The economy, banking and finance are not complicated subjects. They are in the opinion, which is different. Some scientific disciplines are difficult because they require the prior knowledge of several knowledge itself difficult.


There is none of this in economics, banking and finance. Common sense is enough to understand the basics. The apparent complexity that surrounds them is the result of several factors: the opaque vocabulary "experts", the way these subjects are taught (or ignored) in education, the importance given to the quantitative approach ...


But there is also confusion created in the minds of the divergent views of economists in debates or in the stands. The scientific spirit, deviated from its primary mission to search for the truth, appears frequently in the service of ideological options barely concealed.


These debates have crystallized popular opinion more often than constructive criticism clichés: "The economy financialised, Globalization has accentuated inequalities, markets are disconnected from the real economy, money speculation could be used for the good of the people, must regulate international finance, markets impose short-term business, securitization and big Wall Street banks are responsible for the crisis, the euro is a straitjacket for France "... .


These recurring cliches mixed in varying proportions verifiable facts and interpretations that are not. They nevertheless constitute for many the starting point for the exploration of the economic world. 


The purpose of the book is to show the truth of shares and interpretation. More broadly, it is to show what are and are really the actors of the economy: markets, banks, businesses. What exactly the role of central banks, states and regulators. What we know and what we do not know the current crises.


Banks, markets, financial management of the company, management of the economy, growth problems, employment, exchange rates, international trade, euro ... all these subjects form a whole and are part of a coherent set the reader is invited to discover.




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Economics, Banking and Finance: everything is connected


To understand the real world and current events , it is necessary to approach the usually separate topics. There is no one side the bank and finance and further the economy. In the real world, these areas are mixed. 


The overview of the financial system as a whole makes it possible to perceive these nests. The market, the bank and the state are the three poles of power that structure the economic and business environment. These three powers are relatively independent, and in any case inseparable.  




The bank


First party of the company, the bank provides payment systems, bookkeeping and especially credit. In fact, the banking system is tightly controlled by the CENTRAL BANK. This is where lies the first power.  


Keep inflation within narrow limits, fight deflation, are part of its mission. The central bank uses for it, mainly, the weapon of the volume and rate of resources made available to banks.  


The central bank can influence the exchange rates, indirectly, by changing interest rates. Direct interventions, that is to say, the purchase or sale of currencies are increasingly rare for central banks as for States. We saw with the attack of the Swiss franc and the yuan at the beginning of 2016.


The State


With bank credit, companies invest and maintain growth. The State encourages this movement through incentives for investment and consumption (subsidies, taxation, public works ...). The state is the second power .


The action of the State can affect inflation (stimulus policy, wages of public service, ...) against the aims of the central bank. Note that the European Central Bank, the ECB is independent status of political power, unlike its counterparts in the US and especially in Russia or China, for example, 


The market


The market - stock market or bond market - an alternative source of funding for ENTERPRISES, in addition to bank loans. This is its most important function. The market is the third pole of power .  


The market also finances the BANKS! The stock market, of course, to strengthen their ownership, but also the bond market, which allows them to obtain stable funding in addition to customer deposits.  


And finally market funds STATES! The debt of France, about 2000 billion is financed by issuing bonds. These are placed on the market in France and abroad.  


The market also determines the course of currencies and commodities.


The diagram below illustrates the major links connecting the market, the banking system and the state.




The solid lines represent cash flows. The dotted lines express influences.




This introduction leaves behind many outstanding issues, including that of the importance of markets in financing the economy.


Why this second financing circuit, this dual piping might say, while credit is the main activity of the banks?


One can also ask why central banks have so much difficulty in keeping inflation within narrow limits, to combat deflation, revive the economy, etc ...


Why, despite the control of banks, the crisis risks are not totally excluded?


These questions show again, if necessary, the links between subjects usually separated: banking, finance, economy.


We can not dissociate the study of corporate finance to study the functioning of banks and including criteria they use to grant loans. Analysis of the operating logic of each others shows the complementarity of banks and markets. And hence the importance of markets for companies.


We can not dissociate micro and macro economy .


















































Chapter 1 - Three fundamental concepts


Prima facie, the concepts described here may seem too technical, even grunt. Independent of each other, requiring no prior knowledge, they are actually very useful. They are the key to understanding the essence of economic and financial topics in the book.     







This is the  LUNG  banks, a little known aspect of banking life and which it is nevertheless easy to understand the reason. Banks never have immediately available the exact amounts that customers withdraw for payment or, conversely, immediate use of money that customers deposit.


They therefore invented a system of exchange of surpluses and deficits. This system has a name ... the interbank market, also called money market, which is the most important part. This form of solidarity occurred naturally. The major drawback of the interbank market is its fragility. The failure of a bank puts indeed in danger all those who at one time lent him money and in turn almost any other. Above all, any doubts about the soundness of a bank is enough to block the system. 


Having this in mind completely changes the vision of the banking world. This shows the fragility of banks and the crucial role of central banks that oversee the functioning of the interbank market. It is an essential key to understanding the regulation, the crisis of  subprime , or ... the differences between liquidity and profitability.







The securities are a good sense of invention, whose scope is unexpected. There are indeed two ways to materialize a loan either with a conventional credit agreement or with a  PAPER BEARER signed by the borrower. The "paper" is a  share  or  obligation , that is to say one. As such, action or requirement, can be bought and sold at any time by the investor on the market (stock exchange or bond market), while for the borrower, nothing changes. 


This concept of security is fundamental to explain the complementarity of the financing by bank credit and market financing and therefore the importance of markets in the economy. This idea leads naturally to the concept of ... securitization, which is nothing but a technique to transform a title credit. The most important is probably something rarely said the scholarship allows the company to borrow without obligation to repay !





There is obviously no need to dive into accounting, but only to seize this  TOOL DESCRIPTION  powerful what the balance sheet. A tool that is learned as a foreign language ... that would not have more than four rules of grammar and vocabulary of twenty words. A mini-language practiced over water.


Its usefulness is considerable. Thanks to the balance sheet, for example, one can guess the activity of a company. The balance sheet is a key to  many applications:   diagnostic business management, banks or funds, regulation, analysis of banking regulation, the  quantitative easing , the  subprime ... and again, an important and little stressed element: companies lend to each other.


It is an economic reality that accounting terminology does not perceive immediately. How to see it? Simply positions "Customers" and "Suppliers". So a well-managed company must make a  banker working!  The priority attention often given to earnings and cash flow should not overshadow the importance of the balance sheet as an analytical tool.


These three basic concepts developed in the following chapters.









Chapter 2 - The interbank market, banks lung


SUMMARY  The banks fulfill three basic functions necessary for the economy: transfers, deposits and credit. The deposits are used for credit, but not only, because deposits are not stable. To compensate for this instability, the interbank market has been created to allow surplus banks to lend to those cash deficit. Upstream banks, the central bank ensures the proper supply of the monetary system and regulates the volume of loans granted by banks. The central bank plays a financial role and an economic role. The importance of the interbank market and its operation illustrates two important points: the fragility of the banking system and forced solidarity between banks.




banking functions


We must imagine the banking system as a set of invisible piping linking all players in the economy. With banks, money moves in circuits in electronic form and is reflected in some places banknotes. 


In this system there are entry points and exit points. Cash dispensers installed by hundreds in the urban landscape are silver exit points, like the fountains were once water outlet points. To continue with the analogy, the banks have a dual reservoir and pump function. They store and circulate the money to the economy.



Money is running. Each credit card use leads sooner or later the decrease in bank reserve holder. This reserve is available in a registered account supplied by a different origin flow of money, usually a salary. 


Overall, the bank manages all reservations of its customers. Far from constant, the amount of money varies considerably from one day to another, depending on the needs of account holders, require payments or storage needs.       


The unpredictability of customer transactions 


In the example above, there are the predictable flows - such wages are paid on a fixed date - but we must also represent all the unpredictable flows.


These unpredictable flows correspond to sudden withdrawals by individuals or companies, to receipt of payments on orders for a company for tax reminders to pay, the use of credits, etc ...


Banks face every day to the unpredictability of customer transactions. They therefore never exactly in cash money available for their needs (especially electronic tickets or money). Conversely, they never have the immediate use of the money they deposit.


This permanent fluctuation of surplus resources or resource requirements is further amplified by the credit phenomenon. The money lent by the Bank to certain customers comes from deposits and savings of other guests. This allows money available to grant credits, but it is blocked for long.


By late afternoon, when his accounts might say, each bank finds herself or with an excess of money available, or on the contrary with a lack.


The interbank market


This is where an essential element, invisible but indispensable to the proper functioning of the banking world. The complementary needs of a bank to another has indeed given rise to a system of solidarity and mutual facilities. It's the interbank market, also called money market. he is a compartment. 


Specifically, banks lend to each other every day (in the afternoon) considerable sums. These loans are almost all loans with a duration of 24 hours. The J / J in the jargon of banks. The rate and amount are determined by mutual agreement by a simple phone call. 







These exchanges are not improvised and are instead subject to strict supervision by the central bank, as is discussed below.  





A bank may be borrowing one day and the next day lending, illustrated by the figures below.








On day: some banks are lending, other borrowers  






On day j + 1: needs change, as bank lending became yesterday borrowing


















Thanks to the interbank market, banks that have significant needs know they can rely on other banks to cover. It is the same for those with surpluses, which have ensured that the money available will "sleep" no, but to bring their interests. 


The blockage of the interbank market can have serious consequences. Perfectly healthy banks can fail for lack of immediate resources. In turn, this mechanism may affect a large number of healthy banks. 


Impossible ? No, this situation occurred in 2008, in the context of the subprime crisis. This was also the case of some banks in southern Europe which other banks have long refused to lend due to their worrying situation. They are the source of certain measures taken by the ECB since 2014 and continued in 2015-2016.




For example, the year-end balance sheet (December 2013) of a large French bank use shows that made the bank the interbank market at that time.


To facilitate the "reading" of the balance sheet of the bank, the figures were represented by rectangles whose size is proportional to the amounts.

Regarding the distribution of credit to the customer that the bank lent corresponds roughly to customer deposits. The difference was covered by recourse to the interbank market.

It is surprising to see that the bank has lent and borrowed simultaneously on the interbank market. The reason is simply that these loans and these loans are of different lengths and therefore will not compensate.



Keep in mind that a balance sheet is a snapshot of the situation, and it evolves in fact every day.


What is the central bank


The system described is ideal in that it assumes that the surpluses of some of the banks exactly cover the needs of others. The reality is somewhat different. And even very different if we think the credit. The system is then likely to be in deficit if the loans distributed globally at a given time exceed all available savings. 


Technical precision  banks especially need the interbank market they practice what is called  transformation .

Summary of a sentence, the transformation means that banks borrow short and lend long. Why ? To take advantage of the spread between the short and the long term. This difference is in their favor, except in exceptional circumstances inversion of the yield curve. The consideration of the risk taken is a profitable supplement because their margin is higher.

The result: the end of each short-term loan (one week, one month, three months), the bank repays the previous loan by taking out a new short-term loan of the same amount and so on until the final repayment of the credit to the customer . This explains the very high activity and the very great importance of the proper functioning of the interbank market. You understand incidentally complexity bank treasurer job! 

Two remarks  of France also practice processing, to enjoy attractive rates of short-term borrowings. Furthermore, the exceptional situation because of the ECB policy changes somewhat the landscape. On the one hand, in fact rates are exceptionally low or even negative, and also puts the ECB directly available to banks for long-term credits.  


As shown in this diagram, the central bank intervenes to fill up, you might say. 


In fact, the central bank is not limited to this role controller that simply checks the power of good in system  liquidity . It can act as its own and decide to either "over-supply" circuits, or on the contrary to withdraw some of the liquidity of the banking system.


In the first case, the aim is to facilitate credit. It can then also choose to lower  interest rates , to vary the rate functions durations, thus control precisely the distribution of credit to the economy.


In the second case, its purpose is rather to restrict credit to the economy, so as to avoid overheating and to fight against inflation. In 2015-2016, the opposite phenomenon has appeared, that of deflation. A new situation has led the central bank to take unprecedented measures. The unprecedented policy initiated then, called "quantitative easing" is explained later in the book,




Chapter 3 - The title: another way to borrow  

SUMMARY  A company that needs financing can choose between bank credit and the issuance of securities, stocks or bonds. The securities are bought by investors who can sell them at any time to other investors in the markets. The circulation of securities, the fundamental point of view of the investor, does not change for the issuer. The shares have a considerable advantage because it is a loan that the company form is not obliged to repay! 




classic credit limits


Stocks and bonds are securities. This concept was born as an inherent limitation to credit, the difficulty or impossibility for the lender to change their mind. In a conventional credit, bank credit or personal loan, the lender and the borrower are linked until the full repayment of the credit.


This aspect can be a disadvantage for the lender, whose money is somehow "stuck".


To illustrate this situation, we can take the example of a direct loan between individuals, as is often a loan between friends. 


An individual inheriting fifty thousand euros lends to a friend in the form of a repayable loan in full at the end of a period of five years and carries interest intermediaries. They agree to keep a written record of their agreement and draft a document resembling in every respect to a loan agreement. Things are going well, the interest is paid on the agreed dates.


But the third year, the lender finds out that he could use his fifty thousand euros because it has to deal with an unexpected expense. Impossible, morally, to request early repayment of the loan to his friend, who, moreover, could not. The lender has no choice but to go to his bank.


It is precisely to deal with this situation as another way of doing was designed, the sale of a security. 


The benefits of title


Rather than linking the loan lender and the borrower, it would have been easier to prepare a document signed by the borrower and he alone, stating its commitment to pay fifty thousand euros to date and future interest on that sum. Something like an IOU, but without mention of the beneficiary. 


The lender would then simply "bought" this paper called title.



The advantage? The title in question would become immediately transferable. In other words, the lender could sell it at any time after three years in this case, without any formalities. A condition of course find a buyer, that is to say, someone willing to pay fifty thousand euros repayable two years later, producing the interest attached to the original.






Stated another way, it would find an investor have the money and willing to place in good conditions.


Difficult ? Perhaps, if a limited number of people are aware of the existence of this title for sale. Very easy on the contrary if the information is public, since then the number of potential investors increases. And even easier if interest rates have fallen over the period, in which case the "Offering" over two years to the original rate becomes attractive for the investor. And if they are several, an escalation might occur, which would raise the stock price. ... We see here to open the doors of the "market". 


This transferable title would have imagined the two friends was the forerunner of what is now called - for companies and states - an obligation.


The bonds may be sold at any time


We must see in this simple fundamental mechanism: the party who pays the initial investor is NOT the original borrower, but another investor.


For the original borrower, nothing changes: it pays interest and principal on the dates indicated on the obligation.


In contrast, the "lender", that is to say, the title holder, may in turn be repaid at any time. 








The success of the bonds is phenomenal: there is in the world a lot of companies and states need money. And there in front a lot of other companies, states and institutions that have money available.




This request this offer and meet daily on a "market" called bond market. 






Lenders, because of their numbers are always sure to fill resell the purchased bonds, with the added bonus of the possibility of making a profit.  


This considerable flexibility explains the huge success of this form of loan. Daily volumes are around trillions of Euros! Like many financial inventions, this one based on a common sense observation: a lender will be more willing to lend it knows it is not related to the borrower, and it can recoup its investment at any time without disturbing the borrower. 




Actions: the never repaid loans


Bank credit must imperatively be refunded. A bond issue also .... except that there is a way to avoid it!


For example by issuing, on the day of repayment, new bonds for the same amount as those who arrived in deadlines. The "new" money thus obtained allows the repayment of previous obligations. The operation is neutral for the company. A well-known borrower does every week, or almost! The borrower is ... the French state.


For shares is much simpler. The shares issued are never redeemed ... by the company. Except in exceptional cases, when a company is dissolved, which almost never happens, or, if very rare, too, when the company repays part for shareholders. In fact it is the shareholders who decide.





But how those who buy shares they agree never to be repaid? The answer is simple: they know they will never be reimbursed by the company, but they can sell their shares at any time on the market, that is to say the stock market. With there also, as for bonds, hoping to earn more, but also to lose.




Chapter 4 - The Appraisal: descriptive language 



SUMMARY   The two "cases" presented here require no accounting knowledge, only a little thought. The objective is to show the power of this tool that is the synthetic balance sheet. The use of figures was banned to allow the focusing of attention on the balance sheet relative values. The first case can be seen that the activity of a company and a bank have many common points. The second, more pointed, provides a glimpse of how the most common management business difficulties can be detected.













1-   Guess who does what


This is to guess what type of business balance sheets correspond the three below, knowing that for each of them, only the balance sheet on the left (asset) were represented.


Here is the first assessment or rather the first "half" of the year balance sheet. Some preliminary explanation is required. 


The representation of rectangles passed for obvious pedagogical reasons: these rectangles of different sizes are more readable than a series of numbers (left), and especially allow to visualize the relative values ​​of different positions.




The items listed here are classic. They are found in the most sophisticated balance sheets.




Here is what they mean:



Value of real estate, production machinery, vehicles (capital accounting language)


Value of all stocks: products ready to be sold, spare parts, commodities ...


Cumulative bills WAITING FOR PAYMENT. These bills are not due to delays. When a company sells to an individual, it most often requires a cash payment. If the customer is another business, the custom is to give credit, 3 to 6 months.


CASH of business: liquid and especially bank accounts



Balance Sheet No. 1


We can already say that this record No. 1 is a company that manufactures and sells goods to other businesses, industrial goods so. Why?


The position ASSETS,  first of all , may suggest that it has the machines. It is true that it may be as real estate, or a mixture of both.


Which puts on the track is the importance of the  positions   CUSTOMERS and STOCKS . The importance of customer receivables means that the company sells to other "businesses" which it has granted payment facilities. The importance of stocks suggests it had a production activity.


Finally, note that  CASH is almost negligible, indicating that it does not sell or little detail. The bulk of sales is realized from other companies.


One might think that the No. 1 record is that of an industrial company. Number knowledge would see if it is an SME or a larger business.








Balance Sheet No. 2


What can we say then of the activity of the company which is the No. 2 REVIEW? 


This report No. 2 has a different asset structure, even very different from the previous.  


The first observation concerns the lack of  STOCKS .


This company does not produce physical goods. It is therefore a service company. We can deduce that the post CAPITAL  does not represent production machines. This is most likely real estate.




Which then hits is the great importance of the position  CLIENTS. A service company that holds a large volume of customer credit is ............. yes .... 








Balance Sheet # 3


One can wonder now about BALANCE SHEET No. 3, and look at what kind of business it is. 


The question is more difficult because there are several possible solutions. 








This company has  STOCKS , so it sells products.


It is possible that the produce as it has PROPERTY,  which may suggest that it has the machines, but it could be real too.


The strangest thing is its CASH  huge, and no credit  CLIENTS. One might think that it sells primarily to customers who pay cash. So individuals. 


This is the most plausible hypothesis. So this business is likely ...









This exercise shows the richness and transparency of information provided by the left, that is to say, by the balance sheet.


2-    The other balance sheet items: liabilities


The balance sheet, that is to say the right shows mainly LIABILITIES the company (or bank). The concept of debt is considered here in the broad sense. It refers to the actual credits, and a special category of debt that are equity.


Equity   Shareholders' equity simply means the initial stake of shareholders who created the company, increased or reduced profits or losses over the years, and also called capital increases, that is ie the call to shareholders.


Some remarks are necessary to clarify this notion of equity is not a priori intuitive.


The first is that it is probably clearer to speak broadly of origin of funds rather than debt. Capital and more generally the liability items show the source of the money made available to the company.


Another difficulty of understanding can arise because the fund with a company (or bank) are not "visible" in that they are not on an account. The money, the money of shareholders is disseminated in all that belongs to the business, property, debts, ... called its assets.


An approximate way of representing capital is to imagine that they represent money that would remain if shareholders decided to stop and "liquidate" the company. Equity would then be the product of the sale of assets less the repayment of debts. In fact, the result of this calculation would be a liquidation value, which is highly dependent on the market price of machinery, real estate, etc ...


Equity represent precisely what shareholders have invested increased or decreased from what the company has won or lost. The capital does not reflect market values.


The top and bottom review of  the term "equity financing" means the resources and the most stable investments of the company. Stable resources are the "capital" of the company and the long-term loans in progress.


The counterpart to the asset is represented by stable investment, called, as stated above, "capital". This is mainly of machinery and real estate.


The record high for determining an important element accounting for the company's management: working capital, which is the excess of long-term resources on long jobs, whose utility is discussed below ..






Balance down The term "low balance" and figure summarizes the elements of the daily activity of the company that generate cash offsets, and therefore the source of financing needs.


The best example "talking" is that of stocks. Inventories of raw materials are payable immediately to the supplier or an agreed period. These raw materials are progressively incorporated into the production of finished products. To produce, you have to pay salaries and other expenses. The finished products are in turn stored until sold.


The settlement of the sale as it takes some time. The flow of the sale does not compensate much later the flow of the corresponding expenses. The company can reduce this gap by reducing customer payment period and lengthening the supplier payment period.

The record low to determine an important element accounting for the company's management: the need for working capital.






Practical example: diagnosis of mismanagement  Excessive generosity for commercial payment terms, following poor sales, resulting in rising position "clients". If this trade generosity is not offset by trading with rising terms "supplier", the mechanical effect is the increase in working capital. That is to say an additional financing need.


