Banking news

The Banque de France is concerned about the increase in debt

The Banque de France fears that the rise in corporate and household debt could slow down the economic recovery.

(Illustration photo) (hooly News / STEPHANE DE SAKUTIN)

As a result of the Covid-19 health and economic crisis, the Banque de France notes in its quarterly threat assessment report on the French financial system published Tuesday, June 23 strong growth in corporate and household debt . “This is the risk that we consider the highest” , commented Sylvie Goulard, deputy governor of the institution.

This publication does not necessarily describe imminent dangers, but rather points the spotlight to risks with a high probability of materialization and their potentially systemic impact.

“The companies, faced with a strong tension on their treasury, are for many of them constrained to request additional debt”, underlines the report.

The measures taken by the French government and other European governments – notably the loans guaranteed by the state – made it possible to respond quickly to these financing needs. However, “the extent of this liquidity shock remains uncertain and its absorption conditioned by the pace of recovery in economic activity. The increase in corporate debt is likely to worsen the solvency of many of them “, worries the Bank of France. And in turn,” a marked increase in business failures could in turn lead to an increase in bad debts on the balance sheet of banks, curbing the credit dynamics, necessary for economic recovery ” , she adds.

Regarding French households, their “solvency remains largely intact given the public support measures” , even though their already significant indebtedness imposes high repayment charges on them. In this context, “a significant increase in unemployment is likely to increase the weight of loan repayment, which would into increased credit risk and / or less buoyant consumption “ , continues the institution.

According to her, “the control of the indebtedness of companies, of households, as of public finances, will constitute a determining objective, as well at the macroeconomic level as for financial stability”.

Among other risks to the French financial system, the Banque de France points market risk, with possible further corrections in the equity markets and tensions in the bond market.

In addition, the now widespread environment of persistently low interest rates, will continue to weigh on “the future profitability of banks” , while “life insurers are seeing their asset-liability management constraints tighten while the return on their asset portfolios continues to erode gradually”, anticipates the report.