The French financial system is facing an unprecedented international macroeconomic environment characterised by very high uncertainty, fueled by the unpredictability of US policies. The announcement by the United States on 2 April of widespread and large-scale tariffs, which were subsequently partially suspended, and the implementation of bilateral retaliatory measures by the affected jurisdictions, notably China, have added to an already severely strained geopolitical environment In addition to the ongoing wars in Ukraine and Gaza, an open conflict between Israel and Iran started on 13 June.
Since the outbreak of the trade war, markets have been resilient, but are still at risk of disorderly adjustments in the event of further adverse shocks.
The exceptionalism of financial assets issued by the US government and US corporates, which prevailed at the time of the December 2024 Financial Stability Report, is now being called into question. At the end of 2024, US equities were still appreciating significantly faster than those in other advanced economies, driven by expectations of faster growth and their concentration in the digital technology sector. These expectations were also reflected in an appreciation of the dollar and a decoupling in interest rates between the United States and the euro area. However, in January 2025, fears over a potential artificial intelligence bubble triggered a correction, with a gradual deterioration in US equity market valuations. This reversal accelerated in February and March with the deterioration in US growth expectations that accompanied the new administration's first economic policy announcements, while Germany’s fiscal policy announcements supported bond yields and European stock market valuations.
Financial markets then reacted sharply to the announcement of tariffs on 2 April. The significant movement of risk aversion also impacted US Treasuries, which failed to play their traditional role as a safe haven. The Treasury market experienced increased volatility in early April, with a sharp rise in long-term rates. At the same time, the US dollar depreciated sharply against other currencies. Contrary to usual historical correlations, the rise in longterm Treasury yields was not accompanied by an appreciation of the US dollar. Conversely, gold benefited fully from its status as a safe haven asset, reaching an all-time high.
However, the steepening of the US yield curve is part of a broader trend of rising long-term sovereign bond yields worldwide since 2022. This trend is partly attributable to a deterioration in fiscal positions in many jurisdictions, characterised by high government deficits and large public debts in a context of moderate global growth. At the same time, the bond market normalized with the end of ultra-accommodative monetary policies.
Hedge funds are increasingly prominent in G10 sovereign debt markets, including in Europe. In 2023, they accounted for more than half of the volumes traded in euro area sovereign securities, as well as half of the aggregate demand recorded by the main banks during auctions. Due to the high leverage embedded in certain strategies, a significant price movement could force funds to unwind positions simultaneously, increasing volatility and weighing further on prices, particularly if other financial intermediaries are unable to absorb these sales.
The announcement of tariffs also led to significantly higher volatility on international equity and bond markets, with US indices underperforming markedly. However, in Europe and France, the adverse movements on equity and bond markets following the announcements on 2 April remained contained. Equity indices recovered most of their losses in June 2025. Equity market valuations remain high, particularly in the United States, in view of the climate of uncertainty and the long-term historical average. Risk premia on corporate bonds deteriorated temporarily in the United States and Europe, in particular for lower-quality issues, before returning to levels close to those prevailing prior to 2 April.
The materialization of geopolitical risk may disrupt supply chains and lead to higher risk premia in markets. The proliferation of international armed conflicts, in particular the deteriorating situation in the Middle East, can disrupt strategic trade routes, such as the Strait of Hormuz, and lead to higher prices for energy commodities. While the cut-off date for market data featured in this report was 17 June 2025, the outbreak of the Israel-Iran war on 13 June and US military involvement on 22 June have added to the uncertainty. Under these circumstances, oil prices initially rebounded strongly. A sustained rise in commodity prices could fuel inflationary pressures and an escalation of the conflict could possibly lead to increased risk aversion in markets and an investor flight to safe assets.
The trade war and widespread uncertainty could weaken the non-financial sector
The unpredictability surrounding new international trade rules is encouraging companies and investors to adopt a wait-and-see approach, which is likely to hold back global growth. However, it is still difficult at this stage to quantify the macroeconomic impact of tariffs on economic activity and inflation in France, given the many possible scenarios. Studies conducted by the Banque de France suggest that the new US trade policy would in principle result in limited losses for French GDP. Furthermore, although tariffs are likely to lead to imported inflation from the United States, their overall effect should in principle be somewhat disinflationary due to a decline in global demand and to lower import prices from other regions of the world.