Here is the result on the balance sheet of bad management of the balance sheet below:

In this example, the increase in inventories and longer payment terms (the increase in the "Customer") will create a "hole" that is to say a financing need "x". The company's first instinct is to try to fill this need by increasing its prints discovered.


Everything then depends on the attitude of the banker, who sees that he is a sales problem and wants to ensure that it discovered will not exceed the limit set by mutual agreement. Several solutions can be considered by the company to prevent this ceiling is reached. It can get its suppliers an increase in the payment time, and parallel reduce inventory.




If this is not possible or not enough, the banker asked to "consolidate its record high." Clearly, it may request that shareholders reinforce the capital by a capital increase. This new injection of resources will sustainably offset the increased overdraft generated by the increase in customer credit.

The simple idea is the sharing of the effort to make between the company and the bank. Otherwise the company will face serious difficulties and that, regardless of profitability.


This issue is included in Chapter 7 of the book.





Chapter 5 - "  The markets are disconnected from the real economy"

SUMMARY  Far from being disconnected from the real economy, the markets are a critical component. Business development and innovation resulted indeed a need for funding that exceeds the banks' lending capacity. Bank credit limits are the direct result of prudential rules imposed on banks. These limits are quantitative, set according to banks' capital, and qualitative, in the sense that banks should not take too many risks, such as start-ups, for example. This caution logic simply based on the need not to endanger the public deposits in banks. The markets have virtually unlimited resources and an appetite for risk than banks. They are thus complementary to banks for business financing. They also allow the financing of states, as is the case for France, the reason being there as the importance of the needs facing the bank building. This is largely thanks to the strength of the markets in the United States that American companies have developed and continue to develop in such numbers quickly from being a start-up to that of globalized companies. The strengthening of European markets therefore seems a necessary condition to give European companies the capacity to par with their competitors from across the Atlantic. the reason being there as the importance of the needs facing the bank building. This is largely thanks to the strength of the markets in the United States that American companies have developed and continue to develop in such numbers quickly from being a start-up to that of globalized companies. The strengthening of European markets therefore seems a necessary condition to give European companies the capacity to par with their competitors from across the Atlantic. the reason being there as the importance of the needs facing the bank building. This is largely thanks to the strength of the markets in the United States that American companies have developed and continue to develop in such numbers quickly from being a start-up to that of globalized companies. The strengthening of European markets therefore seems a necessary condition to give European companies the capacity to par with their competitors from across the Atlantic.


Next: "The markets in the short term"






























1- The markets complement the action of the banks


The particular point of bank limits is crucial to understand the importance of markets.


In many ways, the banks operate as businesses, but with two major differences:


- Banks are custodians of money thousands of people and businesses that could not conceive that their assets are endangered to clean the bank reasons.


- Banks are interrelated to the extent that they lend to each other, every day, considerable sums to adjust their cash.


Because of this interdependence, the failure of one bank can have catastrophic consequences for all of its depositors, and also for many of its counterparts, which, in turn, can endanger their own customers and other banks. This is what is called systemic risk .


The prospect of a bank failure results in "rush on the windows" for applicants to withdraw their assets before it is too late, and chain bankruptcies threatened other banks can not recover what they had momentarily lent.


This interdependence of banks reproduced on a much larger scale that can be observed at the enterprise level. These are indeed credit to each other by the almost universal practice of payment facilities. The result is that companies are linked by chains of "customer-credit" and "supplier credit". Thus the bankruptcy of a company may cause the bankruptcy of several providers - however well managed. The consequences "systemic" are lower because the trade credit is not the vital function of the interbank credit, and above its size.


The quantitative limits of banks The issue of security of banking is fundamental. Western banks have organized themselves that security in the so-called Basel agreements.


The basic principle is simple. The bank uses the money deposits to practice a risky activity, the distribution of credit. By definition, therefore, it is likely to lose some of the money it lends, even if it carries out this activity with caution. This inevitable loss should not be levied on deposits of its customers, who do not understand it. This loss must be deducted from the money that is specific to the bank and hence money from its shareholders, called its own funds.


As mentioned in the previous chapter, those funds simply represent the initial bet (capital) of those who created the bank, increased or decreased profits or losses over the years, and also called the increases capital, that is to say the call to new shareholders. The capital of the bank are something of a cushion. It is money that can lose before infringe the deposits entrusted to him.










































The Basel Accords are set at EIGHT PERCENT of the loan stock the minimum amount of bank capital. Conversely, a bank can not lend more than TWELVE TIMES the amount of its own funds. The diagram above illustrates this principle: These figures are of course arbitrary and result of reasonable compromise bankers met in Basel to set and periodically revise the rules.


The qualitative limits of banks  A bank may lend unless it is authorized by the Basel rules, and still risk losing a lot if its funds were distributed without discrimination.


This is the case if the bank has concentrated its funding on a single economic sector, or activity, or a few companies in particular. Real estate is one example. If the market downturn, the bank has focused its commitments can lose more than its equity.


Banks are required to allocate their risk knowing that failures rarely affect all economic sectors. They do so at their own initiative, to protect depositors' money ... like the shareholders.


Too risky start-ups Not to take too many risks, as well prohibit banks from engaging in certain types of business, such as start-ups and very young companies. The statistics are relentless indeed: the "mortality" of new firms is very strong, and very few of them that exceed the milestone of five years of existence.


For similar reasons, banks are cautious regarding purchases of shares or sovereign debt. Buy shares of Coca-Cola or French debt is risk free, but the temptation better yields therefore riskier investments is large.


This problem, and the difficulty of finding the "right" solution explain the reluctance of central governments to strictly prohibit investment banks in the markets.


Markets have more resources that banks and more appetite for risk Until the ninety and any prior period, States were were little or no debt, international trade was marginal. Banks and local stock markets largely sufficient to business needs.


Since then, funding flows have grown considerably. On the one hand, companies have seen growth needs to invest and the other States, or at least a large part of them, have accumulated large deficits. Gradually, the markets have taken over from banks to finance.


The markets have been able to cover these new needs in parallel because the money in the world has increased. We're talking about tens of thousands of billions of dollars! More and more "investors" are indeed willing to invest their assets outside banks and to take risks to achieve higher returns.


Unlike banks, the markets have few limits in terms of volume or in terms of "appetite" for high risks.


2- The France borrows on markets


To see the usefulness and functioning of markets, starting from a situation that everyone knows, the indebtedness of France. The concrete translation of this debt is simple: each week, a specialized service of the State borrows between 5 and 10 billion euros. These loans are represented by bearer bonds.

Who borrow us? Those who lend to France make it through the markets. They could do this directly, we will see why they prefer to go through the markets.

These lenders who purchase bonds issued by the French Treasury are institutions of France and elsewhere who have permanently or episodically money to invest. private or public institutions, private individuals or investment funds, they are called investors. 




These investors could invest this money in banks, some do elsewhere. It is a matter of preference. Many are turning to stock market investments or purchases of bonds, taking stakes in companies. Or simply entrust their money to specialized agencies that will make investments on their behalf. Thus we find insurance companies, pension funds, sovereign states holders of surplus investment funds, etc ... 


Magnitude  The overall debt of France is about 2000 billion, which represents roughly the French GDP. We are far, very far from investors abilities. Banks specialized business in the creation of sophisticated investment vehicles estimate that 70,000 billion the money available. This amount does not include the daily volume circulating on the foreign exchange market or the volumes traded on the commodities market ... 


Why go through the markets The market presents considerable advantages for the lender as for the borrower. The main advantage is related to the number of participants.

1- The borrower is almost sure that at any moment someone will be interested and willing to lend.  


"The French bond last week was over-subscribed."

This title appears regularly in the press. It simply means that on that day, investors were willing to pay more to France than was requested.


2- The lender is also sure to find someone willing to take back the loan he has made some time ago. 


"The French debt market is liquid."

This comment reflects the fact that the French debt flows easily. French loans are issued by the State in the form of bonds, which can be purchased and then resold indefinitely. This feature gives flexibility to investors.


 3- Unlike banks, the markets have no boundaries. The markets allow investors to buy bonds as the French treasure they wish. The only limit is that they themselves are fixed depending on the quality of the borrower "France". The measure of this quality is the rating of agencies, Standard & Poor, Moody or Ficht.


3- America outperforms Europe thanks to its markets


US multinationals are present throughout the world, the oldest, Coca-Cola and General Electric, to more recent, Facebook, Amazon or Apple. What strikes most is the ability to grow these businesses, their longevity and, for the youngest, their growth rate. Several factors explain this exceptional vitality, among which include the stimulation of an internal market of 230 million inhabitants, quality of education, the mobility of the workforce, innovation capacity.

On all these points, in fact, Europe was not ashamed, as witnessed by the dynamism of its young shoots. Economic modernization of the "old Europe" is running, whether the blurring of barriers to movement of people and goods in an area of ​​530 million people (a little less since Brexit) or the adaptation of educational and legal systems to the most current requirements of the economy. This development promises closer ties with the US economy to more or less long term.


European late However, it is an essential point, on which Europe is well behind: financial markets. They have reached the US level of extreme sophistication, both in terms of volumes mobilized in their ability to respond to business needs in their different stages of development. Conversely, low growth in Europe will measure the difficulty of start-ups to take the step of their transformation in medium-sized enterprises and the difficulty of SMEs to become large or very large companies.


The situation is not the same from one European country to another. Germany and Italy are for example respectively three and two times more SMEs than France. The punitive inheritance taxation, the absence of a culture "SME" in the education system certainly partly explains the French delay, but common obstacle to the development of European businesses is the lack of "young finance system "and very young companies. City of London, the most developed financial market in Europe, focuses on financing companies listed on the stock exchange. Its activity "risk capital" is very far from what can be observed in the United States.


For a long time in Europe, the bank has been considered the main place where the distribution of credit is operated, the bond market and the stock exchange are limited to large or very large companies. This is done while the lower level companies that have suffered and still suffers from lack of funding. The equity in start-ups such has been their forbidden precisely because of the degree of risk it represents.


Financement des start-ups Dans les premières phases de développement des start-ups, leurs besoins de financement, modestes, peuvent être couverts par les entrepreneurs eux-mêmes, leurs amis, voire des business-angels. Quelques rares fonds privés prennent ensuite le relais, mais très vite, au-delà de la dizaine de millions d’euros, l’« offre » de capital-risque se raréfie en Europe.


Disintermediation The market financing is sometimes likened to the bank disintermediation. This ambiguous term seems to mean that there is in the market use a tendency to reduce the role of banks in financing the economy. The term and carries the idea of another possible choice, such action by States to reduce the role of markets.


The historical importance of the state in Europe in the control of the economy explains to a large extent this perception and a form of resistance to abandon the market which for a long time fell within the domain "sovereign" control of funding. Recent economic crises hastily attributed to non-market regulation have reinforced European states and public opinion in their distrust of the latter. 


The reputation of banks is not really better but at least in this area, States still feel as strong position have the weapon of nationalization. A somewhat illusory weapons in Europe to the extent that the banking power has shifted gradually towards the ECB. Nationalizing banks would imply for the country breaking the link with the ECB and therefore the output of the euro. These two points are subject to specific chapters later in the book.


  Chapter 6 -    "The markets in the short term"          


SUMMARY  The markets are not only in the short term. Their peculiarity is indeed to make the synthesis between the short time of the investor and the long time business. The importance of financial markets resulting material characteristic properties of "securities", stocks and bonds. Far from being linked to the borrower issuer of a security, the buyer of the security could turn around and sell it at any time. This does not change for the issuer of which is funded in the long term. In fact it is investor speculation that conditions the market activity and therefore their purpose, which is to enable companies to finance. Equity issues are particularly interesting for companies because there is no obligation for them "redemption". Far from competing, markets and banks are in fact complementary. For an essential reason: banks' funding capacity is limited. As for the "pressure" of the market for immediate results, it is only one element among others to manage by management.


Next: "The banks are not taking risks"





















1- Markets link the long time and short time


Everyone has an idea of ​​what the stock market: it is a place where it is possible to buy and sell shares. It is very easy to buy or sell stocks from home, thanks to the internet.


What is interesting to observe is the birth of the shares. Companies issue shares in order to obtain resources. An IPO in financial jargon, is called an IPO, short for Initial Public Offer .


The said day, everyone ( "  public  ") may buy the offered shares, at the price set by the company. In fact by its investment banker, as it takes the art to determine the "right" price. The right price is one that attracts many buyers, and helps sell more shares than what was originally set to nurture confidence ... and future price increases. Buying stocks is to have confidence in the company's prospects.


 Award: the "financing" never reimbursed

There are other ways to get resources, bank credit, for example, or the issue of bonds, but from the standpoint of the company, the shares have a really interesting feature: the company is not required to repay to the buyers the money received in exchange for its shares.


One could say that the share issue is a "credit" that is never repaid ... almost (in the rare case of a capital reduction decided by the majority of shareholders). 


For the investor, the opportunity to regain its implementation at any time

But how those who buy shares they agree never to be repaid? The answer is simple, they know they will never be reimbursed by the company, but they can sell their shares at any time on the market, that is to say the stock market.


An action can be resold with a click. There is always a buyer. True, the seller hopes to profit but knows that there is also the risk of loss. This is the dimension of the "bet" that make investors about possible price changes.  


The issuance of stock market action always takes place on a specific day, foretold. The next day, sometimes the same day, a more or less large portion of buyers resell the acquired shares to new investors and the purchase-sale cycle starts.


The most spectacular cases of recent years is that of Ali Baba. Its IPO twenty billion generated the same day an unexpected buyer power. At the first listing, the prices rose, a sign that the market is ready to absorb more shares. Taking advantage of the opportunity, the Company completed the following day to a second issue that brought him nearly five billion dollars.


The volume of daily stock exchange trading is considerable. Many sites can track it all the time. Monitoring ongoing for a week of action Apple for example gives an idea of the frenzied activity of investors. The chart below is taken from the free site Boursorama .




We see that the volume is to say the number of Apple shares traded each day between 25 and 50 million, a daily amount of between 3 and $ 5 billion. This amount is only a fraction of the total value of Apple stock exchange, in the order of $ 200 billion in early 2016. Every day, investors paid these amounts to other investors to purchase their shares of Apple, or a transfer between 3 and 5 billion bank accounts to bank accounts. Those who sell think the action has lost its upside and those who buy think the opposite.


The co-existence of these opposing perceptions is the condition of the proper functioning of the award. Note that when everyone thinks the same, there is no "market". In a bull for example, courses can thus reach staggering levels, giving rise to what is called a bubble. This bubble may resolve over time or suddenly explode. The crash occurs when everyone decides to sell simultaneously.


long and short time time

The miracle of the stock market - and its purpose - is in the cohabitation of two worlds with complementary visions of the concept of time, the world of investors and the business.


The companies are in long time. They know that the resources obtained during the initial issue (IPO) and subsequent emissions, they are acquired over time. The investors are in short time. They can sell at any time, or even make several round trips in one day. The rationale and the proper functioning of the stock market based on the daily movement and intensity. There is not every day an IPO, far from it, but every day a large number of purchase-sale transactions, so a large number of participants. This is the condition for the entry of new investors.


The huge volumes traded daily on the stock exchange should not deceive, it is good to trade. If a thousand euro exchange took place in the same day, we talk about a trade volume of thousand euros, while in fact it is the same that circulated euro! The day of the IPO, the first euro went directly into the coffers of the company that issued the share. When the first buyer resells its action, it recovers its euro which such returns on his bank account where it will be lent by the bank. Although far from being lost to the economy, the first euro has in all cases to help the company to invest.


Control of stock market transactions

As can be expected, initial access to the stock market and the maintenance of listing over time impose severe constraints for businesses, as the quarterly publication of audited accounts and compliance with accounting standards. The world of the stock market is highly regulated, it is in everyone's interest to maintain confidence.

The market regulators play a vital role in this regard. An organization like the SEC in the US and has extensive powers. The investigative capacity of these agencies is essential. Their mission is to make sure that there is no manipulation.

Listed companies must comply with specific rules concerning the publication of information that might influence their stock market price. Orders to buy - or sell - Important preceding an essential communication are particularly scrutinized.


Market pressure on results

At these regulatory provisions is added a sense element. The interest of any publicly traded company is seeing its course steady progress. It is in its image, the financial interests of executives holders of stock options, and especially its positive reception chances for future share issues.

Companies that have announced losses are particularly scrutinized by the market as a whole and of course by the holders of its shares. Falling prices magnifies the importance of losses as the recovery prospects remain unclear. The "pressure" psychological investors concerned is then very strong. The company has to announce as soon as credible measures.

For managers concerned, in fact, things are not very different, that the company is publicly traded or not. The owners of a company loss carry anyway pressure at all times on the managers. Things are just more visible on the stock exchange since the owners are shareholders and that they have the right to speak publicly on the company's management.


2- Investors; simplicity purchases / sales of securities


The bonds have a lot in common with equities. For the company, this is another way to get money in time, but with different characteristics. For example, the interest rate of a bond is attached to the issue, while the dividend of a share depends on the decisions of the shareholders.


For investors, too, the differences are significant, except on one point. Such as stocks, bonds can be sold at any time on a specific market, the bond market. As the stock market, the bond market should guarantee any bondholder the option to find a buyer.


A bond is an easily transferable credit

The rationale of the notion of obligation appears in comparison with credit. A "current" credit as a mortgage, an investment loan or a personal loan is the result of a formal agreement between borrower and lender. A borrower and a lender identified.


For the lender, credit limits result from the fact that it is "related" to the borrower, in the sense that if at any time he changes his mind, he can not ask the borrower immediate repayment of the credit.


To illustrate the case where the prepayment may be desired by the lender an example.


Particular ready fifty thousand euros to a friend and agrees with him a repayable loan in full at the end of a five-year period, with payment of intermediate interests. They agreed to draft a paper-like agreement on all points in a loan contract. Things are going well, the interest is paid on the agreed dates. But the third year, the lender finds out that he could use his fifty thousand euros to cope with an unexpected expense. Unable morally and even legally demand early repayment of the loan to his friend, who, moreover, could not. The lender has no other recourse than to go to his banker.


It is precisely to deal with this situation as another way of doing was designed. Rather than a loan contract between the lender and the borrower, it would have been easier to prepare a document signed by the borrower and he alone, stating its commitment to pay "bearer" fifty thousand euros on a certain date and and interest on that sum. Something like an IOU, but without mention of the beneficiary .


The lender would then simply "bought" this document. The lender said, is no longer called "lender" but "investor", although in this case the two functions are economically identical: A lends to B and A takes the risk of non-payment of B, which is the definition credit.


 The advantage of this transformation? Reads the document would become immediately transferable. In other words, the lender would have been free to sell it at will, without any formalities.


A condition of course find a buyer, that is to say, someone willing to pay fifty thousand euros repayable two years later, producing the interest attached to the original.

Difficult ? Certainly not if that placement is proposed to tens of thousands of potential investors. The likelihood of finding a buyer becomes a certainty, and especially if interest rates have fallen over the period. The buyer then benefit from better conditions than those of the market.


The transferable paper that might have been imagined two friends foreshadows what is now called - for companies and states - an Obligation.


The bond market


The success of the obligations is phenomenal. There is in the world a lot of companies and states need money. And there in front a lot of other companies, states and institutions that have money available. This request this offer and meet daily in the bond market. Lenders, because of their numbers are always sure to fill resell the purchased bonds, with the added bonus of the possibility of making a profit.


This flexibility explains the huge success of this form of loan. Daily volumes are around trillions of Euros!


Incidentally, this form of each other and funding is done "outside banks" in that it is not the bank that credit. The bank merely records the flow.


3 companies: an alternative to bank financing


For the company, financing through bond issuance is an alternative to bank credit.


A company that needs money to finance an investment - or hire purchase of machinery - has three options: it can take out bank loans, issue bonds or go to scholarship .


Bank credit must imperatively be refunded. A bond issue also .... except that there is a way to avoid it! For example by issuing, on the day of repayment, new bonds for the same amount as those who arrived in deadlines. The "new" money thus obtained allows the repayment of previous obligations. The operation is neutral for the borrower. This is also the manner of proceeding of the French state.


For shares is much simpler. As mentioned above, shares issued are never redeemed ... by the issuer. Except in exceptional cases, when a company is dissolved, which almost never happens, or, if very rare, too, when the company repays part for shareholders. In fact it is the shareholders who decide.


In practice, companies combine the three methods of financing. There in this macroeconomic reason mentioned in the previous chapter, namely the lack of capacity of the banking system only in terms of business needs. There is also a corporate motivation to combine the characteristics of these three financing.


 The market financing is suitable for long-term needs of the company, as its "heavy" investments. The scholarship allows the long-term financing at the cost of loss of autonomy as possible to the extent that the new have their say in the company's management.


Funding from the bond market does not have this disadvantage but nevertheless obliges the company to some transparency because it is then subjected to the imperative of notation, that is to say, the periodic evaluation of its note risk.


The bank loan is suitable for short and medium term business needs. It has however a risk of instability because the lender may impose specific constraints under threat of non-renewal of short-term loans. 


The usefulness of speculation


It is a paradox that may surprise: investor speculation on the markets affects the functioning of their primary purpose is to enable companies to finance themselves.


The market size is measured by its size, that is to say the number of stakeholders, and trade intensity. the combination of these characteristics defining what is called liquidity.


The exchange -Sales and purchases - "speculative" help boost volumes in the market. Price volatility, that is to say significant gaps over a short period are to many investors gain opportunities. 


