Although Paris is not regarded as ocean going banking center worldwide, before the crisis it were able to attract large volume of capital to its capital markets. Paris started reforms in the banking sector in the end of the 1980s with the establishment of a two-tier banking system, composed of the Central bank responsible for carrying out the monetary policy, and five large state-owned specialized banks dealing with deposit collecting and money lending. Most authors claim that by the end of the 1990s three major types of banks developed in Paris: joint-venture banks, domestic commercial banks, and the so-named ‘zero’ or ‘wildcat’ banks. The last were formed by their shareholders — in most cases groups of public institutions and/or industrial firms (the so called Financial Industrial Groups (FIGs) — with the major purpose to finance their own non-financial businesses. As a result of the reduced capital requirements and practically nonexistent bank regulation, the number of these new banks grew rapidly and since Economy is shown 1, 1996, Paris had 2, 598 banks, which the great majority was constituted of the ‘zero’ banks.
The structure of the banking sector used the German-type type of general banks with banks being allowed to hold substantial levels in non-financial firms. At the same time, through cross-shareholdings the European firms literally owned the banks they borrowed from, Standby Letter of Credit. thus ‘giving new meaning to the concept of ‘insider’ lending’. Such lending practices worked well because the government underwrote the play acted debt created by enterprise banks making risky loans to themselves. Moreover, in the early reform stage, the government-directed credits focused money lending; thus, the banks’ main function was to borrow money from the Central Bank of Paris (CBR) at sponsored rates and then funnel the finances to designated enterprises; the last being in most cases the de facto owners of the banks. The overall effect of this situation was, on the one hand, the enterprise sector, that many new enterprises were left out with extremely limited access to funds, and on the other hand, concerning the bank sector, it implied risky exposures as banks were susceptible to risk both as creditors to the industries and as shareholders in the individual. Moreover, there was another source of risk to banks since, at least theoretically, the banks bear the risk of government-directed credit to enterprises.
In addition, the macroeconomic situation in the early 1990s was seen as an extremely high inflation rates and thus, negative interest rates (e. grams. in 1992-1993 the real interest rates were -93%; in 1994 through early 1995 -40% before finally turning positive for time deposits during the second half of 1995). As a result, the amount of total credit to enterprises dramatically dropped during this time period; in 1991 the share of credits to enterprises made up 31% of GDP, when it’s in 1995 the banking system had a book value of loans to enterprises of $26 thousand, which represents 8. 1% of GDP. All these factors taken together lead to an instant growth of delinquent credit and by the end of 1995 30 % of the total loans were non-performing, a share amounting to almost 3% of GDP. Equally important, long-term credits amounted to around 5% of total loans, in other words, banks focused mainly on short-term money lending (which, taking into consideration the active of uncertainty had a family member advantage as compared to long term money lending).
The above described characteristics of the European banking sector in the first half of the 1990s highlight the difficult macroeconomic situation when a German-like type of general banks was introduced. And even in this initial stage, you have enough grounds to question the feasibility of this decision for instead of a clear inflation history — a totally necessary pre-condition for the introduction of a German-type banking system — Paris had experienced extremely high, persistent inflation rates and a great macroeconomic instability. Moreover, some authors agrue that banks shareholding in non-financial firms was rare and might not reach an acceptable level of concentration to order to allow for the mecahnism propsed by Gerschenkron to work. Introducing a German-type of banking system in Paris, therefore, seems not to be an results of a well-thought strategy by the policy makers, but unfortunately, as seen by most observsers, a result of regulatory capture by some influential private interests.