The relative resilience of the French economy in the first few months of 2025 is contributing to the stability of the financial system, despite moderate growth prospects in the short term. After reaching 2.3% in 2024, headline inflation is expected to bottom out at 1.0% in 2025 due to a sharp decline in energy prices,1 while inflation excluding energy and food is expected to fall to 1.9%. From 2026 onwards, the normalisation of energy prices would bring headline inflation back to 1.4% in 2026 and then to 1.8% in 2027, still below the 2% threshold. This return of inflation to its target would occur without a recession, while growth is expected to remain moderate but nevertheless positive, at 0.6% for 2025 and 1.0% for 2026. However, the risks to these growth forecasts are to the downside, given the unpredictability of US trade policy.
French firms are overall less exposed to the US market than their German or Italian counterparts, with
disparities across sectors. Within the manufacturing sector, aerospace, beverages and, to a lesser extent, pharmaceuticals are the most exposed. However, these sectors are currently in very good financial health and their low level of corporate debt contributes to their resilience. In 2023, the share of at-risk debt held by companies in these three sectors was less than 1% of total debt. Conversely, the real estate sector, which accounts for the bulk of at-risk debt in France, is not expected to suffer directly from the increase in US tariffs. However, this sector remains vulnerable as it is particularly sensitive to fluctuations in long-term interest rates and economic activity.
Beyond the potential impact of trade barriers and the high uncertainty environment, French corporates continue to suffer from high interest expenses. The cost of new loans is continuing to adjust downward as monetary easing is passed on, but borrowing costs remain high in France due to the French financing system, with a predominance of fixed-rate loans. However, French companies, as elsewhere in Europe, have adjusted to the period of higher interest rates by reducing their leverage. In addition, the level of corporate failures appears to have stabilised across all sectors and for all company sizes in the first few months of 2025. This improvement comes after a sharp rise in failures in 2024, which was partly due to a catch-up effect following the low point observed during the pandemic.
With public debt at 113.2% of GDP in 2024, France ranks third among euro area countries in terms of debt-to-GDP ratio, behind Italy and Greece. Such a high level of debt is very worrying in the current context of rising average interest rates on French public debt. The fiscal space needed to mitigate an adverse shock appears moreover very limited and could complicate the implementation of any countercyclical fiscal measures, beyond the role of automatic stabilisers.
The persistence of high government deficits and the failure to correct the debt trajectory are having a negative impact on market conditions. As a result, the yield spread between French and German government bonds was still higher in June 2025 than it was before the announcement of the snap election in June 2024, with a higher spread than for some lower-rated countries. However, liquidity conditions remain good, on both the primary and secondary markets.
Although household confidence has deteriorated due to the high level of uncertainty, the risks associated with housing credit appear to be contained. Households’ financial assets as a whole are underpinned by a high saving ratio.2 Furthermore, with historically low unemployment and continued growth in the purchasing power of gross disposable income, the risks stemming from households' financial position appear limited, although aggregate indicators could mask some heterogeneity across income levels. According to the June 2025 macroeconomic projections of the Banque de France, the rise in the unemployment rate is expected to be limited.
The residential real estate market is starting to recover, while the commercial real estate market is stabilising. After an orderly decline in prices and transaction volumes starting in 2022, the gradual reduction in borrowing costs has paved the way for a recovery in residential real estate, resulting in an acceleration in new housing loans, an increase in transaction volumes, and a slight rise in prices for existing homes. While the commercial real estate market is showing signs of stabilisation, it remains vulnerable to a potential deterioration in the macroeconomic environment.
Financial intermediaries have limited direct exposure to US assets but remain exposed to a deterioration in the macroeconomic environment
Banks remain exposed to a deterioration in the macroeconomic environment and to the situation in the nonfinancial sector. The cost of risk for banks continued to increase in the first quarter. While in 2024 the rise in the cost of risk was mainly attributable to the loan portfolio of non-financial corporations (NFC), the situation changed in the first quarter of 2025. The cost of risk rose on the portfolio of households, confirming the heterogeneity of situations within this sector despite a broadly robust financial situation, but remained stable on NFC portfolio outstanding amounts. However, in terms of asset quality, the portfolio of bank loans to SMEs deteriorated, accounting for just under half of total outstanding loans to NFCs.