The more stakeholders, more these players are active and the market is, as the saying goes, liquid. A liquid market is one that ensures that at any time there will be a buyer or seller.


This dynamism indirectly benefits the companies that need financing, because any new issue of bonds or shares from one of them will have more chances to find "taker". 






Chapter 7 - The banks are not taking risks"    


SUMMARY  The banks are cautious. We must not confuse nervousness and caution. Bankers like the businessmen do not like bad business.

The business of the bank is an intermediary business: the bank lends what they themselves borrow from other banks. It uses mainly the deposits of its customers, considered loans, it must naturally to repay.

The margins of banks - less than two percent on credits - are much lower than those of commercial companies when their risks are higher. When credit goes wrong in fact, the bank risks losing the entire capital, therefore, part of the money of depositors.

If banks are careful to respect the prudential rules imposed, they are just as important in determining their own rules for granting loans.

The credit golden rule: the bank is not ready to guarantee, but it is not ready either unsecured "


Next: "We should nationalize the banks"























1- Banks are (almost) like other companies


Somehow, the bank operates as a trading company whose business is to buy and sell and who "lives" in some way its margin between its purchase price and selling price. The analogy is that the bank borrows and lends, with different interest rates. One could say that it buys and sells ... money, and its prices are interest rates.


As with any business, the result of the bank's overall results from the difference between revenues and expenditures. The equivalent of the turnover is bank product. Banking income represents interest earned and commissions. The expenses are mainly interest and commissions paid, and all operating expenses, salaries, purchases of goods and services.


This calculation is close to the calculation of earnings of the company, with one difference, however, one important difference: the bank takes into account the cost of risk , that is to say the cost of disaster loans due to non -refund. This risk is not casual, it is permanent.


We must see how the problem arises for the bank. Its margin on the loan is about two percent. This is somehow the expected gain .... if all goes well. But if everything goes wrong, that is to say, if the borrower defaults, the risk of loss is greater because it not only loses its expected value, but also the capital lent to his client that it is required to repay whatever happens to its external lenders or depositors.


The company also has an outstanding risk on its sales (NSF treats denied), but compared to the bank, the proportions are disproportionate.


To secure an order of magnitude, if, as noted above, the bank can earn two percent if all goes well, the risk of losing the other hand is a hundred percent, or 50 times! The risk is at the heart of the banker.


The interdependence of banks

The second difference with companies is the importance of exchanges between banks.


For the bank to lend, must naturally it has the necessary resources, and it is essential for this that the interbank market is working.


This bank resources problem is not immediately noticeable. It is a fact, the bank lends money to its customers. But if at some point, all the money in deposits was lent, it can still borrow from other banks in excess of what it needs to do a new loan. The problem is even more acute than banks lend "long" and that their resources are "short", as meaning that a customer can withdraw money at any time. Exchanges between banks daily. The exchange system, vital for banks is called the interbank market. News of the years 2008-2015 showed extreme attention to this problem by banking authorities - first and foremost by the ECB. (*)


2- How the bank grants credits 


Risk analysis

Pay is to make a bet on the future situation of the borrower. And to assess the future situation, the lender does not have ... that of past elements . It is the past that can get an idea of the capacity of the borrower to repay the loan. 


Typically, banks look at the  accounts of the three years  preceding the credit. Why three? Because experience shows qu''aller further in the past has little meaning.  


 As fine as it is, risk analysis, however, has its limitations, since there is nothing to accurately predict the evolution of the future situation of a borrower. Zero risk does not exist, the lender seeks also the means to cover the possible fallibility of its borrower. 


A review of accounts is added an analysis of the  business prospects  of the company and the strength of its management. It also requires that the credit pays.  


Assuming that the economic difficulties rarely affect all sectors, banks are also very careful about the  distribution  of risks, economically and geographically. They strive to comply with a number of strict prudential ratios such as the risk division coefficient: the bank fails to pay more than a certain percentage of its equity to a particular customer, or to the all customers in a given economic sector.  


Solvency, profitability and guarantees 

Then determine whether the  risk is acceptable , the bank must answer three questions  





A  -  Solvency : the  financial strength  she is client sufficient to minimize the risk of bankruptcy

B  -  Profitability : this customer he has the  resources  to repay the new loan? 

C  -  Warranty s: how to ensure the  recovery of the capital  in case of problems? 


Solvency expresses the ability of the company to withstand bankruptcy. It is measured by analyzing its balance sheet. Profitability and solvency does not necessarily go hand in hand. A company whose profitability is higher than the industry standard may nevertheless very fragile due to an unbalanced financial structure.


Triggering the bankruptcy is the inability of the company to honor a claim submitted to it. The company does not have enough cash on hand or bank facilities to pay a creditor: a supplier, the maturity of a large credit or the tax for example. She no longer has the necessary liquidity. Such an unfortunate event can affect a healthy business affected for example by the failure of one of its customers.


In fact, it is the bank "house" that triggers bankruptcy, for it is she who holds the key cash. It is she who may decide not to increase current cash facilities. The banker sees granting these facilities operate accounts daily. He is the first informed of the difficulties of the company. It can thus enjoy when the business situation is hopeless, and refuse to continue to give him credit.


It can also make such a decision for reasons of internal policy, even if the business is doing well. The bank wants to reduce such exposure on a given economic sector or geographic. Such decisions are rare but they do occur. In this event, the company has no choice but to seek another bank. No way for it to commit to a new customer who has a strained cash despite a profit situation. The cash position is fundamental to understand if the borrower is close to its limits. 


Low balance

In plain language, the "record low" and figure summarizes the company's activity items that generate cash offsets, so funding needs.


The best example "talking" is that of stocks. Inventories of raw materials are payable immediately to the supplier or an agreed period. These raw materials are progressively incorporated into the production of finished products. To produce, you have to pay salaries and other expenses. The finished products are in turn stored until sold. Finally, the settlement of the sale as it takes some time. The flow of the sale does not compensate much later the flow of the corresponding expenses. The company can reduce this gap by reducing customer payment period and lengthening the supplier payment period.


In accounting language, the working capital requirement (A) in working capital reflects an abstract figure the result of all cash offsets.

Too much generosity on commercial payment terms, so the higher position "clients" that would not be offset by a re-negotiation of the terms "suppliers" will have the automatic effect the increase in working capital.


The representation above block shows the categories of accounts in the balance sheet. The "bottom" of the balance sheet concerns what "moves" often. The item " customer " is actually a figure that represents the sum of  invoices issued  and outstanding on the date the record was constructed. The position  stocks  is the value of manufactured products, not sold. On the other side of the balance sheet, liabilities, figure the job  providers , while the item "customer", that is to say, the  invoices received  by the companies but not paid. The item "customer" is the fact credit to customers. Suppliers represents the credit made by suppliers. These positions vary each day, 



Top record

The term "equity financing" means the resources and the most stable investments of the company. Stable resources are the capital of the company and the long-term outstanding loans. Stable investments, are machinery, real estate, financial holdings ...


In accounting language, the difference between the two is called the working capital abbreviated FDR. This amount represents the portion available stable resources that is available for ... partly offset the need for funding described above, resulting offsets flow in the activity of production and sales.


Incidentally, if in theory the company did not need this funding, the available part stable resources would be in its availability, that is to say, his bank account.




In practice, it may not be an exact match between the need for financing and internal financing capacity. The reason is simple: if internal resources are stable, it is not the same financing needs, which vary each day depending on the evolution of sales and therefore purchases.


Part of working capital is not covered by the FDR is the need for bank overdraft. Good management is to cover most of the WCR with the FDR. The company depends less on its bank overdraft and retains some flexibility in case of difficulties, such as the default of one of its clients.


The challenge for the bank is determining the maximum amount of overdraft need. If the FDR is stable or relatively stable at the one-year horizon, it is not even working capital requirements, which can have strong cyclical variations.


The balance sheets submitted by the companies are rather flattering photographs, which you can not deduct the maximum working capital. The banker of dialogue with the client is necessary.


If the maximum need overdraft exceeds the commitment ceilings of the bank, it may for example ask his client renegotiation of credit "suppliers" and even increasing its equity.


Here is the result on the balance sheet of bad management of the balance sheet below:


In this example, the extension of payment terms has the effect of increase in the "customers" and will therefore create a "hole", that is to say a need for funding. If the company does not respond, it will attempt to address this need by increasing its prints discovered. Everything then depends on the attitude of the banker which is to link this new need with the company's corporate finance elements.

Behind this term hides the simple idea of ​​sharing the effort to be made between the company and the bank. 

The banker then examines the company's stable resources to determine their contribution to the financing of working capital. For this analysis it up the balance sheet. 


The finding of the profitability of the borrower's business and its financial strength at a given time does not put the lender immune to unpredictable events that may later lead to radical change of position.


Over a period of four, five or six years, the average credit period on capital goods, the reversals are always possible. The most classic is as noted above the failure of a major client ,. The customer portfolio analysis in this respect is a necessary precaution. The implementation of safeguards is the need to cover the possible consequences of these events, regardless of their nature or their probability of occurrence. 


The two golden rules of credit and guarantees are: 

- It is ready  not on warranty 

- It is ready  not unsecured .  


Lend on collateral  mean neglecting credit analysis as outlined above due to the existence of a strong guarantee.


It is not healthy to do credit to a borrower without regular income or whose resources are insufficient to repay its debts, or worse, that is thank you to bankruptcy, lack of sufficient liquidity facilities. For the lender, the involvement of a guarantee is cumbersome and expensive process that is best avoided. 


Grant credit on the basis of a guarantee to a borrower whose inability advance known to meet its deadlines, no longer falls within the banker, but of social action. Even worse when the guarantee is based on a property the price is likely to fluctuate, such as real estate.  


Providing unsecured  is dangerous because in case of financial difficulties, this unsecured credit will be the first affected, and the first to be unpaid. The debtor chooses indeed delay payment deadlines or even interrupt them because in so doing he does not incur the risk of implementation of the guarantee may render visible difficulties. 


Guarantees are of two types. There is firstly the  commitments given by third parties  for the resumption of contractual obligations of the borrower when it fails. And secondly the  pledges or charges on goods . In the first category we find such sureties or back commitments, given by individuals or legal entities. From the perspective of credit analysis, it is as if the lender had in front of him a second borrowers could replace the first in case of failure thereof. The value of such a guarantee is the guarantor. It is therefore necessary to conduct a second full credit analysis of the guarantor to ensure its ability to honor its commitment to financial strength. This second credit analysis requires the same rigor as the first. The guarantees or security "real" are the most common guarantees on company assets. This is such pledges on production assets, pledge of financial assets or mortgage real estate.


You should know that in the area of ​​credit risk is never completely covered. In particular, if the guarantees reduce the risk, they are not themselves safe. 


3- How to negotiate with the bank


The negotiation with the bank, like any negotiation requires preparation work. The starting point is to understand the method of analysis of the bank ... and control its own folder. It must then identify the internal decision processes and the real place of his interlocutor in this process. Then comes the question of balance of power and analysis of what can be negotiated. 


Bank house

In negotiation, there is a distinction between the bank "house" and other banks. The bank house, privileged partner of the company, handles most of the financial flows, provides guarantees and finance including the overdraft. It masters of the best guarantees that the company can bring him (business, collateral, personal guarantees).


Other banks have now a more episodic relationship, but that can be no less important. This is the case for credit for medium-term investment, especially for foreign trade. Depending on their importance or significance of risk, these credits can be unionized, that is to say, several banks share the risk and are grouped under the authority of a leader.


In any case, the notion of trading less about the financial aspect of this is to say the cost of credit or the cost of banking services that the credit itself, and the type of services that the customer may request his bank.


The relationship with the bank house stood in duration and each partner attaches importance to this duration. The bank knows better and better client, an essential element of his knowledge of the risk. And conversely the company knows it can count on its bank, she knows what she can and can not ask.


Discuss rates

The question of the cost of all services provided by the bank is important, but not paramount. What is important is that the company know exactly what the bank cost him and above what it brings to its bank in terms of revenue. This is always mentioned in the risk committee is sort of the thermometer of the economic interest of a customer to the bank.


Ask his bank reduced fees, account maintenance fees, etc ... is always possible but the company is often wiser to place also at stake in its negotiations with the bank. She asks or not reducing conditions, the company must somehow know what she refers to her bank and tell her banker. Estimate that bank income is not out of reach. This requires calculating the average out over the year, applying the interest rate and the agreed commissions, and add the revenue generated by other banking services.


Instead of cutting costs, the company can get significant benefits and one-off that will earn perhaps more than a drop in bank conditions. This is for example one more year or an initial period free of payment in a medium-term credit. As a principle, and enforce is that the win-win .



other banks

The simplest way is the competition between banks, which is always possible and even desirable in the case of specific operations, such as medium-term investment loans or export credits.


But again, the company must act wisely and choose the banks that will compete. If such a company seeks to finance the extension of buildings of his seat and also concern a possible development abroad, she will include in his call offering a bank whose expertise is recognized in the area of ​​interest. The final choice of the banks or will be based on such considerations that go further than the nominal rate for credit. The company will have to explain then the unsuccessful banks (good) reasons for his choice.


In this example, an "ordinary" operation, a mortgage is now an entry opportunity in relation to one or more new banks. The bank house is of course involved credit. The company "wins" on two fronts: it prepares for the future while making clear to the banking house that it is no longer tou completely alone. This is the real negotiation, the appreciation of the balance of power, and when the opportunity arises, the change in his favor the balance of power.


Mutual trust case

For the company as to the individual's relationship with the bank should be seen in the confidence and in duration. The credit is not an exact science. Elements "technical" credit must be controlled of course, but what counts just as much is the judgment, the assessment is that each of the ability of the other to keep its commitments.


The commercial bank that defends "its" risk committee in customer agrees somewhat on the quality of the borrower. And likewise, the customer must feel that the word of the bank is solid, that summarizes the formula Anglo-Saxon my word is my bond, pledge my word.


This is not a clause of style. Business life sometimes accelerating and it may happen that the company commits itself vis-à-vis a customer based on a verbal agreement from the bank. Besides the occurrence of serious difficulties which the support of the bank can be decisive for the survival of the company. In all cases, small or large business, small or large bank, the personalization of the relationship is not only inevitable, it is necessary.






Chapter 8 -     "should nationalize the banks"


SUMMARY  The presence of the state in a bank inevitably raises the issue of gender confusion. The state may be tempted to solve economic and social problems by forcing banks it controls to support poorly managed companies, against the rules of practice of the profession, contrary to the European rules and at taxpayer expense.

The French example of the BPI shows that there is actually a "gray area" in the interpretation of these rules and thus in the border state interventionism and free competition. The National Bank took advantage of this gray area and by clever management avoid the excessive visibility of its support actions.

The example of Chinese domestic banks is a complex problem to authorities since the country has chosen an economic and monetary policy opening. Bad credits accumulated on their balance sheets under pressure from the national and provincial authorities cast doubt on the strength of the Chinese banking system as a whole. This prevents the integration of China into the international banking community and hinders acceptance of the yuan as an international currency.


Next: "The austerity weakens the economy"






























1-   A false good solution


The crises of recent years in the world, the real estate crisis in particular, have shown that banks sometimes-even reputable banks make mistakes in that they lend or make investments in flagrant contradiction with the cardinal principles of the profession about risk control.


At first, bank nationalization may seem like a common-sense measure to the extent that bank failures are likely to undermine public order.


Risked going bankrupt in fact, these banks endanger the deposits of their customers, thousands or even millions of customers depending on the size of the institutions concerned. These depositors may lose their assets when they have no responsibility in the activity of the bank and any management mistakes made by management.


The problem is even wider when one considers that even managed flawlessly banks can somehow be "contaminated" by the bankruptcy of another property instead. The reason is the structural interdependence of banks through the interbank market.


In short, banks use money from customer accounts to do their job which is to lend. What is lent is lent, but the deposits vary from day to day depending on each client account activity. At one point, a bank can be a gap between its availability and customer demands (withdrawals or new loans). The interbank market, by connecting all banks together, solves this problem by daily circulation of surpluses from one bank to another. It is a vital device for the proper functioning of the system. This topic is discussed in detail in the zoom of the second part of the book.


In this context, the idea of ​​bank nationalization has always germinated in the mind. Since the banking business has high potential risk to the population, it would be necessary to leave to the state support and supervision.


To this was added - and adds - the belief that the government would do a better banker than private banks whose sole objective is to make profits without regard to the public interest.


Things are however not so simple. It is not enough to decree that the banks are nationalized to solve problems. The history of past nationalizations and observing what is happening in some countries show the many side effects of this "medicine".


The confusion penalize banks that do not belong to the state

These side effects are the result of the confusion that occurs presqu'immanquablement between political power and economic reality. When a shareholder of a bank is the state, the temptation is for the latter to "force" the granting of loans from political considerations.


The problem that arises is that of limits. When does the National Bank stop making loans to companies that are not viable? How long must supporting lame ducks? What criteria to judge the management of the bank? Add to this the problem of the cost to the State therefore to taxpayers, since the losses of the bank are those of the shareholder, and that it must compensate the property. If it does not, the bank can not meet its obligations, paying salaries, etc ...


This bank nationalization of problem does not belong to the past as some in Europe use. Two contemporary examples illustrate this inevitable temptation and its consequences: BPI in France and Chinese banks.


2.   The example of the Bank for Investment


Since its creation in 2011, the Bank for Investment is in discretion. In fact this institution was not created ex nihilo but results from the merger of state entities that existed in France in the field of corporate finance and export assistance.


The BPI takes each day funding decisions in the form of credits, guarantees or bias in the investment business capital. Credit decisions are taken as all banks from the usual criteria of the profession.


Risk taking is at the heart of the bank's business. Too many risks lead to excessive losses that destroy the capital of the bank and therefore the shareholders, but too few risks also affect bank profits because low-risk loans are low-paying. But the bank, like any business, must generate sufficient returns for its shareholders responded favorably to future capital calls.


These credit decisions are always difficult, are taken in all banks in risk committees which are in turn examined the economic, commercial, and quality management of credit applicants.


Political pressure

Credits are rejected by the BPI, it is inevitable. Some of the companies know they have a possible claim would distort somehow the economic analysis of the bank. They can plead their case with regional political bodies.


The popular political bodies can then put pressure on the management of the BPI, as required by "mount" the record in Paris. They will highlight the social dimension of the problems of the undertakings concerned, the consequences of the end of activity driven by the refusal of credit. It takes all the talent management to withstand the pressures and find solutions that will preserve as much as possible its autonomy of decision while avoiding to appear as responsible for possible business failure.


A 'traditional' way of solving the problem is as follows. The state bank stands firm on its initial refusal but proposes to change that with a capital increase of the company in financial difficulty. She then invited the regional body is "leapt" to defend the interests of the company to take its part in this capital increase.


Whatever the mounting however, if things go wrong, in case of bankruptcy of the recipient firm is taxpayer money that is lost. 


Increased competition vis-à-vis private banks

Faced with this situation, the challenge posed to the management of the public bank is offset by the inevitable future losses increased profits related to certain risky loans granted against his will.


To preserve the balance of its accounts, and therefore the taxpayer's money, she is forced to develop its business with "good" customers, which is not really his first mission.


The problem is that then comes the field of credit banks "classic", which have as much need these good customers. They also hope to offset their losses on outstanding loans by revenue from "good" loans. 


The difference with the BPI is that these banks already have losses to manage because of old loans. Compensation for these losses by gains on the good credit is an essential component of their "business model".


With BPI, they must don face increased competition in this segment of borrowers. This distorted competition bpi creates an inevitable weakening of private banks.


The end result is not really positive in the sense of the public good when you consider that the French public bank may still making losses while depriving conventional banks for ways to reduce theirs. 


C- The example of Chinese banks


The international press reported periodically difficulties of Chinese banks and doubts about the strength of some of them. This problem is evident in the poor functioning of the interbank market. Banks that surpluses no longer have confidence in the solvency of those who want to borrow.


We speak of the fragility of the banking system, an elegant and conventional way of saying that many Chinese banks granted loans to non-creditworthy customers . It also means their actual losses are not reflected in their apparent accounts. These banks granted loans to notoriously unable to repay borrowers. They did so under pressure from the central government or the local authorities in the provinces. The lack of bank real commitments visibility effect blocking the interbank market. China's central bank is forced to intervene by lending directly to banks short of cash that banks will not lend to them. 


The volume of bad loans held by all banks is not public. According to reports at the beginning of 2016, however, the overall debt vis-à-vis private sector banks and public sector represent several times the Chinese GDP. Maybe some of these banks have lost the equivalent of their capital, and even more. In the absence of information, without drastic action to eliminate these banks recapitalize, the situation will continue. Chinese banks continue to distrust each other and therefore the interbank market will remain blocked. 


The problem with the Chinese authorities is that it prevents Chinese banks joined the international banking community. But this integration is essential for China to fully reach its goal of internationalization of the national currency, the Yuan.


Chapter 9 - "The austerity weakens the economy" 



SUMMARY  At first glance, the concept of austerity seems to oppose the idea of revival of the economy, essential to reduce unemployment. The problem is that France is in debt to finance its deficits, and the level achieved, contrary to European agreements, represents a threat to its independence, as the French borrowing capacity and the level of rates depend on the wisdom of markets .

The low level of interest rates that has long prevailed due to the policy of the European Central Bank and the strong euro mask this reality. 

