December 15, 2017 / 4:54 PM / a year ago

France moves to rein in corporate borrowing binge

PARIS (Reuters) - France’s financial stability council said on Friday that it planned to set a cap on large banks’ exposure to highly indebted companies after big French firms binged on cheap debt in recent years amid record low interest rates.

The debt of non-financial French companies has risen to record levels of 134 percent of gross domestic product and is among the highest of the big economies, according to data from the Bank for International Settlements.

The High Council for Financial Stability, which is chaired by Finance Minister Bruno Le Maire, said in a statement after a quarterly meeting that systemic banks would have to limit exposure to such firms to five percent of their capital.

The details remain to be hammered out in discussions with various European authorities, which means the measure will most likely take effect at the end of the first half of 2018.

A finance ministry source said that France would for now probably hold off on requiring banks to hold extra funds against rising risks from Jan. 1 and a formal decision would be published after talks with the European Central Bank.

The council has not imposed any so-called countercyclical capital buffers since it was set up in 2014. The Czech Republic, Sweden and Slovakia are the only EU countries to have decided to use them.

“The High Council considers that if cyclical risks remain at their current levels then it could be necessary to take additional preventive actions in the coming months,” it said in the statement.

The council, which includes central bank governor Francois Villeroy de Galhau, said that big French companies had borrowed heavily to finance acquisitions and investments.

As a result, borrowers balance sheets have become heavily burdened, although net leverage has remained contained due to high cash levels, the council said.

“The High Council is particularly vigilant about the sustainability of non-financial companies debt and the sensitiveness of their financial health to interest rate increases,” it said.

While French firms have borrowed heavily, euro zone rivals have reduced the debt on their balance sheets such that corporate debt across the bloc stood at 103 percent of GDP as of the second quarter, the most recent period for which BIS data is available.

The council also voiced concern about easing mortgage lending standards and urged banks to be vigilant about the impact on their balance sheets.

Lastly, it warned equity investors that low volatility, ample liquidity and low-risk premiums made markets sensitive to sharp price swings.

Reporting by Leigh Thomas; editing by Michel Rose

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