Assessment of Risks to the French Financial System June 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 first half of 2018, the main risks to the French financial system are:

1. Risks linked to private sector debt:  The ongoing rise in the indebtedness of non-financial companies (NFCs) and households contrasts with trends observed in other European countries. NFC debt dynamics are a source of cyclical risks. Growth in household lending remains sustained and calls for careful monitoring in the face of a possible easing of lending conditions.

2. Markets risks: The threat of a sudden correction in risk premiums is rising as financial markets continue to exhibit favourable momentum for equities and bonds, driven by procyclical behaviour that reflects substantial appetite for risk. Economic and political uncertainty has intensified and could be a source of instability, particularly in connection with US economic policy and the Italian situation.

3. Risks linked to the interest rate environment in Europe: Financial institutions remain resilient in a context of historically low interest rates and positive macroeconomic conditions. The possibility of a sharp rise in long-term interest rates is a potential source of risk.

4. Risks linked to structural changes in the financial system: The financial system continues to face structural challenges, from digitalisation to cost control and the quest for new profit sources. Rising operating costs remain an area to watch, as financial institutions forge ahead with efforts to adapt and transform their business models.