The stimulus is needed to fight against unemployment. Its reduction based on sustainable job creation in companies. The deliberate state action in this area can take two forms, called policy of supply or demand policy. The supply policy is to strengthen the productive capacities of businesses through incentives such as investment relief for expenses or taxes. The demand policy is to increase the purchasing power of consumers through various incentives.

In practice, the French authorities combine all these elements, Austerity reflects the need to include any action recovery in a global target for reducing public spending. with mixed results on employment and .. uninterrupted increase in debt. The key is in restoring the competitiveness of businesses


Next: "Leaving the euro, France regain its sovereignty"





































1-   The debt reduction is a priority


The issue of public spending is essential in high debt situation. Must be considered in fact that the French budget is "already" in deficit, so that any additional expense can only be financed by borrowing.


A high level of debt is unsustainable in the long term for the payment of interest is a heavy burden. The exceptional situation of negative rates in 2015-2016 only applies to a portion of the new debt. Besides the interest rate risk, liquidity risk is also taken into account. Behind this expression means the risk of no longer find lenders willing to finance the French State, although today this risk may seem theoretical.


Debt markets and dependence

It must be understood that French needs are considerable. The amount of annual new borrowing should be calculated by adding to the government deficit - about 70 billion - the repayment of loans matured. Clearly, France must borrow each year much more than its deficit. 


The reason is in the way of borrowing France, which is not that everyone knows in real life. A mortgage, for example, is repaid by monthly installments incorporating part "return of capital" and part "interest". 


France traditionally borrows the "small pieces" over varying periods from months to ten, fifteen or twenty years and repay at the end of each period. As she has no resources to make those repayments, it issues new loans to repay the old ... and also borrow to pay interest. The snowball effect is increasing every year.


False security 

Since the creation of the euro, France borrows easily, despite the constant increase in debt. These loans, in the form of bond issues, are underwritten week after week by investors. Appearances can be deceiving. 


French debt pose a security issue related to the uncertainty about the behavior of lenders, ie markets in the future, a rarely mentioned aspect of reality. He rules about that sort of indifference to the opinion, an indifference that the state does not seek to correct because the theme of addiction or a form of dependence of France against "market" is a sensitive issue. 


Lenders have virtually hand on the tap of credit and the power to set the rules.

much of the debt is placed outside France

About half of the French debt is purchased outside of France. There is a big difference on this issue with Japan, for example, which is proportionally higher debt is safer than that of France, since placed exclusively with Japanese lenders, banks, insurance companies and pension funds. In case of acute problems, it is conceivable that the Japanese patriotism would play its role and that the continuity of the state funding would be ensured. Added to this an important element: the absence of exchange risk from the perspective of lenders.  


the protective effect of the euro . 

We must realize that the very low and sometimes negative rates which France has benefited are the direct result of the economic measures of the ECB.


Ease of France to find lenders is a direct consequence of its membership of the euro. The strength and stability of the European currency reassure investors but there are especially feeling that lend to France is in risk as lending to Europe. The euro thus acts as a protective shield for France.


If exit from the euro, risk perception "French" by lenders would change beyond recognition and would result immediately by rising interest rates. The inevitable devaluation of the franc mechanically increase the weight of the current debt and the uncertain evolution of the exchange rate would make them even more cautious lenders. 





2-   Policy of supply or demand policy

It is companies that create jobs and wealth. The deliberate state action aims to help them to develop their business.


Several solutions are possible depending on the state chose to directly help businesses by reductions in their costs or indirectly in helping enterprise customers to consume more.





The State helps companies directly.    


To stimulate aggregate demand for goods and services for enterprises, there is one method of helping the latter to produce more and cheaper.


This assistance aims to lower the cost of the charges and taxes imposed on their activity.






One might question the actual effectiveness of this policy can only be measured over time. All companies do not reflect the immediate relief of charges and taxation of new job-creating investment.


Part of the opinion can also move the "unrequited gifts" and completely ignore the positive measures. It is certain that some companies may enjoy a windfall, that is to say, they had anyway planned to invest and had the means to do so. Other companies do not invest immediately.


The supply policy must be accompanied by a psychological element of importance, business confidence in the future.


Recent experiences of European countries and all have shown the positive employment effects of the supply-side policy.








The state increases the purchasing power of consumers 


Support for business activity can also be expressed indirectly. This is the case of measures to improve consumer purchasing power, measures that translate into additional demand for goods and services, so in an extra activity for companies.


Technically, this policy signifies direct taxation on households, to raise the salaries of civil servants and increase the minimum wage, knowing that any increase in the minimum wage led to a general rise in low and average wages.

Alternatively or additionally, the State may choose to increase their own purchases through public procurement, targeted on certain key sectors such as building and construction.




This policy, electorally attractive and easy to implement, has the disadvantage of lower efficiency on the job the previous and especially to cause adverse side effects.


Limitations of demand policy

The demand policy is less effective than supply policy because there are "leaks". The financial support to "households" that is to say, consumers can not completely businesses. 


In other words, one euro aid does not result in additional euro of turnover for companies. It must indeed take account of the savings and purchases of foreign products.


More than 50% of the assistance provided finance imports of consumer goods. The reason is either the inability of firms to respond quickly to increased demand or consumer preference for products that are not manufactured in France or more.  


 This is the case of many electronic products such as computers and phones or home equipment, that is to say, most of the so-called "black" or "white". 


More generally, all the so-called "general public", including in the textile field, is concerned by the phenomenon of " low cost " that applies to certainly lower quality products but much cheaper because manufactured in low-cost countries.


Stimulus "Keynesian" 


Historically, the political demand, theorized by Keynes in the 30s, is the origin of Roosevelt's New Deal, a policy that has helped the economic recovery of the United States after the Great Depression. The supply policy for its part is based on the work of economists like Ricardo and Say, and the best example of its application is in the 1970s under Reagan's presidency. The so-called Keynesian stimulus still has its followers today because of its positive effects for the population. However, it is recognized that the globalization of trade has significantly reduced its economic efficiency.


3- Restoring competitiveness


In practice the state policy combines supply and demand policy. Spend more or reduce revenues, eventually lead to the same result, which is therefore increase the deficit of public debt. To mitigate the effect of the debt snowball, the state strives to decrease somewhat parallel other expenses.


The implicit idea is that this new debt increase is justified by new productive expenditure which will then allow a more rapid debt reduction. 
This ignores the multiple constraints on the choice: the growing burden of debt interest, uncertainty about the behavior of markets and the French involvement in European integration.  


Public jobs are a temporary solution, socially welcome in time of high unemployment and their advantage is in the speed of implementation. This is an important feature since the resumption of investment therefore employment in companies after a period of recession is a slow process.


This process can not be virtuous if it is targeted primarily on the restoration of the competitiveness of enterprises. Preserve, promote, investment capacity of businesses remains why the heart of the medium- and long-term state policy.  






Chapter 10 - "Leaving the euro, France regain its sovereignty" 



Summary The idea of leaving the euro is based on the perception that this measure would enable France to correct the devaluation of the gap vis-à-vis productivity of Germany and also not to suffer the constraints Europe. This perception is wrong on several counts. Today, this is no longer the state that decides the value of its currency, but the market. The structural deficit of French foreign trade would cause the franc to lose control on the foreign exchange market and its chronic instability. Imported inflation resulting from devaluation would diminish the effect the export price, a random effect otherwise, as demand for exports is determined not merely from the price. The immediate increase in prices of many imported products, including energy would cause a significant loss of purchasing power for the population. The public and private debt subscribed outside France could not be converted to francs under penalty of blocking any possibility of new borrowing. This debt would rise with the devaluation. All these reasons are destroying the illusion of sovereignty regained since the output of the euro would subject France to the market laws. Conversely, membership of the euro is a shared sovereignty whose positive effects are to be measured at fair importance. The euro protects France because it brings a double stability vis-à-vis the countries of the euro zone with which trade has been greatly simplified, and outside, since the strength of the euro enables it to par with other currencies that dominate the world, the dollar and the Yuan mostly. The example of some countries that have kept their currency - the UK, Norway and Switzerland in particular, must be watched closely. All kept a specific export advantage that protects their respective currencies. But all have also negotiated special agreements with Europe, for in international negotiations a disproportionate weight to the relative size of their economies. This is the difficulty that the British government has faced since the vote in favor of Brexit. All kept a specific export advantage that protects their respective currencies. But all have also negotiated special agreements with Europe, for in international negotiations a disproportionate weight to the relative size of their economies. This is the difficulty that the British government has faced since the vote in favor of Brexit. All kept a specific export advantage that protects their respective currencies. But all have also negotiated special agreements with Europe, for in international negotiations a disproportionate weight to the relative size of their economies. This is the difficulty that the British government has faced since the vote in favor of Brexit.


Next: "The securitization created the crisis subprime  "











































1-   Myth and reality of the devaluation 

Opinion is without memory. One has the impression that the euro was born in January 1999, has always existed. The long period of thirty years which preceded marked by  devaluations  repeated and humiliating, is already far in minds. 

The France often devalued its currency and the operation was in pain. 
The basic problem was the trade deficit. France imported more than it exported. The difficulty of exporting was the result of higher prices, themselves a consequence of high domestic inflation. Specifically, the devaluation was not decided quietly, but imposed by violent attacks on the franc markets. Those who had sold francs at all costs against stronger currencies. The Bank of France dipped into its foreign exchange reserves to buy francs on markets to halt the fall of the course, but in vain. Each time this scenario ended with a capitulation.


After the devaluation, the French became momentarily attractive products for export, but at the same time, imports were more expensive, especially oil which the country badly needed. The rise in import prices gradually nibbled the initial advantage of the devaluation, so that a new devaluation was necessary in external markets after months or years to correct the external deficit. 


2.   The strength of the euro against globalization


The strength of the euro is expressed internationally, where he settled in serious competitor to the dollar. It is also expressed on the inside, in its protective role. Before the euro, as indicated, the chronic instability of the franc was the result of high inflation and export-import imbalance. Inflation has gone, but the external accounts have deteriorated, so that there would return to instability. The franc would suffer immense market pressure. We can no longer talk of devaluation since currency reserves of negligence, the Bank of France could not announce a parity and stick. The erosion of the franc would have an immediate effect on the French debt taken outside of France, whose repayment would weigh increasingly heavy. 


More importantly, the return to the franc considerably weaken the French position on the international stage, facing the major US and Asian blocs. Like it or not, the relationship between the blocks are more than ever the economic and financial power relations. Depriving yourself of the euro would mean an immediate weakening of France vis-à-vis these blocks. France did not like Switzerland, Norway or even the UK comparative advantages allow it to pull out of the game outside of the euro. What is less known and the Brexit revealed is that all these countries have negotiated special agreements with Europe, to take advantage of its strength and make better figure in international discussions.


The euro is a difficult concept to grasp. banal element of everyday life on one side and the other abstract entity. This abstract side stems from the notion of trust that accompanies any currency. A subjective element, perceived differently depending on whether we are in or outside the area. Today, Europeans use the euro as their national currency they used, without thinking really. They are not aware of the progress it has represented and chaos that would follow his death.


The changeover has completely changed the situation. Managed remarkably well by the European Central Bank, the European currency has gained in record time, against all predictions, global reserve the coveted position of second currency, after the dollar.


This means that those who have reservations (Gulf countries, China, global companies) have enough confidence in the strength and stability of the euro to move in this currency a significant part of their assets. This is not just a matter of money, but through trust in the currency, the perception of the real economic power of Europe.

Thanks to the euro, more or less strong isolation of the country economically, but sufficiently complementary knew constitute a powerful unified whole.


Overall foreign trade of the countries of the euro area is in surplus, which means that Europe has no resource problem in currencies other than the euro to honor its commitments to the contrary. Overall good health of all was even the cause of a rise in the euro against the dollar, although other factors such as interest rates have played a role.


France has obviously benefited from this formidable protective shield. Its external deficit does not weigh on the accounts of Europe and does not undermine the external credit of the euro because it is offset by the surpluses of other countries in the area. Without the euro, the country would have been weakened. 


It is to the credit of the ECB the indisputable success and credibility of the euro. 


The general public is not aware of the benefit of the euro 

Apart from tourism and money transfer problems within the euro zone, the currency has not changed visibly the lives of everyday French.


For businesses, however the change was considerable, and primarily for those who trade with the countries of the eurozone. The cost of the changes has been eliminated, as well as currency risks. Export or import to or from the euro zone has become as simple as selling or buying on the national territory.


Business transactions outside the euro area have also been facilitated by relativity stable exchange rate of the euro vis-à-vis other currencies. In other words, the risk is always present but in greatly reduced proportions. 


Euro exit: risks

The protection we bring the euro could disappear overnight if they return to the franc.


This return is presented as the solution to a real problem, the productivity difference between France and Germany. The return to the franc would leave us free to correct this difference by the "game" of devaluation. 


It would be very bad solution to a real problem, a dangerous utopia by its simplicity and thus its best attraction in the opinion.


You have to imagine the chaos that would cause the scenario of exit from the euro. The problems of deficit and debt french then arise in the foreground, causing immediate speculation and continuous devaluation of the franc market, the dollar, the yen and the euro ..., with all its economic and social consequences.


An inevitable chaos 

To understand this, it must start from the reality. Many actors of the economy every day need to obtain foreign currency to pay for imports, to make repayments of loans granted by lenders outside France, to invest abroad, buy stocks, etc .. .


Borrowers are private or public companies, and the state itself. Those who pay the creditors so are banks, in the case of loans, and more generally all those who hold outside France of bonds issued by French borrowers. 


With the euro , no problem, since on the one hand a large part of trade concerns the countries of the euro area and for the rest, foreign currency payments are easy to perform, knowing that the value of the euro in the weather is stable and predictable in all cases.


Without the euro , everything changes, because then it is no longer a part of the imports, but all that should be settled in foreign currencies and unfortunately, France imports more than it exports. And it is the same all the debt of the state and the private sector placed outside France should be paid in foreign currency. 


It would add to it an aggravating factor. Holders francs in France, anticipating the weakening of the currency, is dépêcheraient exchange them against hard currencies, and those who receive foreign currency payments will not convert to the francs. Besides market speculation also anticipating the fall of the franc. As we know, the price in a market as a result of the relationship between supply and demand that the anticipation of this report. 


To "hold" parity decreed by the public authorities after a euro exit would require the Bank of France is ready to sell at fixed currency to cover all these needs. The French reserves would be swept away in a few hours, with or without exchange controls. 


The days when a country could "wall" and unilaterally impose an exchange rate is over because the amounts involved in the market are multiples of what they were thirty years ago.


The dimension of chaos would be in direct proportion to the importance of economic and financial ties that France has woven all because of globalization. interdependencies of no comparison with what they were in the years 1970-1980.


Monetary problems would be quickly transported to the level of the economy. Prices in francs of imports would rise over the erosion of the franc, inflation explode. 


The price advantage  in foreign markets subsequent to the devaluation of the franc would be wrong for one simple reason, the share of imported products in our exports, once negligible, has now reached 50%. 


Above all, the old rule taught in economics that sales increase when prices fall lost and loses every day of his truth. Other factors play an equally important role, such as fashion, quality or perceived quality based on price.


The problem of external debt

Private debt being denominated in euros increase over the devaluations. Bankruptcy would threaten banks because French banks have close ties with their counterparts in the euro area and also all issued bonds in and outside the euro area. 


The public debt of France is the equivalent of GDP, slightly more than 2000 billion. Half of the debt, 1 trillion is paid by foreign lenders.  


To reassure lenders and to obtain new loans would require while France is committed to maintaining its existing euro commitments. The consequence would be overnight increased debt outstanding in the same proportion as the devaluation of the newly created franc. Interest expense would become unsustainable because the rate of the new loans would skyrocket.  


For individuals and businesses, the foreign exchange market would be framed. Banks would be nationalized. Only astronomical interest rates would attract new lenders to repay the outstanding debt


In fact, in reality, the mere mention of this disaster scenario in the context of elections would be enough to cause an immediate rise in French debt ratio and capital flight. Markets, as has been said, anticipating. 


The example of Switzerland in the first quarter 2016 shows. This country does not want to follow the downward trend of the euro against the dollar. But seeing its currency reserves fall precipitously, the Swiss Central Bank was forced to give up in a few days its fixed exchange rate policy between the Swiss franc and other currencies.  


Free France to impose its currency to foreign creditors? 

Supporters of the output of the euro do not simply advocate a return to the monetary sovereignty of France including the freedom to devalue. There is also talk of a provision of French law authorizing the State to convert its debt in the national currency.


The argument for it is just in French law would have a disastrous psychological effect on the markets. It would be suicidal to impose on foreign lenders such a provision, even legally founded. The balance of power is obviously the lenders side. The chances of finding new lenders would be void if France applied this provision.


For a foreign lender, accepting repayments francs would take the risk of degrading the value of future repayments.


Oppose this provision to foreign lenders would be the best way to cause their flight and therefore to France in widespread default situation vis-à-vis its creditors. 



Now the  continuity  of loans is critical for France, because a large portion of new loans used to repay those expired.



 3 - The challenges of a single currency: the theory Mundell


Robert Mundell, Nobel Prize of Economy, studied the single currency issue. Observing how the dollar had emerged as the US currency, he deduced the necessary conditions for the success of a single currency and set the "Optimal Monetary Zone".


According to this theory, correcting productivity differences between countries that have adopted a single currency rests on two essential conditions, mobility of labor and especially fiscal centralization.


Mobility enables inhabitants of the regions (countries) disadvantaged find employment elsewhere. The time that the federal government is able to invest in these regions lagging productivity. On both counts Europe suffers from disability, mobility is hampered by the language barrier and Europe with no real budgetary power. Note that some mobility nevertheless within Europe and that the absence of a fiscal authority did not prevent the annual financial transfers of hundreds of billions of euros to help many countries - Spain, Portugal, Greece and Eastern European countries - to modernize.


Strengthening the budgetary powers of Europe requires the unanimity of the euro area Member States. Young American States quickly agreed to the transfer of budgetary powers to the federal government, as part of the creation of the dollar. It is certain that the process will be more difficult in Europe, where the force of tradition is naturally higher.


The symbolism of sovereign weighs in the minds and can distort the reading of the facts. Admittedly, the small "Great France" is stronger in its European alliance. In the game of the blocks, which face the growing power relations.


Robert Mundell was first blasted the euro on behalf of its construction defects. More recently he acknowledged that the deconstruction of the euro would bring more problems than it would solve. He continues to advocate for fiscal centralization, an objective that European views are not yet prepared to accept. 







 Chapter 11 - "Securitization and Wall Street created the crisis subprime  "  


SUMMARY  Securitization, introduced in the thirties in the United States to revive lending, including mortgage lending is a transformation technique of bank loans into securities, which were then sold to investors. On the macroeconomic level, these credits were no longer funded by deposits in banks but by the markets, a virtuous system allowing more credit to the economy. The Wall Street banks have extended the securitization creating sophisticated securities securities for investors worldwide. Securitization and Wall Street are generally more responsible for the crisis of subprime mortgages as the plane or air traffic control can be air disasters. Responsibility for the crisis is actually the side of the US Department of Housing who did not know or could limit the issuance of the state guarantee on securities from mortgages to disadvantaged households, loans " subprime  " especially. For all financial market participants, this guarantee was implicit.

When the real estate market turned, the volume of mortgage loans previously securitized and the mixture was colossal collateralized with other unsecured securities operated by Wall Street has made it impossible to trace. The system is blocked and all titles of outstanding shares almost saw their values ​​fall apart. The government of the United States had to pay billions of dollars in compensation under warranty. It has beautiful game today to continue the large banks that have actually benefited from the "packaging" of securities and who can afford to pay.

The prosecution by the DOJ, the Department of Justice, rely on sometimes trivial deformities affecting thousands of contracts on the sale of loans and securities. Hundreds of thousands of pages, counting appendices, therefore impossible to verify one by one. The DOJ plays this provision likely to require investment banks to compensate the holders of the securities ... or guarantor, that is to say, the Government of the United States. Rather than incur legal costs and research against the formidable opponent what American justice, major banks agreed to pay.


Next: "Eurobonds would avoid crises"









































1-   The circuit subprime


The crisis in  subprime   result of the  widespread pollution of sophisticated financial circuits shaped by US investment banks and two state agencies from the outset to facilitate the mortgage financing. Used to connect the circuits of a particular side of banks and other international investors (European banks, pension funds, sovereign funds, etc ...).


Credits - primarily real estate - distributed by banks to individuals have been "sold" to investors in bonds. The mixture in variable proportions of these credits has created bonds tailored, offering different combinations of interest rates and risk. Their success with investors was considerable.  


Put another way: the money of investors who bought bonds developed by these investment banks was used at the other end of the chain to make loans to American homebuyers individuals.


Many of these borrowers - borrowers called " subprime " - did not have the ability to repay, but they paid high interest rates and the value constantly growing real estate, so guarantees given to lenders, reassured investors ... as long as housing prices rose.



In the US banking jargon, the term  subprime  describes loans to households barely afford to repay, ie risky borrowers not offering the usual resources of collateral required by banks. This expression was constructed from the word  bonus, which means the best customers. Hence the term    prime rate , which represents the best interest rate granted to top clients,   customers premium.  A client that is not   premium   pay a higher interest rate   premium plus 50 bp   for example, which translates to "best rate increased by 50 basis points, or 0.5%." Subprime   literally refers to borrowers "under the  premium customers " at the lowest level. Presenting the highest risk, they pay the highest interest rates too. 


















