Outlook: French banks

AND JUST when it was getting to be fun too. Anglo Saxon traders assumed it was they who would be determining the outcome of France's great banking takeover fest. With the fight largely being argued out on British soil, and a high proportion of the shares owned over here, this seemed a reasonable enough presumption. Plainly they hadn't banked on the whimsical Jean-Claude Trichet, Governor of the Bank of France. The Gallic spoilsport has brought the whole process grinding to a halt.

It is rarely possible to fault Mr Trichet. As a central banker, he is second to none and on the whole he seems genuinely to believe in free markets and unfettered enterprise. If the truth be known, he would have made a far better first head of the European Central Bank than the eventual compromise incumbent, Wim Duisenburg. But with his French Committee of Credit Institutions hat on, Mr Trichet is now making a dreadful hash of the takeover fight being fought out between three of France's biggest banks.

In Italy, banking regulators moved swiftly to outlaw all hostile takeover bids in the banking sector after the recent outbreak of fisticuffs. This may have seemed unduly interventionist to markets, but at least it had the merit of being a clear-cut, unambiguous position. In France, Mr Trichet seemed to give the green light to a hostile bidding war. He cleared first the agreed merger between Societe Generale and Paribas, and then later Banque Nationale de Paris's hostile bid for the two of them.

Now effectively to block Societe Generale's revised Paribas merger terms is therefore a bit rich. Doubly rich are the grounds he is doing it on - the prudential concern of their impact on the robustness of the French banking system. Both the Societe Generale and the BNP takeover proposals already satisfy the highest international capital adequacy standards. In terms of financial strength, either combination would be a good deal healthier than Credit Lyonnaise, which is about to be privatised.

The truth of the matter is that letting the market decide is still a principle central bankers have some difficulty in accepting when it comes to action on their own patch. Mr Trichet has been desperate to intervene in this three-way fight right from the start. He is rumoured already politely to have instructed a number of interested foreign banks, including ABN Amro and Banco Santander, to get lost.

When it comes to his own unruly countrymen, Mr Trichet's behind the scenes edicts do not seem to have the same power of persuasion. These three banks are determined to have their fight, regardless of Mr Trichet's view that the interests of La France and the overall national integrity of its banking system must remain paramount.

The implication of Mr Trichet's insistence on a "consensual" solution is that he backs the three-way merger BNP's Michel Pebereau is proposing, and on terms that don't cost BNP's shareholders too much money either. This is a stance which is wrong both in principle and in practice. Mr Trichet is in danger of learning the hard way that when managements cannot agree, it is nearly always better to let shareholders decide.

An enforced truce under one roof may seem the logical approach for regulators, but almost invariably it results not in the national champions that governments dream of creating, but in corporate disaster characterised by management division and infighting. This is as true of banking as any other industry.