it described as a "liquidity crisis".
Pierre Moscovici, the French finance minister, said the bailout was subject to the approval of the European commission. He said the financial institution's business model had been "weakened by the [economic] crisis".
"To allow CIF to respect all of its engagements, the state has decided to respond favourably to its request to grant it a guarantee. This guarantee will be put in place on the condition that the European commission and parliament agrees," Moscovici said.
It is the latest financial headache to hit the French president, François Hollande, whose Socialist administration has been forced to deal with ... the winding-down of the Franco-Belgian financial group Dexia.
CIF, which specialised in mortgage lending to less privileged families, encountered problems when previously cheap funding from credit markets, on which it depends to finance its operations, dried up. A €1.7bn (£1.34bn) covered bond is due to expire in October.CIF showed that finding funds for risky mortgages is impossible without transparency. A lesson learned from the financial crisis was not to blindly bet on risky mortgages, but rather to require observable event based reporting so that the mortgages could be monitored and assessed on an ongoing basis.
The government has not said whether it will continue to seek a buyer for CIF or try to wind down the group. However, Le Figaro said a winding down of the group, which has about 300 branches and more than €30bn-worth (£23.76bn) of loans, was the most likely outcome.
The paper added that Moscovici acted in spite of opposition from the government-owned Banque Postale to a CIF rescue in the hope of avoiding panic in the financial markets.