The sudden collapse of the housing market triggered the crisis, that is to say the loss of value of all bonds as there was a doubt about the presence and proportion of loans  subprime  present in packet of credits which they were backed ..... there were more than 10 000 billion dollars !


Mechanism and scheme 

The  mechanism of explanation path  subprime   crosses numerous "technical" landscapes: how to move from a one-time credit of duty, what were the intermediate steps, how to operate the control and US control, what was the risk analysis investors etc ... 


Initially, a US borrower gets a mortgage from a bank. This borrower addressed to the bank directly or through a broker, itself related to several banks. Credit is registered in the bank's balance sheet. The credit agreement establishes the claim of the lender on the borrower.


Some time later, we find this claim to the other side of the planet, "drowned" in a bond purchased by an investor, investment funds, sovereign or bank funds. Between US borrower and the investor in Europe or Asia, what has happened? The answer is: a cascade of transformations.


In the diagram below Fanny Mae is the name of the public agency that has played a key role in the crisis and which is described later in this module. 


Note also that the obligations corresponding to the real estate loans are called MBS ( Mortgage Based Security ). Mortgage , which means mortgage, is the word used to describe a mortgage. Security  means title within the meaning of negotiable instrument, generic word for, among other duties. ABSs are Asset Based Security, that is to say as backed assets other than mortgages ( "automobile" credits, for example).


As for CDO, it refers to the secured obligations (Collateralized Debt Obligation).






Acronyms MBS, ABS, CDO, CDO² therefore means all, in fact, of "obligations". The above scheme can be simplified. Writings




This simplified diagram shows the circuit of  subprime  is nothing other than a bank credit processing circuit in bonds, which were then retired only to be sold to investors.


Why invest in bank loans 

The basic idea was simple: she came from the observation that "investors" wanted increasingly invest their money in products "tailored". Customized in terms of risk and return. 


For investment banks, always keen to offer their customers investment combines high profitability and low risk investment in bank credits had real opportunities to meet this demand for "tailor-made".


Interest on bank loans as individual investment products can surprise.


This is mainly explained by the fact that these bank loans to individuals with relatively high yields and by a simple method, we can reduce their overall risk by grouping. 


We can intuitively understand in fact that it is  less risky  to lend € 100 thousand to ten borrowers rather than lending the equivalent, 1 million euros, a single borrower. The probability of simultaneous failure of ten borrowers is lower than that of one. And in addition, to the lender, the risk of loss covers only a fraction of the investment. 


It may be more complicated to manage, but the advantage is twofold: less risk and less possible losses. 





The problem that then arises is: how? A credit is a contract, credit guarantees and has legal documents, called the documentation. In fact credit is not designed to easily change lender. The solution is the  transformation of credits into bonds.  


The bonds are securities whose main feature is the ease of exchange. This is detailed in the "basics".


To do this transformation, it is necessary to create a structure that one side will sell bonds to investors and the other using the proceeds of that sale to buy credits to the bank.


Securitization is a mechanism for banks to get packets from their books loans, and sell them at a profit.


This transfer has no impact for borrowers, who are bound by their initial credit agreement. For the bank, however, everything changes. No longer part of these contracts, it is no longer committed only supports more risks and can use at will the proceeds from the sale to reduce debt ... or make new loans, it will resell .


Credits "securitized" from different sources (mortgage, car loan, etc ..) are grouped together and sold to SPEs. These proposed issue bonds to investors. Proceeds from the sale of bonds allows to pay the securitized loans.


These SPEs are existing companies whose job it is (eg  Fannie Mae  in the US) and investment companies created for the occasion, called CIS (Special Investment Company) or SIV (Special Investment Vehicle). Very small companies without staff or physical space. The formula of the SIV corresponds in principle to the French notion of receivables Common Fund.  


This SIV issues bonds it sells to investors with the promise of a good yield. Investors have confidence because the "arranger" is almost always a Wall Street bank, known for its competence.  


2   Wall Street and the tools of international finance


Millions of MBS bonds resulting from the securitization of mortgage loans and ABS bonds were acquired by private or institutional investors such as funds or banks.


Rather than keep the tracks from various securitization transactions in their balance sheets, some of these funds or these banks continued the transformation process, mixing the titles.



Of different origins obligations have been accommodated in turn in new independent structures SIV giving rise to new issues. The process was repeated in cascade. The goal was the creation of financial products "tailored" built based on different investment strategies. 


These products are  CDOs  - stands for  Collateralized Debt Obligation -  what can lead to  guaranteed bond debts.  These are securities backed by assets heterogeneous, mixtures of MBS and ABS securities. This is the main difference with the ABS securities backed, them, bundles of homogeneous loans.


You can really talk about bespoke about these products. Their designers play on the portfolio which are CDOs backed to obtain a profile of  risk and remuneration.

These CDO securities created by some investment banks have enjoyed great success with investors attracted by the variety of products obtained. There are even CDOs of CDOs, the CDO²! The total volume of securities has exceeded ten thousand billion.




This success is largely due to the development of real estate credit, encouraged by a global policy of easy credit and low interest rates.


Taking advantage of easy credit, some - commercial banks, investment banks,  hedge funds , pension funds, insurance companies etc ... have made significant gains by borrowing at low rates to buy high yield securities. The institutions that have "arranged" CIS - investment banks or  hedge funds  - have made money through commissions proportional amounts.   


rating agencies 

Contrary to popular opinion, the aarrangeurs and buyers ABS, MBS and CDOs and CDO² were not indifferent to the risks attached to these securities. All emissions SIVs were indeed subject to strict notation, established by the major rating agencies internationally recognized as Standard & Poor's, Fitch or Moody's.


It is conceivable for these agencies the magnitude and difficulty of the task, with regard to securities issued by thousands of SIC, which had to analyze the assets. These assets are composed of "millefeuille" of various origins securities, agencies have developed specific analysis tools including statistical tools for modeling complex composite risk.


This work of assessment and grading is fundamental. The concept of rating of a security goes hand in hand with his remuneration. The rating allows investors choices-risk profiles tailored remuneration. For banks, the rating of assets kept in the balance sheet has a direct impact on their weighting in respect of solvency ratios they must comply.   



Investment banks and funds to the origin of SIV have devised a clever system to create more or less risky bonds that the obligations to which they were backed, which at first glance may seem impossible.


In this system, newly established bonds are grouped in three installments of decreasing risk:  senior, mezzanine, equity . 


The principle applied to the creation of these units was extremely simple: each capital reimbursement of a borrower was allocated primarily to the highest tranche, the equity tranche, then cascade to the following tranche, the mezzanine tranche and finally to the last, the equity tranche .... if there was anything left. 


A mechanism that can be represented pictorially by an alignment cascade basins that successively filled, since the previous well is full.




This mechanism applies to principal repayments only.


For interest, it is the opposite could be said. The overall mass of interest does not change, but their allocation is done on the principle of proportional interests at risk. 


Consequently, the obligations of the senior tranche are carrying an interest rate lower than the average of the securitized loans. Conversely, a higher rate than the average rate is allocated to bonds of the riskiest tranche, the equity tranche. As for the mezzanine tranche, it benefits the average or near average rates. This is of course the arranger that secures the distribution rule.


Thus a senior tranche can be assigned a AAA rating by a rating agency, while the average bond rating which this tranche is backed only has a rating of AA or A.



The band mechanism used to create securities with an average quality quality of the securities they support, but in volume limits that depend on asset quality. It was therefore necessary to improve this quality.


The principle was the partial transfer of risk assets on third parties under an insurance mechanism. Two hedging methods were used, the purchase of an actual insurance from a  monoliner , specialty insurance company, or the purchase of products much easier to use, CDS  Credit Default Swaps .


CDSs are contracts of insurance against default of portfolio credits. The operating principle is: the swap buyer pays a periodic premium determined in advance and, in return, the swap seller pays the outstanding amount in case of loss of credit.


The emitter of the swap can be a bank, a fund, an insurance company, in short, any entity having a good  rating . CDS are tradable securities, thus likely to circulate from hand to hand. The exchanges are over the counter, that is to say outside of an organized market. We completely out of the constraints of the insurance business.


The success of the CDS was phenomenal. Their original purpose of coverage of the securitized loans was exceeded. Investors have used CDS to speculate heavily in corporate bankruptcies. The overall volume of CDS was estimated at several tens of thousands of billions of dollars. It is clear that the lack of control of this huge market, without being the cause of the crisis in subprime in was was an aggravating factor. Some issuers of CDS were unable to meet their obligations under these contracts, either because they were further weakened by their own investment at risk, either because of the enormity of the sums due, as has the case of the US insurer AIG.


Out of the context of the crisis, we must emphasize the innovative dimension of CDS and securitization. These mechanisms have transformed the insurance and credit activities, giving them a new fluidity. In the banking or insurance "classic" in fact the credit and the insurance policy underwritten remain on the books of the issuer risk taker. CDS securitization and allow the release of a static system. 


Credit match the ABS securities (and their derivatives, CDOs). A corresponding insurance CDS securities. Lenders and insurers have a fine tool for managing their portfolio risk.


3-   The crisis in subprime  : the real causes


The scheme presented in the introduction showed the different stages of processing and transportation credits. Initially processed in MBS or ABS securities, these funds were then diluted with other funds and other securities to provide new securities (CDOs), and the process is repeated. The dilution cascade finally produced securities whose exact content was difficult to trace. This opacity has long been no damage to the extent that each intermediate title was subject to a rating by the major agencies. The buyer of securities therefore knew the level of risk of their investment. This "plumbing" enjoyed an explicit quality label notation.


The problem started when the real estate market turned and the mortgage defaults have increased.



Three main factors explain the intensity of impact and velocity on the financial system:


1 Fanny Mae and Freddy Mac agencies, the most important issuers of MBS securities appear to have been slow to share their difficulties.

2 The rating agencies were late and abruptly adjusted their rating system

3 Some accounting mechanisms have amplified the financial disruption


Trigger factor: the downturn in the property market

The surge in credit defaults is due to the bursting of the housing bubble. This bubble was rooted excess housing demand over supply, a situation permanently maintained by a policy of easy credit and cheap.


Two factors contributed to the downturn, that is to say at the point where demand is lower than supply. Developers, by flooding the new construction market have ended up creating an overflow housing.


An infernal mechanism played: housing prices dropping, there comes a time when the credit granted by the bank is no longer covered by the value of the property. The bank, insufficiently guaranteed, can then demand repayment of the outstanding balance.


The borrower can run, his property is seized and sold. The bank becomes the owner of tens, hundreds of housing it seeks to sell, and often sells off. The price drop even more, new loans become delinquent, and so on. This phenomenon first struck the "subprime" loans, the most fragile. 


First aggravating factor: the problem of notation 

Rating agencies have been accused of all evils, and including collusion with the groups that were responsible for assessing, which seems difficult to conceive. A study by the Bank of France, the problem is mainly that of a default modeling.


The measure of risk of a heterogeneous package of collateralized credits was based in fact on the statistical analysis of default risks in each category of loans, mortgages, car loans, or consumer credit (credit cards). The overall risk was weighted according to the respective weight of these categories in all. The system was refined by taking into account risk correlations between economic sectors of borrowers. To feed these analyzes real data lists twenty or thirty years were screened and continually updated.


The models developed worked well as the risk of fluctuations were within a certain range. The problem is that recent data were considered only so attenuated in the calculation of risk "medium". In other words, the models were not built to rapidly integrate risk measurement a "peak" sudden failures. When the rating agencies reacted, thousands of titles had been wrongly rated positively. Thus appeared the toxic securities, the exact volume and especially the location was impossible to trace.

Second aggravating factor, the "mark to market" 

The banking panic was amplified as a result of a provision of accounting regulations according to which the balance sheet shall give the market value of securities held. There were long as the regulatory authorities of most countries had agreed to delete the old method of valuing an asset by its historical acquisition cost.


The new rule was based on common sense, since it tended to close a valuation of reality. Its consequences were catastrophic unfortunately when the crisis broke out and the new MBS toxic scattered everywhere was known. Impossible indeed to refer to a "market value" of the portfolio securities, since there was no market. The few transactions in the context of rescue operations showed price representing only a fraction of the face value of the securities.


Banks were forced to depreciate their assets blindly believing themselves the market values ​​of the moment. Huge losses have emerged without cash accounting loss of output since the banks did not sell their shares, and for good reason. But losses anyway, thereby decreasing the own funds of the institutions and creating a situation of extreme fragility. 


bank liquidity crisis

The crisis led to a result "collateral" disastrous, loss of mutual trust and the drying up of the interbank market. Clearly the banks do lend themselves more them which could not measure what is called counterparty risk. Not knowing is worse than risk confrontation with a high risk.

Now the interbank market is the lung of the banking system. Banks lend each other every day billions of Euros on the basis of formal guarantees minimized so as to simplify transactions. The slightest doubt mutual credit reduces trade to zero. That's what happened. In the process, central banks intervened by lending bilaterally to each applicant institute.

Economic crisis

The paralysis of the banking system barely avoided, a new phase of the crisis began to develop. Global economic activity came slowly and inexorably into recession.


The first reason was the decrease in the ability of banks to lend. Lack of funds, companies have blocked their investments. The inter-company activity fell. The second reason is the loss of consumer confidence. Consumption, the engine of growth in many countries including the US, collapsed.


The spiral of negative chains has grown, the drop in consumption has led to the decline in industrial activity, so the unemployment fears, so a further decline in consumption, and so on. Banks, barely recovered problems of toxic assets to prepare for further write-downs of their own loans to their customers less and less able to meet their commitments.


The responsibility of the US Department of Housing 

The whole world believed that the obligations arising from the credits subprime   securitized enjoyed the Crown guarantee, which in reality was not entirely the case.


The crisis raises fundamental TWO QUESTIONS:


1- Why US banks were they granted loans to customers without extra resources with the anticipated risk of downturn in the property market? 

2- How these problem loans have they penetrated the circuits of securitization, in other words, they pourquoiles buyers were willing to buy high-risk loans? 


The answer to the first question is in a US law, the  Community Reinvestment Act,  prompting banks to distribute a portion of their mortgage loans to poor populations in some areas and causing them to degrade their acceptance criteria. This law, old thirty years was amended in 2005-2006. The incentive given to banks was converted into stress with sanctions.


The securitization of these problem loans, meanwhile, was overwhelmingly the result of a public body established in 1938, the  Government National Mortgage Association , more commonly known under the name of  Fanny Mae . A body under the authority of the Minister of Housing, headquartered in Washington. In 2008, Fanny Mae - his alter ego and Freddy Mac-guaranteed almost half of mortgages  subprime  (2000 billion!) Securitized in the US, so with the implicit state guarantee. 


An explosive mixture was therefore constituted by the combination of high efficiency, the credits  subprime  and zero risk because of the government guarantee.


Imagine the  gold rush  of investment banks and  hedge funds  on these securitized products. yarrow added to more traditional funds, they allow to boost the overall performance of bonds offered to US investors, European, Chinese or Russian.


When the real estate market turned, things went awry. The credits  subprime  integrated into milfoil backed bonds have gradually become defaulters and property values for these credits is gradually passed under the original value. Therefore it was impossible to know what exactly these bonds were worth, especially as investors ignored the share of credits subprime in their composition.


Fanny Mae and Freddy Mac were soon overwhelmed by calls for guarantee. 


Playing the legal uncertainty over the validity of this guarantee, the US government was able to adopt a selective approach to the granting of this guarantee. The biggest buyers of securities from  subprime loans,  sovereign wealth funds from the Gulf countries, Russia and China, were the first to benefit from this guarantee. For political and financial reasons, these countries are in the biggest purchasers of debt securities issued by the US treasury era.


From the first hesitations, the damage was done, everyone doubted everything. The value of bonds collapsed because nobody knew exactly how much  subprime  unsecured was contained in the bonds issued by investment banks.


It is unfortunate that the classical rule that misdiagnosis are bad reforms. Remember that a European Commissioner has failed to convince his colleagues of the creation of a European rating agency of. As if the change of the thermometer could guard against disease! Other unfortunate reforms have emerged as the separation of credit and market activities within banks, or restriction of market investments of insurance companies ... 


Fines for major banks

The prosecution by the DOJ, the Department of Justice allowed the US government to recover tens of billions of dollars. It is less, much less than that cost him the implementation of its guarantee when the crisis erupted. But the large sums gives the operation its political credibility, and it's mostly what was sought. The American citizen has evidence that the "great" and especially the Wall Street banks and some large foreign banks did not escape the ax of justice of the United States.


An attitude that was not safe since the designation of the guilty -There was in line with the populist dialectic, as the result showed.


Technically, one might say, the weapon used by government lawyers is interesting to observe. When credit is given indeed disposal of a bank in a SIV or SIV to another, this sale is without recourse, unless the assignment agreement has a technicality.


The likelihood of such insignificant sometimes deformities affecting thousands of sales contracts, and hundreds of thousands of pages (counting appendices), was both very high and impossible to verify case by case.


The DOJ has played this provision to require commercial banks to compensate the holders of the securities ... and especially the guarantor, that is to say, the Government of the United States. Rather than incur legal costs and research against the formidable opponent what American justice, all the major banks accept to compromise and pay.




 Chapter 12 - "The eurobonds would avoid crises"


SUMMARY  The eurobonds account for the States of the euro area on average to borrow on behalf of Europe and not piecemeal. The pooling European debt would result in the same interest rate for all and especially the solidarity of all vis-à-vis the lenders. The top rated countries could experience an increase in their interest charges to the extent that the interest rate applicable to Eurobonds would be the average of each State interest rates. The project failed in the context of the Greek crisis, because, especially in Northern Europe countries have highlighted the risk of a lesser incentive of the most indebted countries to reduce their deficits. The gradual improvement of the financial situation of states and especially the decline in interest rate spreads will certainly give a new chance to eurobonds . The buyback policy conduct sovereign debt by the European Central Bank contributed to this convergence of rates.






















1-   The pooling of debts


Today when a country borrows, it does so by issuing bonds to his name, called in English the  bonds . This name is generic. In France, it is called OAT - fungible Treasury bonds, the United States of  Treasury Bills  or T-Bills, in Germany  Bund. 


Principle leaps

For a borrower sign a loan or issue a bond contract is the same economic: in both cases you must pay and pay interest.


For the lender or buyer of the bond, the view is the same. The key element is confidence in the borrower's ability to meet its obligations. But there is a crucial difference. The buyer of the obligation can sell it at any time, while the conventional lender is "tied up". Replace one lender to another as part of a credit agreement is not impossible, but it is a binding approach. Sell ​​a bond achieves the same result with much more flexibility.


There is a bond market as there is a stock market. This is because it is easier to sell a bond (or action) that these products attract so many investors This aspect is based on the concept of market and developed as early in the book.


What is a eurobond

The idea of ​​simplifying the process of issuing bonds country by country was indeed tempting. Countries in the eurozone borrow more so dispersed as is the case today, but through a single borrowing entity and the name of Europe. 


In this context, a Eurobond is a bond issued by Europe, that is to say by a European financial institution or a specialized agency acting on its behalf.


The word euro means that the commitment to repay the Eurobond is carried by a representative body of all the countries in the euro area and not by a particular country.


Point of view of investors

The Eurobonds do not exist yet, but it is certain that their success would be guaranteed to investors.


A Eurobond jointly committed indeed all countries of the euro zone and not a particular country. As a result, the holder of a eurobond is sure to be paid since Europe is solvent. The debtor is no longer one of the European countries, but all of them.


The risk of non-payment of a eurobond an average risk of each individual country. This means risk is higher than the German risk, which is the best in Europe, but less than the Greek risk.


Risk compensation, that is to say the interest rate of the Eurobond is a reflection of the risk hierarchy. The eurobond offer better pay than German Bunds, but less than an investment in bonds from Greece.


Viewpoint borrowers

On the side of the debtors, so the next European countries, the situation is less simple. The principle of solidarity means in effect that if one of the European countries is unable to repay its share of the Eurobond, the others must arrange them to pay for him.


He adds to this the problem of interest. As mentioned, interest rate debts vary from country to country: the "good" pay lower rates, the "worse" pay higher rates. With Eurobonds , countries with high rates pay less interest and vice versa, the cost of debt of countries "virtuous" increase.


The implicit solidarity that created the eurobond thus doubling the effect of penalizing the "virtuous" countries. Not only do they risk having to pay for the failures of others, but in addition they pay more for their own debt. The virtuous countries therefore feel subsidize less virtuous countries. They have less reason to improve their financial situation.


To work around these problems would require the issuance of Eurobonds for any country is subject to the agreement of other countries.


These "secondary" effects of eurobonds and risk pooling why the discussion of European foundered on this point at the time of the Greek crisis.



2-   The Greek crisis and the European debate 


The Eurobonds have appeared on the public scene in the context of the Greek crisis.


Greek crisis: the e-rich family syndrome

Before the crisis, the Greek scenario was similar to that of a fragile debtor member of a wealthy family. Each creditor of the debtor fragile- bank, friends, business relations - was convinced that if problems arise the family would always come to the rescue of the failing member and pay its creditors.


As amazing as it sounds, that's exactly what happened with this country. Banks around the world, insurance companies, the most serious pension fund had lent to Greece, believing that "Europe", wealthy family, implicitly guarantee the debt of this country, or of any of its members elsewhere.  


