The Credit Lyonnais in France (C. 1871-1918): Using Cash Flow Analysis to Assess Risk in Banking

Article excerpt

Abstract: In the absence of accounting rules, financial reports and disclosures were of little use to shareholders and stakeholders before World War I. To offset the unreliability of financial information, several banks, including the Credit Lyonnais, implemented a system of accounting analysis that, in essence, anticipated modern financial-analysis tools based on funds statements and cash-flow statements. This paper, based on the Credit Lyonnais archives, sets out to explain the purpose of this method, to present the different concepts employed, and to show how they interact. The relevance of this model is assessed through two case studies.


After the failure in France of a number of Saint-Simonist (1) initiatives, such as Laffitte's Caisse Generale du Commerce et de l'Industrie in 1837 and the Pereire brothers' Credit Mobilier from 1852 onwards, mixed banks (banks combining both commercial and investment-banking activities) emerged at the same time as large department stores. They would be called "savings banks" before World War I, having been labeled on occasion with the rather pejorative term of "financial bazaars" [Bigo, 1947, p. 182]. Notably during the Second Empire but also up to the inter-war period, they were the main players involved in structuring the credit system in France.

The Credit Lyonnais (CL) was the epitome of a success that was if not collective at least pluralistic since other so-called savings banks such as the Comptoir d'Escompte (1848), Credit Industriel et Commercial (1859), the Societe des Depots et Comptes Courants (1863), the Societe Lyonnaise de Depots (1863), the Societe Generale (1863), and the Societe Marseillaise de Credit (1865) can also be added to the list. The CL's early move away from direct investment in industry forced it to become the savings bank par excellence, and its subsequent history demonstrates the significance of this decision. From this constraint, it was able to draw its strength--the small unitary margins generated by commercial banking operations required the bank to implement a high-performance organizational structure in which information had to be centralized to enlighten rational decision making and to limit risk. For such everyday banking business, Henri Germain, the founder and chairman of the CL until the turn of the 20th century, would put accounting at the heart of his information system.

The CL's withdrawal from the sector of direct investment went together with the birth of its Service des Etudes Financieres (SEF) (the Department of Financial Analysis). On the issue of financial brokering, in which the CL played a leading role, assessing the risk of insolvency (2) did not yet rely on quantitative and statistical analysis methods such as "credit rating," but instead on financial and accounting analysis tools. In this context, the SEF's main purpose was to draft technical and/or financial studies for numerous departments requesting them, such as Securities Management, Risks, Interbank Relations, Securities Issuance, to enable them to use sector-specific information and accounting data provided by companies to measure company economic viability and to assess the risks the bank was assuming. The SEF also carried out economic monitoring, including macroeconomic studies, sector-specific studies, and data collection. Since it reported directly to general management, its strategic function would always ensure it remained independent from other departments.

More specifically, this service set up a system of "deconstructing" accounts disclosed by companies with the purpose of restating them. This analysis of financial statements constituted one of the major reasons for this service to exist; the goal was to reduce the risk of asymmetrical information tied to the window-dressing that most companies engaged in at that time in western countries such as Britain [Edwards, 1980], France [Lemarchand, 1992], Germany [Spoerer, 1998], Spain [Bernal Llorens, 2000], and the U. …