French banks can, however, rely on a sound and diversified business model and are benefiting from improved financing conditions, which enable them to post historically high income. After declining in 2023, the net banking income (NBI) of the six leading French groups had already grown significantly in 2024 (+8%), supported in particular by income from fees and commissions and from market activities. The figures for the first quarter of 2025 show that this growth has continued. This is mainly underpinned by growth in net interest margins and, to a lesser extent, a volume effect confirming the recovery in lending in response to stronger demand.
The insurance sector remains sound, with solvency well above regulatory requirements. French insurers hold own funds well in excess of their capital requirements, with the solvency capital requirement coverage ratio reaching 238% at the end of 2024. Investment portfolio yields are improving, thanks to past interest rate increases, and insurers' exposure to commercial real estate remains very limited (7% of investments at the end of 2024). However, non-life insurance technical profitability remains under pressure, due to past inflation and the multiplication of climatic events.
A deterioration in the macro-financial environment could also test the resilience of unlisted asset funds, which generally target highly indebted companies. Private equity and private debt funds have experienced rapid growth over the past decade, although growth has been less strong since 2022. This growth has been accompanied by increasing interconnections with the rest of the financial system, which remain difficult for authorities to measure accurately. Greater transparency in this market appears essential in order to better understand the risks and ensure effective supervision.
In the sector of crypto assets, the development of stablecoins poses risks of contagion to the financial sector. Dollar-backed stablecoins account for 99% of these instruments, which are highly concentrated around two main issuers. In the event of a loss of confidence, a run by investors could force stablecoin issuers to liquidate their reserve assets quickly, at the risk of generating stress in the underlying markets. To date, the reserves of the two main stablecoins consist mostly of short-term US Treasury securities. Rapid growth of stablecoins would therefore enhance their potential footprint on the short term sovereign debt market. Moreover, the rapid development of dollar stablecoins, encouraged by the new US administration, should not come at the expense of European monetary sovereignty.
Geopolitical tensions and the weakening of multilateral initiatives are increasing cyber and climate risks
According to data from the University of Maryland, the number of cyber attacks worldwide stabilised in 2024, but threats persist. Increasing digitalisation, the use of external services providers, and the deterioration of the geopolitical environment could lead to a resurgence of cyber attacks. The European Agency for Cybersecurity (ENISA) has highlighted that banking institutions are prime targets and were affected by close to half of all cyber attacks targeting the European financial sector between 2023 and 2024. However, the entry into force in January 2025 of the European Digital Operational Resilience Act (DORA), which will complement other coordination mechanisms at national, European and international level, should enhance the resilience of the European financial system to cyber threats.
The assessment of the consequences of climate change confirms that, in both the short and long term, transition is significantly less costly than inaction. While in France, a no policy change scenario with regard to climate change would lead to a loss of 11.4 percentage points of GDP by 2050, the return on mitigation policies appears to be significant. Conversely, less coordination of transition policies and delays in their implementation raise the costs and risks associated with the transition. In this context, the fact that the United States is scaling back its ambitions in this area and withdrawing from the Paris Agreement could increase the climate risks weighing on the financial system.
A thematic chapter of this report introduces a new forward-looking transition risk indicator for French financial sector market portfolios. This indicator is based on a model of sectoral income trends in response to climate transition, derived from scenarios developed by the Network for Greening the Financial System.3 By projecting changes in corporate income according to the sectoral breakdown of their turnover, this approach makes it possible to identify climate vulnerabilities at the microeconomic level in a forward-looking manner.
1 Assumption underlying the macroeconomic forecast published on 12 June 2025.
2 In Q4 2024, the household financial saving ratio stood at 9.7% of gross disposable income, while the saving ratio (including investments in new housing and
major renovations) reached 18%.
3 For a presentation of these scenarios, see the cross-sectoral chapter of the Financial Stability Report, Part 1.4, June 2025. Banque de France.
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Updated on the 24th of June 2025