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French banks must limit exposure to heavily indebted companies as of July 1

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French banks must limit exposure to heavily indebted companies as of July 1

France's largest banks, including BNP Paribas SA and Société Générale SA, will have to limit their exposure to heavily indebted companies from July 1, the country's High Council for Financial Stability said.

The council, which oversees the French financial system and is headed by the country's finance minister, had indicated it planned to undertake the measure once it received approval from the European Commission and European Council. Under the move, France's six largest lenders must limit their exposure to highly indebted large firms based in France to 5% of their capital from July 1 for at least two years.

The other lenders are Crédit Agricole SA, Groupe BPCE, Crédit Mutuel Group and La Banque Postale SA. Highly indebted firms are defined as those with net debt equivalent to more than 100% of cash and equity.

The council has been concerned for some time about mounting levels of corporate debt and said the move was justified because corporate debt was rising at a faster pace in France than in other major European countries. It said it wanted to protect French banks from the risk of default by a highly indebted company and raise awareness of the risks of high debts at a time when interest rates are expected to rise.

It also called on other European countries to implement a cap on highly indebted French companies, thus preventing them from borrowing abroad.

The council has warned in the past that it could activate a countercyclical buffer for banks to restrict lending, and central bank Governor François Villeroy de Galhau, a council member, said in late April that the body would consider introducing additional measures in June, given that lending to the private sector was growing at close to 6% annually.