Does this new organisational approach by NFCs create risks for the financial system ?
The answer to this question depends on the types of transactions undertaken by these entities, as these developments appear to reflect several optimisation goals, i.e. not just tax but also administrative and financial optimisation. The risks to the financial system posed by tax optimisation relate primarily to economic, budgetary and social issues rather than to questions of financial stability. However, multinationals also set up captive institutions in order to centralise financial transactions within a single entity based in a country that is conducive to managing these transactions, for example because of the ease of dealing with investors, or because legal procedures are facilitated. More complex and more global corporate structures mean longer financing chains, with beneficial effects – for instance, efficiency gains can be unlocked by grouping financial transactions within a specialised structure – but also risks, for example by making it easier to set up leveraged arrangements.
Has this new structuring approach, which may be described as vertical disintermediation, in contrast to the horizontal disintermediation associated with trade credit, for example, been accompanied by a sharp increase in carry trading by NFCs and their subsidiaries? Carry trading is an investment strategy that exploits interest rate differences across countries. It consists in borrowing in a country where interest rates are low and then lending in a country where rates are high. To give an example, since interest rates have been lower in the euro area than in the United States in recent years, a fairly typical strategy among companies has been to borrow in euro (specifically by issuing bonds in the euro area) and to lend the resulting funds in US dollars (specifically by buying US debt securities).
Have these developments spurred pronounced use of carry trade transactions?
NFCs have different net positions in euro and US dollars
We need to look at company data to answer this question.
To draw up the balance of payments, the Banque de France uses data on companies that are resident in France and that engage in international transactions. In particular, data are provided by major companies referred to as Full Direct Reporters (FDRs). Though offering only a snapshot of NFC activities, these data are a rich source of information, offering valuable insights into the currency positions of these companies.
A currency-by-currency breakdown of the net external position of FDRs (trade and financial assets net of liabilities) reveals a USD surplus (Chart 2). The net external position has fluctuated since 2011 in a range of EUR -20/+20 billion.