Financial Stability Report - June 2026

Overview

The French financial system continues to demonstrate resilience in the face of the accumulation of shocks since 2020 and must now face the consequences of the war in Iran. Since its outbreak on February 28, the conflict in the Middle East has resulted in a negative supply shock on commodity markets, particularly following the blocking of the Strait of Hormuz, through which approximately 20% of global hydrocarbon consumption was transiting. As of June 5, the free circulation of ships under satisfactory security conditions had not yet been restored.

This shock to commodity prices, however, occurred in a different context than in 2022, with hydrocarbon reserves significantly higher than they were at that time. This factor explains the relative moderation in crude oil price increases, to which a significant reduction in demand since the beginning of the conflict also contributed, particularly marked in East Asian economies. For liquefied natural gas (LNG), the shock was also much milder than that resulting from the Russian invasion of Ukraine. The decrease in demand in Europe since 2022 and the increase in global liquefaction capacities were other factors moderating prices.

Nevertheless, tensions on commodity prices are not limited to hydrocarbons alone, and they have led to an increase in inflation forecasts. According to the central scenario of the Banque de France's June macroeconomic forecasts, inflation in France would rise to 2.5% in 2026, compared to 0.9% in 2025 (an increase of 0.8 percentage points compared to the March interim forecasts). In this context, operators anticipate a tightening of monetary policy conducted by the Eurosystem, and markets as of June 12, 2026, after the Governing Council of the Eurosystem's decision to raise its three key rates by 25 basis points (bps), priced in between one and two additional rate hikes of 25 bps by the end of the year.

Rising long-term interest rates in G7 countries increase vulnerabilities related to public finances

Expectations of rising key rates in the eurozone have contributed to an increase in sovereign rates, without however causing a notable increase in the French risk premium. The yield on French ten-year sovereign debt stands at 3.75% as of June 12, up by more than 40 bps since the beginning of the war, but the ten-year spread between the rate on French Treasury bills (OATs) and that of the German Bund has increased by only 8 bps over the same period. The stability of the French risk premium is related to the still high demand for French sovereign debt, historically as well as relative to other European countries, but which must absorb the increase in financing needs.

In the absence of a reduction in the budget deficit to 5% or less, the supporting factors benefiting French sovereign debt could erode further, with the risk of new downgrades by rating agencies. Such a scenario could result in increased volatility and reduced liquidity in the French sovereign bond market, potentially amplified by actors with short-term and procyclical investment strategies, such as hedge funds. These are notably present in the securities lending market, where they develop high-leverage arbitrage strategies on OATs.

The thematic chapter of this report analyzes the functioning of the securities lending market and the emergence of vulnerabilities linked to the growing role of investment funds. This dynamic increases the risk of abrupt price movements and favors the emergence of contagion channels to the rest of the financial system in the event of a sudden shortage of liquidity. These fragilities are exacerbated by the concentration of operations around a small number of actors, the predominance of very short-term maturities, and an application of risk management mechanisms (haircuts and margin calls) that is sometimes insufficient and may prove procyclical in the event of a shock.

A significant deterioration in financing conditions for sovereign debt could spill over to French banks and companies. While the volume of sovereign debt issuance in the eurozone will remain very high in 2026, particularly in France and Germany, ensuring a sustainable debt trajectory is an indispensable condition for maintaining good financing conditions for all economic actors.

In June, the inflationary environment was already weighing on French public finances. Many expenditures are indexed to inflation (pensions, family allowances...), and more directly a portion of the debt burden via indexed bonds (one-tenth of French debt). Regarding revenues, the slowdown in consumption tends to reduce tax bases overall, directly as in the case of fuel excise duties, which depend on volumes sold, and more generally through the decline in activity. Even if, as of early June, financial aid to households and businesses remained targeted and increased public spending only in a very measured way, the impact of the conflict in Iran on the budget deficit in 2026 will be non-negligible.

Risky asset markets, particularly US equities, remain vulnerable to a sudden reversal of investor sentiment

The war in Iran caused only a moderate and temporary correction of equity markets, which was quickly recovered. After notable declines in the first four weeks of the conflict, equity markets began to rebound, particularly in US technology stocks. In this context, equity markets, and particularly US indices, which are still largely driven by a few technology stocks, maintain historically high valuation and concentration ratios, making them vulnerable to a sudden reversal of investor sentiment. A revision of profitability prospects for technology stocks could in particular fuel a disorderly correction, with spillover effects to other markets.

Investor appetite for US corporate bonds and, to a lesser extent, European corporate bonds remains high. The still low level of yield spreads between different credit qualities, despite the geopolitical context and macroeconomic risks, could be a sign of underestimation of the risk borne by certain borrowers. The European corporate bond market absorbed a wave of very large issuances from the US technology sector: between October 2025 and March 2026, nearly two-thirds of net corporate issuances in euros came from companies domiciled in the United States.

The private credit market, which experienced strong growth over the past ten years, went through a period of turbulence in early 2026. Concerns emerged in the first quarter of 2026 regarding the quality of credits granted in this market as well as the high exposure of private credit funds to the software sector. These manifested as high redemption requests from retail clients in semi-liquid funds from several major US asset managers. The increasing exposure of private credit to the AI sector makes this asset class vulnerable to a downward revision of revenue expectations in this sector. Private credit actors are thus exposed to two aspects of risks caused by the development of AI: the first concerns the potential effects in case of poor performance of this increasingly indebted sector, and the second concerns losses that funds exposed to the software sector could suffer in the event of strong competition from AI. The growing concentration of the private credit market around large international management companies and its relative opacity also tend to reinforce its vulnerabilities and require an improvement in its transparency.