Of course everyone knew that European solidarity stress did not appear in any text. The implicit respect of this provision was however imaginable because it was in their eyes the same strength of the European currency.


When creditors of Greece realized that Europe would not guarantee the debt of this country, a wave of panic rose. For their part, of course, but also the Greek side, because overnight Greece was more buyers of new bonds issued, except to pay outrageous interest rates.


The idea of creating Eurobonds was clever because it allowed implicitly establish that financial solidarity without explicitly talking guarantee unacceptable legally and politically.


As we know the proposal for the creation of Eurobonds has been rejected by the  countries of Northern Europe  and the first of them, the Federal Republic of Germany.


The reason for the refusal is not only related to a problem with the public in these countries, hastily qualified as "selfish". It also relies on an element closest to the good sense of the banker. The banker never pays credit before the conditions of this credit (guaranteed profitability engagement, balance accounts, etc ...) are met. If the money is paid before that, it is unrealistic to expect the implementation of these conditions.


We must also recognize that the incentive to reduce debt would obviously be lower for countries already in debt, and this is where the key problem that delays the spread of this tool. 


Building on this principle, the North said the countries of the South: "First do the housework in your spending, and we agree that Europe jointly borrows for you."





Refusal of Germany 

To understand the refusal of solidarity with Greece in the German public, must immerse themselves in the context of that country.


Three elements are to remember the 1989 reunification, the Schroeder laws and the federal equalization system.


German reunification in 1989 resulted in a huge transfer of wealth from West to East. Each German household had to pay a special tax, the solidarity tax.


The laws and Schroeder Harz 1995 to strengthen German competitiveness has resulted in severe wage restraint as well as drastic cuts in unemployment compensation system.


The German Federal Law to the budget states the contribution of the regions (Länder) rich to the poor regions. This solidarity mechanism regions gives rise each year to violent debates. The indiscipline, laziness or poor regions is put in the public square. The rich and virtuous Bavaria announces that it refuses to pay for the Lower Saxony spendthrift. After several weeks of discussion and outside the parliamentary sphere, things back to normal, budgets are accepted and legal compensatory mechanism is applied.


We understand better the German reluctance to eurobonds . They do not derive only an opinion a priori hostile to the principle of solidarity. They also carry out an analysis of sense.

Where would be enforced rearrangement of the economies (Greece, Italy, France, Spain, ....) if overnight these countries could finance without problems and at low cost? This constraint would disappear instantly. 
The sense of position is for each country struggling to balance the budget and make it an essential legal requirement. It is these conditions that a eurobond system will be set up in Europe one day. That said, the "price to pay" for the fiscal adjustment of countries is huge in economic and social terms. So that a query is emerging about alternatives to austerity. Another problem.


3-   The ECB policy  


The ECB has bypassed subtly political problem posed by the North, particularly by Germany and their refusal to issue Eurobonds .


You should know that in fact almost all of the Greek public debt is now held by the ECB. So ultimately, it's all the European countries that lend to Greece through the European Central Bank. It was good then the goal sought through eurobonds .


This transfer system of European debt in the books of the ECB was widespread with the famous plan of  quantitative easing  launched in early 2015.


The ECB has indeed offered to European banks to redeem the bonds they held on their balance sheets. Banks follow for redemption conditions are very favorable.


BCE's operating rules prohibiting him directly subscribe to bonds issued by states, it intervenes only in the context of what is called the secondary market, that is to say at resales of securities debts.


In September 2016, the ECB said it bought 1,000 billion euros of sovereign debt, that is to say between ten and fifteen percent of the total debt. An amount sufficient to send a signal of confidence to markets and particularly guide the downward trend in interest rates.





 Chapter 13 - Quantitative easing and negative rates, the balance 



SUMMARY  The quantitative easing   is the name given to the ECB's policy to boost credit distribution by facilitating the work of banks. This policy is marked by the chiaroscuro. This is the area of intervention of a central bank is not only based on technical elements but also notes of psychology. The first measures of the ECB sought to make cheap loans to banks to enable them to distribute more credit to the economy, a policy dictated by the malfunctioning of the interbank market. Despite adjustments, this policy has not had the expected impact on stimulating investment. The ECB then proceeded to significant declines in interest rates and extended its sovereign debt purchase program held by banks. Deflation threats were then led to the introduction of negative interest rates with the objective of deterring banks to keep their availability and to encourage them to lend to businesses. If the States of the euro area have benefited enormously negative rates, banks are parallel outputs reinforced by the sale of securities to the ECB, an aspect of things rather kept confidential. The system has allowed many of them to strengthen their capital, a fundamental element for the recovery of credit. Deflation threats were then led to the introduction of negative interest rates with the objective of deterring banks to keep their availability and to encourage them to lend to businesses. If the States of the euro area have benefited enormously negative rates, banks are parallel outputs reinforced by the sale of securities to the ECB, an aspect of things rather kept confidential. The system has allowed many of them to strengthen their capital, a fundamental element for the recovery of credit. Deflation threats were then led to the introduction of negative interest rates with the objective of deterring banks to keep their availability and to encourage them to lend to businesses. If the States of the euro area have benefited enormously negative rates, banks are parallel outputs reinforced by the sale of securities to the ECB, an aspect of things rather kept confidential. The system has allowed many of them to strengthen their capital, a fundamental element for the recovery of credit.























A-  The problems at the ECB


ECB mission since its inception price stability and keeping inflation "below but close to" two percent. It is not supposed to act in the field of the economy, but it does so anyway, indirectly ensuring the proper functioning of the banking system for the distribution of credit to the economy.


It takes three conditions for the credit reaches companies: 


1  - that banks have access to the  interbank market   (permanent forum for the exchange of cash between banks) and in case of difficulties, they have new resources.

 - that these banks have  capital   sufficient (safety mat) by international rules (Basel Accords)

 - there is  creditworthy customers  ... (and who will want to invest) 


From all these points, only the first is his responsibility. In fact, subtly, the ECB has also seized the second with   quantitative easing. The catalog of actions is impressive.





The problems in the interbank market

From the beginning, direct loans to banks raised the concern of the ECB to mitigate the malfunctioning of the interbank market.


 We must realize the importance of this market for banks, and the consequences of its dysfunction. As explained at the beginning of the book, bank credits come from customer deposits, unstable by definition, adjustments are made by supplemented by loans of banks on the interbank market and the permanent rotation of some of the surpluses in the needs of others. 


In "normal" times, the central bank only occasionally intervenes in the market to act on such rates. The crisis in  subprime   broke this well-oiled machine, forcing the ECB to intervene. In fact, since that time, the interbank market has not fully recovered due to a continuing lack of confidence between banks. The actual condition of some banks (Italy and Germany) has continued to worry. 


Direct credit to SMEs

 Then there is the willingness of the ECB to encourage the distribution of credit to SMEs  mainly those in the South of Europe.


For this, the ECB lowered in stages the rate of general resources made available to banks through the interbank market - the famous  interest rates  near zero today. It penalizes more banks that are doing well, but refuse to lend, and offers a new solution to help banks in a difficult position.


The first steps

The LTRO and TLTRO programs consist of direct ECB loans to banks and to finance SMEs. LTRO stands for "long-term refinancing operations". The program launched in 2014 has not achieved its objectives. The ECB's LTRO has corrected the device which means "refinancing operations  targeted  long-term", together with a particularly low rate of 0.25%. 


The TLTRO is more restrictive than LTRO. The ECB wants to curb the purchase of government bonds by banks (see above) and strictly limit the use of these funds for lending. It is in his role, which is to send positive signals to the economy. 


To act, the ECB has classified the banks into three categories:


 A - means the banks that have access to the  interbank market  and have  sufficient own funds  to lend to businesses. In 2013-2014, many have preferred more lucrative and less risky than corporate loans.


B - means banks have lending capacity (as sufficient own funds) but have few resources, without access to the interbank market due to a lack of trust of banks towards them. ECB lends them directly, provided they extend credit to SMEs.




C -désigne banks that they either do not have access to the interbank market and in addition have reached their credit limits (insufficient capital). The ECB buys them outstanding loans (securitized, that is to say converted into bonds) so that they can make new to SMEs.








B-  The subtleties of quantitative easing 


The  quantitative easing  - QE for short - refers to one of the tools available to central banks to act on monetary circulation. A tool actually little used to date: if the US central bank, the Fed, it uses successfully since 2008, it is not the same with his counterpart, the Bank of Japan, which scored significantly more mixed.


In announcing its launch over the period March 2015 - September 2016, the ECB communicated mainly on the objective of fighting against deflation. But this goal is not the only one!


The study of  quantitative easing  is at the crossroads of economics, banking and markets. This is a technical issue but likely to be approached holistically. To understand, we must see in the QE a shot  billiards in several bands . The three  "official" goals  house three other  targets "secondary" , which are actually more important than the first.  


OBJECTIVES OFFICIAL: fight deflation, ease credit, lower rate   side of the economy, the most feared phenomenon of  deflation , ie falling prices progressive that reminds everyone that better to postpone purchases to spend less. In the minds of millions of people, this feeling hampers consumption and penalizes the entire economy. 


For businesses, another fundamental element is the  credit . Even if there is little demand due to the mechanism described above, there will always be entrepreneurs who want to invest because they have an idea, because they think that demand will return, etc. ... But without credit they can not do anything. 


The  quantitative easing  is at these two levels: to prevent deflation and facilitate credit. We'll see how these aims are achieved ....


To fight deflation, we must encourage its opposite, inflation. For this it is necessary to release the brakes normally used to contain it. To curb inflation, the central bank uses two levers: the first is the  interest rate , that is to say, the price of money provided the banks so that they can extend credit to their customers . The second is more direct as it concerns the  volume  of resources made available to banks.


Overall, the central bank will increase the quantity of money by money creation. By massively increasing the volume of lending to the economy, increasing the potential demand for goods and services, which raised prices once the production capacity limits are reached. The mechanism of increase of available funds is largely based on money creation in addition to deposits in banks to "feed" the credits.


SECONDARY OBJECTIVES:  help banks, assist States, develop capital markets This is the aspect perhaps most interesting - and most discreet - the device. The aid to banks is to enable them to make significant gains on the sale of bonds they hold and the ECB offers to buy. These capital gains will be partly used to increase their own land. The calculation of capital gains is simple. For example, the redemption of a bond with a nominal rate of 4% over 15 years with a redemption rate of 3% indicates a gain of 7% for the seller! This calculation is explained later in the course.

Assistance to States indirectly through the purchase of government bonds held by banks. The European treaties prohibiting direct financing of states by the central bank. This is of transactions on the secondary market sovereign debt. German controversy over illegal operations failed after the judgment of the Constitutional Court in Karlsruhe, confirmed in June 2016.


As for markets, they will benefit greatly from the rise of securitization. The ECB is not going to redeem all of the securitized loans, as it began to do so, but it will obviously prime the pump. Clearly, as the United States for decades, credit financing to businesses and individuals will gradually be shared between banks and markets. This action is necessary because the banking system is not enough to cover all the financing needs of the economy. ECB vocabulary of caution We note here that does not speak of securitization, but ABS buyback, ie redemption of securities resulting from securitization.




DECLINE IN EURO  It is, one might say, the "tertiary" objective. In fact, two elements are added. The first is the rate differential between the dollar and the euro. This differential causes the rising dollar more attractive to investors. The second is the  creation of money . The inflationary impact of monetary creation should dilute the value of the euro therefore lead again weakening against other currencies.


That said, we must not forget that the evolution of the euro against the dollar reflects the imbalance of flows buyers and sellers of these two currencies. These flows are multiple. Overall European trade surplus, which represents an appreciation of the euro factor. Should watch the scale of industrial investment in the euro area, the balance of services, tourism, stock market investments.


All this to say that we should not overestimate the capacity for action of the ECB. The decline of the euro since June 2014 is as much the result of the policy of the ECB as .... Fed, its American counterpart. The hesitations of its president to raise interest rates, thus increasing the rate differential with the euro shows that the US wants to control the dollar.  


The consequences of the decline of the euro are twofold. Besides the impact on foreign trade of the euro area, very progressive in time, there is the immediate effect of import prices, so an  inflation "imported" . The simultaneous drop in oil prices offset the impact of imported inflation, a very happy conjunction for political acceptance of the ECB's plan. As we know, opinions are very sensitive to energy prices


C-  The negative rate


From week to week, France borrows at negative rates. A good deal for the state, which wins by borrowing, but  conversely  it is also a question about paying those who lose ,  in fact European banks.  


It is important to know that the banks have no choice in managing their availability, apart from banknotes. These availability - that is to say are not invested or lent - are compulsorily deposited in their account at the ECB. This is where, in recent years, it penalizes with a negative interest rate. 


Comparing rates shows that lending to France, banks lose a little less than leaving their assets to the ECB. But lose anyway!


The explanation raises questions about the origin of those supplies. The answer lies in another measure of the ECB purchases of sovereign debt. These purchases, a key component of  quantitative easing,  translate for banks by a payment on their behalf ... where it undergoes a negative interest rate. Banks agree to sell to the ECB sovereign debt they hold, because they are earning and that gains far outweigh the negative interest rates hitting the cash from these transactions.


Sales of securities to the ECB actually generate a margin proportional to the difference between the interest rate of these securities and the rate proposed by the ECB, lower than the previous. The time factor multiplies the overall margin. To be specific, if the ECB proposes to buy at the rate of one percent of loans (bonds) at the nominal rate of four per cent over ten years, the bank key 115% of the value of credits in their accounts! A gain of five percent so immediately and in cash. For the bank, the calculation is obviously very profitable. Fifteen percent of revenue to a negative interest at most 0.4 percent.


It must be understood that this operation does not cost anything to the ECB, since this is money creation. On the contrary even, as in this example, it will touch one percent interest on the loans it has purchased and which, moreover, the conditions do not change the original borrowers.


Aid to banks

This is especially the whole device is virtuous, virtuous even doubling. On the one hand the ECB fight against deflation by money creation, and on the other it allows banks to rebuild capital through profits. Best of all, they are encouraged to purchase the bonds of European states in difficulty, as they can sell profitably ... as long as the device lasts, of course. From this, the ECB is alone to decide, especially as confirmation has been given to the orthodoxy of the device under the Maastricht agreements and the German constitution.


Chapter 14 -   Securitization existed since the 1930s


SUMMARY - The securitization (in English:  securitization and securitization ) is very simple. This financial technique is important because of its double impact at the micro level,  for banks , and macro  for the markets,  and more generally in the world of finance. The  banks , through securitization, may sell existing credits against a  cash payment.   They have recourse to alleviate their balance sheet for example, or to change their business policy targeting new categories of borrowers without burdening their balance sheets. The  markets  are fond of the possibility of investing in "packets"














Principle of securitization

To explain this principle, imagine a group of friends who is unique in that all have made a personal loan to a third party (we assume for simplicity that the loans have the same characteristics of amount and duration).


Each has signed a loan agreement with a borrower. Assuming that a joint loan management would be more effective than individual management, they decide to transfer all loans in a company created for the occasion and who will play the role of a pool. In consideration for its contribution in this pool, each receives a certificate for an amount corresponding to the value of provided loan. These certificates, called titles, are bearer.  


We already see a first advantage: before this, everyone was "bound" to the borrower by the loan agreement. After, there is no contract, but a "title" giving the right to reimbursement from the pool.

Then a discussion followed. Some of the participants propose to withdraw, others are willing to buy the shares available. Others, finally, reflect on a possible resale, but outside the group of friends. 
They just invented securitization, ie the conversion of registered securities into anonymous and therefore transferable credits.


The original borrowers are still the same, namely the beneficiaries of the loans. They are no longer indebted vis-à-vis the lenders, but vis-à-vis the pool, which for them is inconsequential. 


For the original lenders, it is as if the pool was substituted borrowers. To put it another way, the original lenders now hold claims on the pool. For them the difference is large, double "title." First they no longer have to worry about the administrative management of loans (collection, recovery ...). More importantly, they have the ability to go out at any time of their engagement. In return for this service, of course, they agree to the pool administrator, one of them or a third party, a small remuneration. 


Lenders have become investors. This is not a change in vocabulary. Investors are indeed free to regain its setting at any time and choose another investment. The lender has no choice, it is bound by contract to the borrower and is released from this coverage at the expiration of the loan.  


A bridge between the bank and the market 


Here is a diagram of securitization for banks.





The loans granted by the bank stood at the balance sheet. What is important is the visualization of something very abstract: the sale of receivables (loans) to the buyer which, to pay "sells" in turn bonds to investors. The buyer is an intermediate structure, called  SIV  in English jargon. This is the equivalent of the pool mentioned above.  


The balance sheet of the SIV has purchased credits in the bank. Liabilities shows how the asset was funded, in this case by a debt obligation evidenced by bonds.  



A simple assignment contract B is passed between the bank and the SIV. This contract defines the list of loans sold contracts, and the total amount paid by the SIV to the bank. It is important to see that for the borrower, the initial credit agreement A does not change. The new contract B is a sales contract credits and transfer of the lender, such as guarantees associated with loans. Note that the active legal sense of the SIV did not consist of "credits" but claims an accuracy that does not change the financial aspect of the operation. 


On the financial plan

Borrowers continue their repayments to the bank immediately transfer them to the SIV. The bank became a simple silver collector on behalf of SIV.   


SIV is the legal lender that now bears the risks of non-payment borrowers but receives payments and benefits from original contracts. Borrowers are notified of the transfer of rights and obligations of the lender - the bank - to SIV. The credits have become collateralized credits. These securities are negotiable, meaning they can be easily sold and resold. 


Interest in banks

The deep significance of securitization is not the desire of banks to simplify their management. Or "get rid of" bad credits, as was hastily commented in the context of subprime . A strange interpretation moreover, because one wonders who would want to buy bad loans.  


banks incentives to give up part of their credits are numerous. As shown in the diagram, the outstanding "worn" by the bank credit has declined, how to improve the assets / equity ratio.

Furthermore " bank debt " is the fact that banks lend to each other constantly (see the course on the operation of banks).

  • The main is to reduce their outstanding - that is to say the volume of these loans - under regulatory constraints imposing a certain level of capital relative to loans granted. If the capital decrease, after losses, for example, the bank must reduce its commitments to comply with the imposed ratios. For this it will sell part of its loans to a third party, bank or ... a securitization structure. For bank clients who have benefited from these loans, nothing changes. The bank continues to receive refunds, it then transfers to the securitization structure.
  • Another equally important reason is the desire to change the risk profile of the loan portfolio. In the latter case, the bank sells the credits of a given economic sector and redistributes new credit in another sector. 
  • The third reason seems to contradict the first: by reducing the balance sheet of banks, securitization gives them the opportunity to lend more. How? Simply by securitizing each new loan, which does not increase their assets and thus does not affect the prudential balance. It is therefore not surprising that in Europe we seek to develop securitization, "we" being the banks and some governments. What motivates the bank in fact pay more is the prospect of earning more. Indeed, it receives a margin on each credit sold to a securitization structure. 
    This margin reached incredibly high levels. The actuarial calculation shows that the credit of the sale price is the present value of future payments. The higher the discount rate is low, more this value is high. Just sell a loan to a lower interest rate at the rate that the borrower knows to achieve a significant margin: over 7% margin for example credit for 25 years sold with an interest rate differential of 1% . The bank gives a credit of EUR 100 000 in these conditions affects 107,000 euros!

Securitization thus gives banks a huge flexibility in managing their funds.  


Interest to investors

For investors as securitization is a flexibility factor. It is indeed for them the opportunity to choose exactly where they want to invest. Who are they ? All the institutions of France and elsewhere who have permanently or episodically money to invest. private or public institutions, these investors could invest this money in banks. Many prefer to make investments on the stock market, buy bonds, take stakes in companies. Or simply entrust their money to specialized agencies that will make investments on their behalf.  

Thus we find insurance companies, pension funds, sovereign states holders of surplus investment funds, etc ...

All financial capacity of investors is estimated at 70 000 $ Billion ! This astronomical figure explains the motivation of investment banks offering investment solutions. 

As we have seen, securitization will allow to offer new "securities" Investment in the financial market. These new securities are bonds mixing of various origins credits. This diversity plays in categories of borrowers. She also plays in the financed asset classes. This is precisely what investors want: choose! 
Those who have affinities with real estate will choose bonds from mortgages. It will be so for those who prefer a particular industrial sector or that type of goods (airplanes, cars, boats, etc ...). The choice of a tailor-made investment is therefore possible! And to all these investors, it appears that it is less risky to lend to borrowers 100 or 1000, rather than 

We understand the rush of investment banks, downstream of the securitization. They exercised their talents to diversify to the maximum possible choice. 


An economic policy tool for States  

The securitization was invented in the US in 1934, in the context of the New Deal under Roosevelt. The problem was then laid the economic recovery after the disaster of the crisis of 1929. The banks, hard hit by the crisis, could not provide the necessary funds, due to the losses. Yet there were resources available. Securitization allowed to capture these resources to finance loans to the economy without burdening banks' balance sheets.

Securitization is a way to expand credit without charging the banks. 
We must realize this: the securitization involves a profound change in the credit financing. Balance sheet registered credits are usually partly funded by customer deposits, and the rest, massively, by appeal to the interbank market, itself fed by surplus cash in banks and central banks.

This ability to finance loans outside the banking system is particularly desirable when banks are struggling to do their job because of insufficient equity.


The recovery of the European economy requires the development of business credit. Now banks have reached their limits, due to the increase in bankruptcies and the provisions of Basel III facing their own funds.


