Assessment of Risks to the French Financial System December 2018

The Banque de France publishes a semi-annual assessment of risks to the French financial system, which brings together analyses prepared by Banque de France and Autorité de contrôle prudentiel et de résolution (ACPR - French Prudential Supervision and Resolution Authority) staff. This offers a way for the Banque de France to share its analysis of France’s current situation in terms of financial stability. The report is also used to support binding macroprudential measures that the Governor of the Banque de France recommends to the HCSF for adoption.

The assessment presents risks to the French financial system in three main categories: risks linked to the macroeconomic environment, risks to financial institutions and market risks. These various risks, which may be connected, are set against a low interest rate environment that presents the financial sector with structural challenges, including the quest for profitability and challenges relating to technological innovation.

In the second half of 2018, the main risks to the French financial system are:

1. Market risk :  The risk of a sudden repricing of financial asset prices remains despite recent equity market corrections. Portfolio turnover phenomena have been observed. Valuations are still high on financial markets, for both equity and bonds, which reflects investors’ appetite for risk. Nonetheless, investor confidence could be undermined by a combination of several factors of uncertainty originating from the United States (protectionism and economic policy), Europe (the political situation in Italy, Brexit) and emerging countries (financial vulnerabilities).

2. Risks linked to private sector debt: Non‑financial corporation (NFC) and household indebtedness continues to rise in France, in contrast to trends observed in other European countries. NFC debt dynamics are notably a source of liquidity and default risks, which could intensify in the coming months. Growth in household lending remains sustained and calls for careful monitoring in the face of signs of an easing of lending conditions.

3. Interest rate risks linked to fragmentation: The political situation in certain euro area countries has led to widening bond yield spreads and a risk of fragmentation in euro‑denominated debt markets. This raises the fear of a resurgence of the contagion loop between sovereign risk and bank risk and higher interest rates for the private sector, particularly in Italy.

4. Risks linked to structural changes in the financial sector: The financial system continues to face structural challenges (digitalisation, cutting costs, the search for new profit sources). Rising operating costs remain an area to watch, as banking institutions continue their efforts to adapt and transform their business models. However, in general the resulting risks are controlled and institutions remain resilient.