European and French financial actors have limited exposures to private credit, but they could be affected by contagion to other asset classes in the event of a shock. These exposures can occur through bank loans, mostly asset-backed financing for funds, or directly for investors, in the case of insurers. In Europe, these exposures represent a very limited share of total assets of banks and insurers, when a strict definition of private credit is used.

The deterioration of the international environment risks weighing on small and medium-sized enterprises and low-income households

French growth is penalized by the negative supply shock resulting from the geopolitical crisis. Initially forecast at 0.9% for 2026, growth is expected in the Banque de France's June 2026 projections to be around 0.5%, due to a disappointing first quarter, a deteriorated international context, and the resurgence of inflationary pressures. In its June 2026 macroeconomic projections, the Banque de France presents several scenarios, consistent with those published by the European Central Bank (ECB) for the Eurosystem on June 11. In the adverse and severely adverse scenarios, oil and gas prices follow a trajectory derived from an implicit price distribution from options on energy futures markets, corresponding respectively to the 75th percentile and the 95th percentile. These scenarios implicitly correspond to a more prolonged conflict, with strong tensions on global oil and gas supply, which available stocks would no longer be able to cushion. The favorable scenario corresponds to a faster and more marked decrease in energy prices compared to the base scenario assumptions. In the adverse scenario, France would escape recession for the entire year 2026, with weak but positive growth (+0.3%). In the severely adverse scenario, GDP growth would be zero in 2026 and slightly negative in 2027 (-0.1%), while inflation would increase significantly, reaching 4.0% in 2026 and 3.9% in 2027. Finally, in the favorable scenario, activity and inflation would benefit from a somewhat faster easing of energy prices.

French companies have shown resilience in the face of the accumulation of shocks since 2020, but they are all the more vulnerable to a shock on their revenues if they have a high level of debt. Their debt service to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is trending upward in 2025. It is higher than that of other major eurozone countries. This gap is explained by a higher consolidated debt of non-financial corporations (NFCs) as a share of GDP, while the rise in interest rates compared to 2021 has already largely propagated through their balance sheets.

Since early 2025, business failures have continued to increase and can no longer be explained solely by the catch-up observed after the pandemic. Other factors must be taken into consideration, notably the rise in energy prices and the trade war. The increase in failures is driven by intermediate-sized enterprises (ETIs) as well as small and medium-sized enterprises (SMEs), while business creations are concentrated in small businesses, particularly micro-enterprises.

While the French commercial real estate market showed signs of stabilization in 2025, the beginning of 2026 marks a new slowdown. This sector is highly sensitive to financing conditions that influence the investment capacity of actors, as well as economic activity, which determines rental demand. The credit risk related to commercial real estate remains contained, however, due to a limited default rate and the very relative weight of this sector in the total assets of French banks and insurers. Moreover, tensions on the liquidity of real estate investment funds seem to be gradually easing.

The recovery of the residential real estate market is also slowed by the rise in macroeconomic uncertainty. After a slowdown in household investment in the first quarter, the rise in mortgage rates could continue to weigh on housing credit demand. The recovery in the rise of residential property prices in France remains less marked than in the rest of the eurozone. This more limited progress is partly related to the fixed-rate financing model of housing in France, which induces a certain inertia that delayed the drop in prices during the interest rate hike episode that began in 2022. Mortgage insurance claims continue to increase moderately, linked to the evolution of the unemployment rate, which has seen a gradual rise since 2023 and reached its highest level since 2021.

Banks and insurers show resilience in an uncertain environment

French banks can rely on a diversified business model and limited exposures to sectors most sensitive to fossil fuel prices. In parallel, the exposure of French banking establishments to counterparties from countries linked to the conflict in Iran appears very limited in the first quarter of 2026. Credit risk to companies and households tends to increase, but banks continue to show results in clear improvement and a solid situation, both in terms of solvency and liquidity. Moreover, the French banking sector is little exposed to the private credit sector.

The French insurance sector shows rising solvency and well above regulatory requirements. The revaluation rate of life insurance benefits from the improvement in the investment portfolio yield and is supported by the mobilization of the profit-sharing provision, constituted from financial results of previous years. This revaluation has contributed to strengthening the attractiveness of life insurance contracts to savers, allowing net collections to reach a historically high level, driven both by an increase in gross collections and a decrease in surrenders. After the degradation observed following the 2022 inflation shock, the technical profitability of non-life insurance recovered in 2024 and 2025, returning to a level close to that before the period of high inflation. Moreover, the exposures of the insurance sector to private credit remain marginal and essentially constitute diversification assets belonging to the general fund of insurers.

The materialization of geopolitical risk favors an increase in structural risks, particularly cyber risks and energy dependencies

Cyber risk is reinforced by the conflict in the Middle East and the increased probability of hybrid warfare actions. The Prudential Control and Resolution Authority (ACPR) and the Banque de France did not identify in the first half of 2026 an increase in the number of cyberattacks against the French financial sector resulting from current geopolitical tensions. However, despite a still limited materialization on the French perimeter, the geopolitical component of cyber risk remains at a high level. Moreover, the emergence of advanced AI models (frontier AI), capable of quickly identifying critical vulnerabilities and potentially used for offensive purposes, reflects a structural change that requires adaptations from financial institutions.

The first economic consequences of the war in Iran finally remind us that European dependence on imported fossil fuels generates inflationary risk and financial instability. France has undertaken significant decarbonization efforts for over a decade, but it remains confronted with a double dependence: on the one hand, to fossil fuels themselves, and on the other, to countries exporting these resources. These dependencies expose France to geopolitical contingencies, which could generate significant economic and financial risks. To reduce these dependencies, France has committed to diversifying its energy supplies, while pursuing a decarbonization strategy.

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Updated on June 24, 2026