 Chapter 15 -    How banks are organized



Find the right person

The smooth and uniform façade houses banks of the complex realities that distinguish the companies in many ways. Some of the many areas of banking:


- Account management

- Syndicated loans

- Asset Management

- Market rate

- Export financing

- Mergers and Acquisitions

- Currency markets

- Trading of shares

- securitization

- Tax Leasing

- Issue of securities

- Financing of aircraft, ships

- Initial Public Offering

- Project financing

- Bonds issuance

- Structured Finance

-  Leveraged buy out

- Private banking



These jobs are very specialized, so that we can really talk about different cultures. The trader of the trading room and colleague of mergers and acquisitions belong to two worlds that have nothing in common. All separated, origin, education, personality, the mode of remuneration. It is the same banker said "private", specializing in the management of individual fortunes, with nothing in his colleague export finance, familiar globetrotter international financial institutions.


To illustrate the problem of the division of business, you should know that it is useless to talk of such an export financing problem to a specialist in syndicated loans, or vice versa.


The most common confusion in this regard is the role of representatives of banks abroad. These figures, by definition very "visible", usually perform specific tasks in connection with local authorities on behalf of their parent. By force of circumstances, they also play a key role home transient guests, which once counted on a total support for their specific issues. Now it is useless to expect such a commitment, it's not their job. Even worse, targeted and visible intervention on behalf of a client could harm their delicate work of local lobbying. Also, these characters have no particular power vis-à-vis the "business" of the parent. As this is the domain of the unsaid,


There is also differences within each business. Highly specialized personnel alongside generalists. Some invent new products, others sell them, others link the business to the "machinery" of the internal bank in the area of ​​treasury, accounting and risk control.


The diversity of the banking business and involve partitioning to know who does what. It arises here a little problem identification. If the contents of these trades are very similar from one bank to the other, it is unfortunately not true of the terminology and especially the organization, which can cause confusion.


organizational problems

Every job has its specific products, type of customers or partners, its business model, profile of employees, and once we understand at the complexity of organizational problems.


The internal organization of banks is the result of the combination of trades according to criteria selected according to each institution's strategy. Overall there are three types of criteria, the criteria 'clients', 'products' and 'markets'.


The problem is that the products are often multi-client and, conversely, the customer of a given group are involved in several products. It is thus common to isolate the activity of "private bank", targeted at wealthy individuals, or "merchant bank", targeted to senior executives. But the private bank must rely on other trades, as "brokering activities" and "structured products". Similarly, the investment bank's clients are affected by market trades and "structured finance".


Any organization is a  compromise  with the inevitable overlap areas. Furthermore organizations  change over time , sometimes suddenly.


Two elements are to be considered in the relationship with a banker: his profession and in some cases his "degree", he should not be confused with the hierarchical position. Know the job of the speaker is crucial because of the strict segregation of banking activities and responsibilities. As for the grade, it is important therefore that one key to the problems of risk-taking and, above decision speed. This is especially true of credit business for example. From a certain level bank executives have indeed personal credit delegations that give them greater authority in the credit committees and above all gives them the ability to make decisions outside the formal framework of the Risk Committee , subject to conditions naturally.



The major sectors


conventionally distinguished in six:


1 Commercial Bank

4 Bank Business

2 Markets

5 Private Bank

3 Financing

6 Equity Brokerage



1 - What is called the "  Commercial Bank"  includes the common services provided to businesses: managing accounts and flows, cash loans, investment loans, deposits emissions. The interface with customers is realized in regional agencies.


2 - The business  market  are specialized in function of the products. We distinguish the interest rate products, foreign exchange products. In their respective markets, stakeholders buy and sell classic or not products such as currency hedges, rate or currency swaps, options. They do this on behalf of their clients or for own account. Their partners are brokers or their counterparts in other banks worldwide. Within the business market, the organization is much the same. This is how we distinguish the  front office  of the  middle office  and  back office . The operators of the front office are in direct contact with external partners, with whom they negotiate transactions. As things happen very quickly, operators do not have time to enter these transactions in accounts, and change as and extent of intervention limits. These spots are assigned to the middle and back office. In some cases, you will find one or two "traders' front office in the commercial bank.


  The so-called business  financing  have deep organizational differences from one bank to another. Basically, the concept of structured finance is a set of sub-trades such as project financing, LBOs, which stands for  leveraged buy-out,  or securitization transactions. One can also find there some specialized financing such as boats or aircraft financing. These two businesses are often grouped together because they support each other and on very close technicalities in the field of leasing, tax or insurance. They can instead be separated into banks wishing to put forward a recognized expertise in either of these areas.  

The major reason for the consolidation of all these trades, more than complementarity or near some of them, is their common link to the bank's credit risk committee. Specialized or not, these funding undertake the risk of the bank, which justifies their centralization. 


4 trades  Business Bank  are also called  trades council  or  high balance In this context, the record high means that part  Equity  liabilities, that is to say regarding the capital and own funds of the company.  

The activity of the investment banker is a paid consultancy. It was he who helps such client to realize a bond, an IPO or a capital increase, all operations impacting on the top of the balance sheet. The "business" the most popular are the mergers and acquisitions,  Mergers and Acquisitions . Some large banks may have an entire department dedicated to  M & A. To meet the requirements of confidentiality and ethics, these departments are surrounded by a "Chinese Wall".   


5 The  Private Bank  focuses on the management of private fortunes. It is a consultancy, tax advice and heritage, and client investment management. The expertise relational, fundamental, creates the reputation of an institution, more than the goods or made recommendations, which do not fundamentally differ from one bank to another. 


 The  Brokerage Shares   constitutes a particular activity, physically and legally isolated from the rest of the bank. Stock brokers execute orders to buy and sell on behalf of others or on their own account. It is especially in this business that is developed "research", that is to say, the in-depth analysis of the strengths and weaknesses of listed companies. These analyzes are the subject of publications, which explains the risks of conflicts of interest with certain clients of the bank and the need for an independent organization.


 The most notable differences in organization of a bank to another are located at the contour of financing businesses and especially the investment bank. Rather than talking about business bank, some banks use the concepts of  Corporate Banking  and  Investment Banking . These entities ubiquitous in organizations are variable geometry. Confusion reigns because if one of them can contain another, in some cases, it is the opposite.



The relationship manager


What happens next then? Just knowing that it is  normal to not know  and therefore and not be afraid to ask his interlocutor. For the client company, the key to good orientation in a bank is the "relationship manager".


These relationship managers, also known as relationship managers,  credit officers  or  senior bankers  - the terminology is just not always as clear - perform a commercial function and monitoring the relationship with customers. Their mission is to introduce them to the various trades to meet their needs, but above all to "defend" the interests of clients in the bank's credit institutions.


The role of the relationship manager is therefore essential for the customer. The importance of this link does not exclude direct contact with the business of a particular profession. In some cases, such as in the context of export financing, direct link is often the key to the essential responsiveness in acceleration phases of negotiations. 


Chapter 16 -   The finances of a start-up



The first steps of a startup: convenient balance


The example is that of two friends who decide to start a small business purchase and sale of used computers.



It is suggested to follow step by step what happens in the early stages and, pencil in hand, trying to repeat the patterns. From then wait a few days before trying again, adding one or two additional steps. As indicated in the introduction, which is taught herein is a language. A limited language course, but learning nevertheless requires some patience.   







Everyone makes 1000 euros in the case, in cash. The "drawer box " contains the first payment is 2000 euros. Later, we will tap into that fund to make purchases, and, hopefully, cash sales.


To find one, it must be noted somewhere the amount of the initial bet of the two partners. This is what serves the drawer " capital ". Inside there is no money, but only two papers indicating who paid what initially.


The schematic diagram below shows the state of the dresser





Total left column:  2000 euros   - Right column:   2000 euros



There, we spent our first writings!







The two friends buy a first computer 1500 euros. The crate will drop by the same amount, but the company now has a computer. To reflect this acquisition, the bill is placed (paid) in the top left drawer.


The new face of the dresser is as follows: 





Total left column:  2000 euros  - Right column:  2000 euros








A computer is insufficient. Furthermore it must be possible to buy used computers that arise. New resources are needed. A family friend is willing to put EUR 5 000 in their case.


The two friends are thinking: what status to give this friend, shareholder or lender? If he becomes a shareholder, its 5,000 euros will give him the majority and the power to decide alone, or almost. If he takes the 5000 euros, it will begin repaying the while the company may have made no sales. They decide an average solution: a loan of 3,500 euros and the purchase of a share of € 1,500. 


The total payment of the new partner, or just 5000 euros in cash therefore goes to 5500 euros. Regarding the right column, capital increases drawer 1500 euros, from Mr zzz. 


A new slide is created, entitled "credit". placed in the loan agreement of 3500 euros, signed between the company and the same M zzz.


The balance sheet "convenient" is the following:






 Total left column:  7000 euros  - Right column:  7000 euros






A second computer was purchased 1,000 euros. The seller has spontaneously offered to pay within fifteen days. 


Here is the new balance after the transaction: 






 Total left column:  8000 euros  - Right column:  8000 euros 



There has been no payment, so no change in the till. However the right column shows the Dell sees computer vendor credit. This is not a loan, it is a form of credit. To put it another way, the company has a  debt  vis-à-vis the supplier.  






The first sale was realized!


More exactly a used computer purchase, paid in cash 300 euros, sold a few days later in the same condition, for 500 euros. A 30-day payment facility was granted to purchasers who could not pay cash.





 Total left column:  8200 euros  - Right column:  8000 euros



The  fund fell  to 300 euros, the price of used computer paid cash. 


However, other transactions (resale of used computer and the purchase of Dell have not resulted in cash flows, since everything is done on credit.


Now we see that the total column is no longer identical. The difference is 200 euros. This is precisely the  profit  realized on the sale and purchase transaction of the used computer. Whose is this profit? To shareholders. So figure on the right.


Here is how the benefit is expressed:




 Total left column:  8200 euros  - Right column:  8200 euros



Note that the  Fund  actually refers to cash, that is to say, the "cash" and above the current bank assets. It was included in the above example that this liquidity have nothing to do with the profitability or earnings.







The used computer buyer came pay for the purchase, or 500 euros. Consequently, the "client" credit is cleared and the cash increases up to this collection.




 Total left column:  8200 euros  - Right column:  8200 euros



 Difference between capital and capital:  the profit belongs to shareholders, that is their business. They can withdraw for them (called a dividend) or leave the company. This benefit will then be added to the capital. All  more capital profit  is the  equity.  This notion of equity will be discussed at length later in the context of  the company  and  the bank . 

Why is this important? Equity reassure all those who lend to the company, banks, suppliers and other creditors. Capital is a key element in the allocation of funds. Regarding the banks themselves, the capital ratios are central to the monitoring of their activity by the authorities responsible for their regulation.






Our shareholders have decided not to pay dividends and therefore retain the benefit of 200 euros in the company. 


 Before the allocation of profits, capital was 3,500 euros. After allocation, what is now called the  equity  amounted to


+ 200 = 3500  3700 EUR



 Total left column:  8200 euros  - Right column:  8200 euros




- - - - - - - - - - -



In summary , the assessment is at every moment the  photograph  at time t of assets and business debts. It therefore changes progressively transactions.


The balance sheet is a condensed way of describing things, but it does not say everything. Hard to know for example how the benefit of 200 euros was generated if we stick to the last balance sheet. For the full list, it will look at  the trading account.





As stated in the introduction, the picture is a formidable  descriptive tool  of the activity of companies and banks. A glance information on strengths and weaknesses. A glance ! 

We see immediately what differentiates companies, banks. Financial imbalances, problems of bank regulation. One immediately sees what "makes" a hedge fund or an investment company. 








Chapter 17 -    Hedge funds



SUMMARY - Investing money in a fund is simpler and more efficient than buying yourself stocks or bonds. The funds  are  ultra light and companies that operate somewhat like banks. The  hedge fund  is a fund category, taking higher risks in areas that are abandoning other funds.  











Investing money in a fund is simpler and more efficient than buying yourself stocks or bonds. The funds  are  ultra light and companies that operate somewhat like banks. The  hedge fund  is a fund category, taking higher risks in areas that are abandoning other funds.  


The so-called fund " classics " are created by specialized departments of banks, which manage hundreds. In France there is talk of mutual funds for example. We also speak life insurance to designate funds with tax benefits at the estate. Some funds specialize in real estate, for example, currencies, or commodities. The activity of the fund is close to the banking business, but not taking public deposits, they are not regulated like banks. 

The  hedge funds  are rather the fact of the great Anglo-Saxon investment banks and independent professionals. Their characteristic is their investment model more complex than funds "classic". That is why we talk about  shadow banking  which simply means that their activity is not controlled as severely as that of banks. The crisis in  subprime  accredited in public opinion the idea of responsibility and therefore a political will to control. The reality is actually much more nuanced.


We must realize  the importance  of funds and  hedge funds  in the economy. They take  risks  that neither banks nor traditional investors such as pension funds or insurance companies would not take. It is very simple example to understand that a bank deposit can not risk the deposits of its customers in so-called venture capital for example. We can say that the funds are at the origin of the great vitality of the American entrepreneurs sector. Without the  hedge ,  no  success story  like facebooks, google, amazon, etc ... 


France and Europe need such powerful and aggressive investors. Among the  crowd-funding  (crowdfunding), the  business angels  and the IPO is the empty or almost. BPI state body obviously can not  "too much" risk  taxpayers' money.


This vacuum explains the inability of young shoots grow quickly for want of capital. We must also say that  hedge funds  are not all winners: many lose and lose a lot, some disappear.  




There is in the world a huge mass of  available capital,  estimated at  70,000 billion . Who has the money? States, pension funds, sovereign wealth funds, companies (Apple has over $ 100 billion of cash), very wealthy individuals etc ...


There in front of these resources  immense needs : business, states in deficit, the entrepreneurs.



In between, there were long two possible intermediate:





and  MARKETS .  


A  third category  of intermediaries appeared,  FUNDS.


The fund industry has developed at the initiative of banks and especially specialized banks (commercial banks, investment banks) to  make life easier for investors  and help them to better invest their assets, stock exchange, markets or directly from businesses. 


The funds offer investors tailored investment products and simple to use. The most common: the SICAV, specialized funds. The more sophisticated funds and most prestigious were created by banks of New York business, we generally call  Wall Street. Or by former managers of these banks who set their account to create hedge fund .       


Depending on the degree of risk of the proposed investments, funds have different names. The investment in the equity markets and derivatives are riskier is the privileged domain of  hedge funds . 


The diagram below summarizes the situation:  





This diagram represents the entire global finance!




The  arrows show the direction of the money, ranging from those with resources to those in need. 


1   - At the top, the CIRCUIT OF FUNDS

2   - Further down the CIRCUIT MARKETS: investments give funding

3   - Tour down the CIRCUIT OF BANKS :        deposits with banks give loans 



Funds capture investors' money which they offer high yield investments, higher than the interest paid by banks and stock returns. Above all, some of them use hedging techniques to avoid losing when stock markets turn around, when suddenly falling currency, etc. 


Note that the markets are here all markets. Not only the stock market and the bond market, but also the currency markets, interest rates, derivatives, commodities ..


Specifically, how to place the money in a fund? Simply by speaking to a bank, or, if it comes to large amounts (million euros), turning directly to a known funds. For example, Carmignac, France, Black Rock in the United States, etc ...

German "wealthy" are very fond of real estate investments. Hundreds of specialized funds in this area thrive in Germany.  


The hedge funds


Also known as hedge funds, hedge funds are now commonplace. Hedge  in English means hedges under the risk coverage. Hedger position means that in case of unforeseen downside risk is limited by a hedging mechanism. The key point is the degree of risk of the fund. Risky background, speculative said will rarely total risk. So there is always a cover to avoid catastrophe. 




This cover has a cost, but the balance benefit / cost allows them to offer  in fine  above-average returns.   


To obtain high yields, they use all possible resources to analyze every second what the best equity investments, bonds, on currency markets, commodities, etc ... ... or to invest directly in companies that are not publicly traded.


These funds are obviously not always win, but the best do receive impressive returns. It is not surprising to learn from time to time that this or that of them was abysmal losses.


There are dozens of fund categories, according to the economic sectors in which they operate, in the markets in which they specialize and according to the investment techniques adopted.


Some work in the long term, others in millisecond ... in so-called  high-frequency trading . Some use the effect of extreme leverage (debt 100 1 invested capital). Some specialize by type of activity, such as real estate, or the electronics industry etc ... 


Tax havens

The media have fantasized about tax havens and the massive fraud committed in these places. The reality is more prosaic.


There is indeed in the world a number of countries or micro-countries that have made a specialty of hosting companies "paper". Thus we can create a society in ten minutes to Panama or Monaco, open an account in the bank, appoint one or more administrators fictitious.


The advantage? 

- The  costs  required to the Annual General Meeting are minimal, a few hundred euros. The same company created in France would result in the obligation of a true board of directors and management totaling several thousand euros per year.

- The  taxation  of profits is low, but this advantage has little effect because the banks that create these funds to declare the tax authorities of their country and profits "offshore" are ultimately taxed as in the country. Only remain punctual tax benefits for those who can best use and legal subtleties of tax law.


For a bank that manages one hundred funds, economic management and tax achieved by placing the funds in tax havens can reach a few million! In legality! 


Note that in early 2016, one of the biggest and oldest  hedge funds,  Bridgewater, manages investments worth  $ 169 billion . A change of CEO is provided in the course of the year: it is the former right hand of Steve Jobs invented the iPod. That to mark the change in strategy of the fund, now keen to invest in the sector "geek", in the words of the person concerned. 


Chapter 18 -    Accounting: Boundaries and gray areas




SUMMARY - The construction rules of accounting statements are rigorous and are subject to codification at international level. The impression of objectivity attached to them, however, is misleading, because there are many gray areas almost unavoidable.

The first, perhaps the most thorny regards provisions for risks, the risk of customer default or the risk of stock damage, for example can not be concealed because of their possible impact on the results of the business. The difficulty is to determine an objective measurement method.

Another equally important problem concerns the assessment of a property such as a building or a financial contribution. In this area, the book value is opposed to market value. The latter seems the more realistic but besides the fact that it constantly changes is the problem of its determination if there is no market.

Other common problems relate to elements called "off balance sheet" or the fact of the legal dispersal of some companies


Next: Cash flow



























1-The provisions for risks


Despite a general need for rigor, some essential elements of accounting within subjectivity. This is the methods of asset impairment and especially calculating provisions, provisions for such risks.

How do I know that a risk was overestimated or underestimated the contrary, even ignored? 

The provisions have a direct impact on the result, and their determination is accordingly the object of the greatest attention from the leaders. There is certainly self-regulatory mechanisms. Do not provision a risk or deliberately underestimate may be tempting in that it maintains a flattering operating income, ... short term. But if the risk materializes during the next year, the impact on the result will be that much stronger, and the leader can be blamed a lack of anticipation.

The impact of risk provisions is particularly sensitive in the profit credit agencies since, by definition, risk is inherent to their activity. The problem is determining the "fair" level has no automatic response. To some extent, the final determination of the amount of provisions succession "political" criteria, say financial policy. 

While the Commissioner accounts .. and the IRS are working to verify the validity of the provisions. They do this by observing the delay payments statistics or surveys on specific issues. But their conclusions are more qualitative than quantitative. How to challenge a decision to fix a 0.5% provision rate of a loan portfolio rather than 0.75%? 

The difference of 0.25% may seem minimal as 0.25% of a 100 million Euros for example portfolio represents only 250,000 Euros, but reported the amount of own funds, or € 8 million (8 % of portfolio), this difference is   3.1% . Clearly, ROE, return on equity is reduced by more than 3%. 



2-accounting value or market value ( fair market value )


In some cases, the search for objectivity has paradoxically led to the disconnection between the book and the economic reality reality. The most striking example is the assessment of real estate assets. These are stated at  net book value , calculated by subtracting the value of the legal acquisition amortization, in perfect application of accounting orthodoxy.


The problem is that after a while, through the accumulated depreciation, these assets are no longer for a paltry balance sheet value! But over time, their economic value is never zero, quite the contrary. Most often it is increasing, despite their cyclical nature.


Search unrealized gains on these assets explains the motivation of some operators specializing in management buyouts. The property assets of a company are not intended to be a business and are not likely to entry and frequent trips to the balance sheet.


It is not the same movable assets. The crisis in  subprime  illustrated the difficulty of choosing the right method of valuation between purchase value, called  "historic value"  and  market value.


In a context of high volatility, the valuation of certain movable assets on the basis of the market value has caused serious problems for the banks because there was no market. Some of them, forced to take as a reference the liquidation carried out in panic, had to carry heavy writedowns. These impairments have upset their balance Balance sheet developed to rush into the red zone of solvency rules.


But it is equally clear that even in so-called "normal" times, the evaluation of a portfolio from the original price does not make much sense, which also explained the transition to market price method ( market value ) or "fair value" ( fair value ). The subprime crisis has shown the difficulty in finding a "fair" rule in extreme cases. 


3-The off-balance sheet


Some elements affecting the company's assets or the risks associated with financial liabilities not included in the balance sheet. We speak here of the "off-balance sheet". In fact, there is a distinction between what is the subject of a statement attached to the report, the "record low" of which does not appear in the balance sheet, "off balance sheet".

And include the oldest example of the  lease , or the more recent of pension liabilities of some companies.

For a long time in France (and currently still in many countries), leasing finance did not appear in the balance sheet of companies. This is also one of the reasons that made the success of this formula. This has not prevented banks making further credit to these companies to consider leasing commitments as debt. The inclusion of this debt "hidden" has indeed a significant impact in terms of risk analysis. 

In France accounting rules require now the mention of commitments under leases. The residual outstanding amount of outstanding contracts should be clarified explicitly .. 

The same is happening now or will happen regarding the problem of  pensions . The commitments undertaken in this area are gradually revealed, and the amounts that appear are often substantial in absolute terms and in relation to their own funds. This problem, which affects medium-sized enterprises and not just large groups is less sensitive in France, where retirement concept "house" is less widespread than elsewhere. 

The most delicate problem of off-balance is related to situations of  deconsolidation . Examples abound of situations where reconsolidation was imposed, which resulted in a profound change in the balance sheet structure. 

The crisis in  subprime  in again provides the illustration, in the banking sector. some of them had created independent legal structures outside their scope of consolidation. These structures have finally been the subject of accounting reinstatement again a disruption effect of balance sheet ratios.  


4-Legal dispersion


The blur effect is particularly marked in the case of the dispersion  of the activity of certain companies. This phenomenon, which is not only the fact of international groups, also affects SMEs. It seems to involve family groups, whatever their size. 

All companies, in varying degrees, have recourse to tax optimization.  These practices lead some of them to create more or less fictitious companies concentration of cash flows, or otherwise transfer the seat of one of their activities. For example the coordination centers as to include in Belgium or the particular attractiveness of the Netherlands as the main seat. These "offshoring" partial legal does not really affect the accounting and financial readability of the whole. 

A real problem of opacity appears however in certain groups, a kind of mushroom effect. A multitude of companies are created, heritage companies, service companies or companies with finance. This may even affect the industrial activity of the group, literally "exploded" across multiple legal entities. It rests on a system of inter-company benefits. Each unit receives and provides - against payment - goods and / or services to others. 

Certainly the companies practice merging the accounts of all companies, so-called  consolidation . But here too the methods are different from one continent to another. The resulting image of this consolidation can be misleading. 

In this context credit analysis becomes a real headache. It is not only the calculation of accounting aggregates and ratios which raises problems, but especially the determination of the least risky legal counterparty.





Chapter 19 - Cash flow     



Summary cash flow is useful in understanding more general topics: how banks (or rating agencies) are doing to measure the creditworthiness of borrowers, how the investment banks assess the value of companies. .. how to negotiate credit with banks. So it is a technical subject, a subject that has taken an important place in the curriculum of business schools. His understanding is based on the concept of amortization ..













The concept of cash flow answers a simple question: what is the "real" margin created by a company? What the company really wins?

The answer to this question is not obvious. The first reflex is to refer to net income as shown in the accounts. This accounting result has the merit to exist and to be published. This is also the reference to the calculation of tax and dividends. But it is not that simple.

The problem is that it is not a good indicator of profitability because there are elements that "disturb" its calculation. This is the case of provisions and above depreciation, which is not an actual expense but can become, when the company changes its hardware. 

To allow to fully appreciate the performance of a company, or to compare between companies, so we use cash flow which is a restated net income, that is to say, calculated as if n ' there was no amortization.

Note that there is another interpretation of cash flow, as defined in the company's cash flow analysis over time. 



Here is the first definition of cash flow. This is the most common, that which is taught by example to students of   business schools  and used by credit analysts. 








This formula is more "talking" if we look instead of depreciation in the sequence of calculation of earnings. As the diagram suggests that it was somehow extract the amortization of the total expenditure to show only the "real" spending.


If we recalculate the result with only these EXPENSES TRUE, we get the cash flow. 



 So there are two ways of calculating the cash flow:







So, add depreciation benefit is the same as not deduct the sales. In both cases it was considered that the depreciation was not an expense like any other, it is not an operational expense. 


Before examining why depreciation is not considered a "real" expenditure, see the second definition of the cash flow of holding as the accounting provisions.   












Both cash flow definitions can be illustrated as follows: 





In these definitions the focus is indeed the notion of amortissement.La purpose of the cash flow is that accounting profit of the company is not really aware of its profitability. Cash flow is the result of a recalculation of the benefit. 


Concept of amortization

The benefit everyone "sees" what it is, but depreciation is less clear. To understand we must make a foray into accounting.


Depreciation is a funny concept, it is a vague concept. Specifically, the calculation is blurred in the rigorous world of accounting. There are also other concepts of nature (such as provisions mentioned above).


This aspect is not explained to the students. The speech and agreed accounting practice indicate that the amortization is related to life, so to obsolescence investments. Except that no one is able to determine this life accurately.


 To explain the origin of depreciation, a little detour. The benefit is roughly the difference between revenues and costs. The benefit of the baker, for example, is what is left when removing the product from bread sales expenses related to this activity, the purchase of flour, the salary of the clerk, electricity, etc ... But suppose one day the baker decides to change his oven. Big expense, even huge expenditure likely to upset the calculation of earnings. This profit will fall sharply, perhaps turn into loss in the year of purchase, although sales of bread experiencing a nice growth. So the benefit calculated in this way would make more account of economic performance.


To get closer to the "economic" reality "we" had the idea to spread the investment expenditure in time. Rather than consider in full, this expenditure is split over several successive years. And to make the calculations comparable profit was defined durations standard by investment categories. The criterion was that of the estimated life of the investments concerned. On "was the accounting standards associations. The IRS got involved, since the spreading changes the calculation of the annual income tax.


Result: a sensible measure, but multiple interpretations. This explains why most businesses have at least two accounts, accounts say "economic" and tax accounting. The goal is not secret or fraud. This is simply the result of differences in interpretation of certain concepts - such as depreciation - between the tax and accounting standards. When we know that the standards are not yet harmonized tax and that every tax has its "features", we imagine the headache of auditors to the consolidated statements of a multinational ...


Cash flow usefulness

The cash flow is useful in assessing the profitability and value of companies. This element derived from accounting therefore of primary interest to the bankers who lend, rating agencies and investment bankers involved in capital transactions: business sales, IPO, mergers, etc ... 


The bankers who lend, and the Rating Agencies, use the Cash Flow ratios, such as cash flow ratio / turnover, but this is only the ratio among others. Risk analysis is a discipline that requires rigorous technique, of course, but also the ability of judgment. And the ability to judgment comes with experience. A bit like the doctor who needs to add a "lived" in his theoretical knowledge. 


Investment bankers and consulting firms use the popular method called Cash Flows This publication -  Discounted Cash Flows  - which is one of the evaluation of the value of a business methods. In practice this method is used in conjunction with others, such as the book value, the stock market value or the present value of dividends. As always, on pricing, the "real" price is one that is actually paid at some point by a buyer. 


EBITDA, cash flow and free cash flow 

The  EBITDA   (earnings before interest, tax, depreciation and amortization) is a concept close to the cash flow that excludes interest paid. It is used to value companies before an IPO, for example. That said, this calculation changes from one bank to another. ...


The  free cash flow  of particular interest to bankers sought for new loans and shareholders because it measures the money actually available to repay new loans and pay dividends. To calculate it, taking into account the expenses "necessary" to maintain the current production equipment. Free cash flow is lower than the cash flow. In practice, the free cash flow is calculated by the company itself, and it is mentioned in its annual report. 


Cash flow and trading 

As has been said, the cash flow is mainly used for the calculation of ratios in the context of risk analysis or to calculate the value of a company. then one is in the area of ​​uncertainty, estimation and especially negotiation. 


Credit analysts are trying to determine the "real" risk of a company, which is obviously impossible to measure. To give this measure an appearance of objectivity, we will use the same criteria, the same ratios of a company to another.


One can imagine also the battles of senior bankers in business talks in a merger and acquisition transaction. Some will try to minimize the value of the company, the other to maximize this value. The calculations and recalculations of cash flows "corrected" or not certain provisions, are one of the weapons of these negotiations.   


Cash flow 

There is another interpretation of cash flow within the meaning of financial flows, and cash flow analysis.


This interpretation does not really contradict the previous one but it may cause trouble. In this reading, it is considered that the company's business gradually generates a cash flow throughout the year. This feed does not appear in the accounts as it is released into the business. Some is absorbed by including changes in inventories, customer credit and supplier credit (in this accounting jargon is called Need for Base Bearing, WCR). The most confusing item notes and terminology and the apparent confusion of concepts.


A CFO of a company sometimes mobilizing its troops on the theme: "We have to reduce working capital." In the same circumstances, the speech of his counterpart of an American group was " we-have pour augmenter our CASH FLOW ". 

In both cases, it is in fact the same message, expressed differently. The aim is to improve cash flow of the company, to produce two effects: reduce debt and thus reduce financial costs.


The calculation of the "cash flow" included in the annual reports of companies. The starting point is the cash flow of "profitability", which is added or subtracted all elements affecting liquidity. 



The formula means  earnings before interest, taxes, depreciation and amortization , which is translated as "margin before interest, tax, depreciation and amortization". The idea is to know what the company has earned its BEFORE depreciation (such as cash flow) BEFORE paying taxes (which vary from country to country), BEFORE its provisions and financial costs ( that one and the other, are not related to the activity).


The ebitda is calculated from the cash flow (ebitda = cash flow (plus amortization net income) + tax + interest + provisions). The ebitda mainly interested in the markets. In a given sector, the comparison of corporate ebitda to identify those that are promised to the best stock performance .. 


International harmonization could not be found on the use and meaning of the word cash flow. We must get used to the coexistence of terms and concepts, each of which corresponds to a particular professional context: EBITDA, cash flow, free cash flow.


This diversity of perspectives explains the difficulty in codifying the concept of cash flow. We understand the complexity of annual reports on this point. These annual reports are intended for a wide audience: the lending banks, broker analysts, prospective investors, shareholders of the moment, etc .... The annual reports provide all the elements allowing everyone to bring out the aggregate which interested.  

















Chapter 20 - Ascertaining form: where, how?      


The impossible objectivity of the media


Get the facts is of course desirable, it is a matter of time and organization. The ideal, complete and objective information probably does not exist. Intentionally or not the media always color information of a variable interpretation. This is how.


On the other commentator analyzes are different. There is of course the editorial lines, marked and recognized. There are also less obvious differences. Thus, from one medium to another, a newscast to another, the titles are different, the order of topics, setting no value facts, quotes are different.


In the Anglo-French world, shades are barely perceptible at first. Everything changes the contrary during a context switch. On the same subject, the non-French press has different angles, European or American TV channels do not have the same angles. Titles, the choice of subjects are different.


The inevitable bias in the retrieval of information grows naturally depending on the complexity or abstraction of topics. The economy, banking and finance are particularly concerned


several sources


Nevertheless, one can overcome these difficulties by using several sources.

The representation of reality, the "truth" of the world, one might say, is somewhere in the middle, in the intersection of juxtaposed views. This juxtaposition is a way to reduce the inevitable distortion of information.


You have to read every day at least two newspapers 'paper' follow several foreign newspapers online. Listen each week several radio and TV shows. The program, at first sight difficult to follow requires strict discipline and mainly the separation of genres.


We can not read all of a given medium, newspaper or magazine, and it is important not to read everything, or lose valuable time. The exception is the intercontinental trip. Faute de mieux, having exhausted all other possibilities for fun, the temptation is great to read from A to Z and following every flight magazines. Life everyday barely leaves time for a minimum information. The extra time available during the trip gives the episodic sense to address this frustration.


This problem of organization is important because it is to maintain a capital item that is envy, and that is related, fun. Work on paper and work on the Internet complement each other harmoniously. was due to the multiplication of sources is simple.


How to do ?


But how, since everyone's time is limited. Just take a very simple discipline. Refrain reading news items or current events. To keep up, the car radio enough. The precious time reading to be effective. So choose his subjects, two or three. domestic politics, international relations, economics. Add to that some specific issues, some companies, stock tips, followed by industrial sector


The ideal program


Early in the morning: 

NEW YORK TIMES, SPIEGEL, ilsole24ore - 30-45mn

-Review Of the international press @

This is the time of the press review, personalized, online. Preferably on a big screen or tablet, iPad mini genre. The screen provides the overview and quick selection of the articles of "eco-fi" area. We must make the effort not to dwell on the news "playful" and focus on major issues of global concern, therefore, likely to be addressed in each log, allowing comparisons. If time is short, it is easy to "mark" an article for later reading. The easiest way is to send an email to yourself or via his facebook page. It is very easy to create a dedicated facebook account, which becomes a sort of personal and shareable library of the best articles, available at any time.


Which internet newspapers? To outsiders, New York Times, Der Spiegel, El Country and Sole24Ore There are more pleasant to browse and especially free or nearly so. It takes about six months of patient practice to be comfortable in the economic vocabulary of each. With the exception of Spiegel, which requires a real knowledge of the language. We can ignore the internet versions of French newspapers. Le Monde and Le Figaro reserve the background analysis to subscribers. Les Echos get paid after some and viewed the site, too thick, does not allow a "press release" rapid.


Morning: Les Echos


The French business daily is a must, its pleasant format. Echoes are the daily reference in France in terms of the economy and finance. As elsewhere the censorship is present must not displease its core electorate, executives and bankers or businesses.


Midi: 1 hour BLOOMBERG

The quality time "academic"

This time of day is likely to be the richest, provided you have a beach about an hour. This is the time of the chain "Bloomberg". The TV channel can be followed live anywhere, let alone in 3G and 4G on any medium, including the smartphone. In the latter case, the graphics are not very legible, but it's not fundamental. It can also be followed online version, with the bonus, deferred. A must, available in TV channel or via internet. The advantage of this chain is multiple. A form of objectivity, first resulting from a permanent questioning attitude. The journalist team scrolls a series of "experts" from different backgrounds. These are CEOs or CFOs of large corporations or big banks. Choices are made naturally depending on current issues. Are also asked academics. Between interviews, carried several journalists discuss them. They do this on the basis of economic and financial data of the moment and their explanations are illustrated by numerous charts. The higher the level, the discussions are technical. It really is a chain of "pros". A kind of university courses continuously. It really is a chain of "pros". A kind of university courses continuously. It really is a chain of "pros". A kind of university courses continuously.


Bloomberg TV deserves special mention. The chain is quasi-university level. There really is a course to pass before assessing all the virtues. We must know the meaning of words and "basic" concepts such as IPOs, hedge funds, leverage, swap, etc ... all items discussed in the e-learning website of the author, and also have an economic culture itself " basic ".


The principle of continuous program is simple. Three or four journalists discuss in turn each other and with guests. The subjects are those of the moment. The guests are primarily distinguished personalities from the business world: corporate CEOs or large banks, ministers, central bankers, founders of hedge funds, specialized writers, academics. The pace is fast. To the right of the screen, column, economic and financial news scroll loop. At the bottom of the screen, the remarkable price quotations in real time. 


The diversity of stakeholders, quality journalists give at Bloomberg unparalleled dimension. There is no truth affirmed, but a constant questioning and a courtesy atmosphere. The impression of seeking truth is reminiscent of an idealized academia, where the speech would be multiple and not dependent on a single "teacher supposed to hold the universal knowledge. It's better than a MOOC.


The evening papers 30mn French newspapers

French newspapers, however, one can find more free analysis of the opposing camp. Le Figaro in France better information on what is going left his big night competitor. ... Just avoid the controversy stands. The World excels in unexpected nuggets, unusual stories, biographies or other. The economy and finance are not his forte. Still less that Le Figaro, whose Salmon pages did imitation of the FT, the Financial Times, that the common point of color.


The weekend: The Economist 30mn

This is the weekly best selling in the world. The language is impeccable. The articles are not signed and are expected to represent the views of the newspaper. A "pro-British" opinion, how doubt therefore quick to highlight the real or supposed shortcomings of Europe. The magazine sold outside the UK is free of advertising, which makes it particularly pleasant. The line is "pro-British", which should not surprise. The content is more political than economic. The peculiarity of this magazine is that articles are not signed and therefore express the unanimous opinion of the editors.



Chapter 21 The teaching of economics and finance


The teaching of economics in France does not appear related to the important topic in today's world. High School at the University, through the higher education schools, this area is far from occupying the place it deserves in the programs of Education. The economy at large is to say, including banking and finance, is the poor relation of education.


And when it is actually about economics, how to present things revealed many shortcomings. Thus, the High School to the University through the Engineering schools or trade schools, it is not really matter nor banks, nor the euro, nor the ECB. This of course outside of specialized banking courses delivered here and there.


In schools of higher education such as the teaching of economics focuses on two components of economic thinking and mathematical modeling, called quantitative economics.


As for the part "enterprises", addresses this teaching very specialized topics, such as the study of the tax return or cash flow. Between macroeconomics and microeconomics, the abyss is yawning. The role of banks and markets in the financing of the economy, the problems of companies facing globalization are barely mentioned topics. Economic thinking and mathematical modeling are not without interest, but a reduced teaching these subjects lack the primary educational objective is to give learners the tools for understanding the world.


What is missing is perhaps most certainly a comprehensive approach to different topics. In the real world, there is not a side business, and the bank and the banks and further markets in the real world, these subjects are related. It is not enough to name things, we must also explain and put into perspective in relation to the news.


The article below, written by the author of the book, summed up the situation in France.


The economy, poor relation of education

Article in the newspaper THE ECHOES July 25, 2014


"The economy and finance are among the most commented news items and ... probably the least known of the French. In these areas, as in others, the substitution of emotion for the analysis is the index of this ignorance. Thus, finance, euro, financial markets and banks are regularly described as "absurd, speculative, suffering from insanity, unbridled" and so on. 

However hard to blame those who lend themselves to these facilities of thought. The economy, banking and finance are right, almost absent of materials for school programs. We can also go further in the diagnosis: the compilation of curricula large French or foreign business schools is full of surprises. The economy and finance are actually taught there, but amazingly abstract. 

The economy is thus confused with the history of economic thought or mathematical models. As for finance, education generally covers two aspects of this vast area, the finance business and finance markets. But besides accounting, considered more or less synthetic, it is mostly financial mathematics and statistics risk modeling applied to portfolio management. This is understandable in view of the qualifications of faculty members, whose prices are derived from the research. 

A graduate of HEC, INSEAD, the Nanyang University of Singapore or Bocconi not ignore anything calculating the internal rate of return and can intelligently comment on market efficiency concept. But the crisis of subprime mortgages , securitization, of Eurobonds , Basel III, money market, or the issue of the euro, it does not know, however, that the news flashes streaking moments the smartphone screen . This is understandable in view of the qualifications of faculty members, whose prices are derived from the research. A graduate of HEC, INSEAD, the Nanyang University of Singapore or Bocconi not ignore anything calculating the internal rate of return and can intelligently comment on market efficiency concept. But the crisis of subprime mortgages , securitization, of Eurobonds , Basel III, money market, or the issue of the euro, it does not know, however, that the news flashes streaking moments the smartphone screen . This is understandable in view of the qualifications of faculty members, whose prices are derived from the research. A graduate of HEC, INSEAD, the Nanyang University of Singapore or Bocconi not ignore anything calculating the internal rate of return and can intelligently comment on market efficiency concept. But the crisis of  subprime mortgages , securitization, of Eurobonds , Basel III, money market, or the issue of the euro, it does not know, however, that the news flashes streaking moments the smartphone screen . the Nanyang University of Singapore or Bocconi nothing ignore the calculation of the internal rate of return and can intelligently comment on the concept of market efficiency. But the crisis of subprime mortgages , securitization, of Eurobonds , Basel III, money market, or the issue of the euro, it does not know, however, that the news flashes streaking moments the smartphone screen . the Nanyang University of Singapore or Bocconi nothing ignore the calculation of the internal rate of return and can intelligently comment on the concept of market efficiency. But the crisis of subprime mortgages , securitization, of  Eurobonds , Basel III, money market, or the issue of the euro, it does not know, however, that the news flashes streaking moments the smartphone screen .

Yet enough of so little! Consider securitization, recurring topic and mysterious subject if any. Less than an hour is enough to explain to a high school senior. But securitization is still in the minds of the majority black box, more or less responsible for the crisis of  subprime mortgages , while she was in this regard that one of the links in a chain.

French banks, the ECB and most recently the French commissioner in Brussels cautiously suggest the introduction of this technology in Europe. It is indeed the way to supplement the limited capacity of banks' loans to companies. As did the Americans, it is a long time, under the New Deal! Caution financial and political leaders in France and Europe is up to the fears of opinion on matters that are foreign. Although there may be even more familiar and less ignored topics: how a bank understand the numbers of a company. 

It must be said and repeated, the acquisition of elementary baggage allowing decryption of the most important economic and financial issues is the matter of a few hours of study only, or even days. Earnings report - effort to acquire such knowledge would be significant for citizens as for public authorities. It is time for action to fill this educational deficit! "





















Not everything has been said in this book because this is not his goal. This was to show that finance is not the obscure field even hostile than we can imagine. But instead, the banking, finance and the economy are mixed in a unique landscape that the reader is invited to go.


The story is that of a peaceful overview regions poorly known and which we gradually perceive the outlines and reality. An overview embellished with occasional dives to specific comments but never lose sight of the context.


The reader is invited to continue the way only the broad outlines have been traced to him. The means are not lacking. The press, internet, journals and Google are all tools available to everyone. It may usefully consult the e-learning website of the author



24/12/2016 1 visit






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