Financial stability report - June 2026

The French financial system continues to display resilience in the face of a series of shocks since 2020, and now faces the consequences of the war in Iran. The outbreak of the Middle East conflict on 28 February triggered a negative supply shock in commodity markets, notably following the closure of the Strait of Hormuz, a critical transit route for around 20% of global hydrocarbon consumption. 

However, this shock is taking place in a very different context from 2022. Hydrocarbon inventories are much higher than at the time, which explains why crude oil prices have risen relatively moderately. Sharp reductions in demand since the start of the conflict, particularly in East Asia, have also helped to limit price pressures, while the shock to liquefied natural gas (LNG) has been much milder than after Russia’s invasion of Ukraine. Reductions in European demand since 2022 and an expansion of global liquefaction capacity have also contributed to price moderation. 

Nevertheless, price pressures are also affecting other commodities, not just hydrocarbons, leading to upward revisions to inflation forecasts. In the baseline scenario for its June macroeconomic projections, the Banque de France raised its forecast for 2026 inflation to 2.5%, after 0.9% in 2025 (+0.8 percentage point compared with the March interim projections). Market participants now expect the Eurosystem to tighten its monetary policy going forward; as of 12 June 2026, they were pricing in between one and two additional 25-basis-point rate hikes by the end of the year, on top of the increase decided by the ECB Governing Council on 11 June.

The rise in long-term interest rates in G7 countries has increased vulnerabilities related to government finances 

Expectations of further hikes in key euro rates have driven up sovereign yields, although without increasing significantly the risk premium on French debt. The yield on French ten-year government bonds reached 3.75% on 12 June, representing a 40-basis-point rise since the start of the war. However, over the same period, the spread between the ten-year OAT and the German Bund only widened by 8 basis points only. The stability of France’s risk premium reflects persistently strong demand for the country’s debt, both historically and compared with other European countries. However, this demand will need to absorb the government’s growing financing needs.

If France fails to lower its budget deficit to at least 5% of GDP, the factors supporting its sovereign debt could be eroded further, raising the risk of further downgrades by rating agencies. Such a scenario could lead to higher volatility and reduced liquidity in the market for French sovereign debt, which could potentially be amplified by investors pursuing short-term and procyclical strategies – notably hedge funds. The latter are particularly active in repo markets where they deploy highly leveraged arbitrage strategies involving OATs. 

The thematic chapter in this report analyses the functioning of the repo market and the emergence of vulnerabilities linked to the growing presence of hedge funds. The trend is heightening the risk of sudden price fluctuations and creating channels of contagion to the broader financial system in the event of a liquidity shock. These vulnerabilities are being exacerbated by the concentration of transactions among a small number of market participants, the predominance of very short maturities and the use of risk management tools (haircuts and margin calls) that are sometimes insufficient and can prove procyclical in the event of a shock.

A significant deterioration in sovereign financing conditions could spill over to French banks and corporates. Given that sovereign debt issuance is expected to remain high in the euro area in 2026, particularly in France and Germany, it is essential to ensure a sustainable debt trajectory to maintain sound financing conditions for all economic actors.

In June, the inflationary environment was already weighing on French government finances. Various spending items are indexed to inflation, including pensions and family benefits. Moreover, around a tenth of France’s debt takes the form of indexed bonds, meaning that part of the debt burden is directly tied to inflation. On the revenue side, any slowdown in consumption tends to reduce government tax receipts – both directly, as in the case of fuel duties which depend on the volumes sold, and more broadly via a decline in activity. Although financial aid for households and businesses remained targeted at the start of June and has only pushed up government expenditure very moderately, the war in Iran will have a non-negligible impact on the budget deficit in 2026.

Risky asset markets, especially US equity markets, remain vulnerable to a sudden reversal in investor sentiment

The war in Iran triggered only a moderate and temporary correction in equity prices, and markets quickly recouped their losses. After falling markedly in the first four weeks of the conflict, equity markets subsequently recovered, with US technology stocks seeing particularly strong gains. Since equity markets – especially US indices – are still largely being driven by a small number of technology stocks, valuation ratios and market concentrations remain historically high. This means markets are particularly vulnerable to a sudden reversal in investor sentiment. A downward revision to the earnings outlook for technology stocks could trigger a disorderly correction, with potential spillovers to other markets. 

Investor appetite for US – and, to a lesser extent, European – corporate bonds also remains high. The fact that corporate credit spreads remain narrow, despite the geopolitical context and macroeconomic risks, could indicate that investors are underestimating the credit risk for certain borrowers. The European corporate debt market has absorbed a wave of large-scale fund-raising by the US technology sector. Between October 2025 and March 2026, nearly two-thirds of net euro-denominated corporate bond issuance was by companies domiciled in the United States.

The private credit market has expanded sharply over the past decade but experienced turbulence in early 2026. Concerns emerged in the first quarter about the quality of loans originated in the sector and funds’ high exposures to software firms. As a result, several large semi-liquid funds managed by US asset managers received significant redemption requests from retail investors. The sector’s growing exposure to the AI sector also makes it particularly vulnerable to downward revisions to expected revenues. AI therefore poses two types of risk: first, the potential negative impact if increasingly indebted AI firms underperform expectations; second, the risk of losses for private credit funds exposed to the software sector in the event of strong competition from AI. The relative opacity of private credit, and its growing concentration among a few large, international asset management firms, further heighten its vulnerability and underscore the need for greater transparency.

European and French financial institutions have limited direct exposure to private credit, but they could be affected if a shock was propagated to other asset classes. These exposures can take the form of bank loans, often secured by fund assets, while insurers may be exposed directly as investors in private credit funds. In Europe, under a narrow definition of private credit, these exposures account for only a small share of total assets for banks and insurers.

The deterioration in the international environment could pose a risk for small and medium-sized enterprises and low-income households

The negative supply shock caused by the geopolitical crisis is dragging on French growth. In its June 2026 macroeconomic projections, the Banque de France lowered its 2026 growth forecast from 0.9% to around 0.5%, citing a disappointing first quarter, a deterioration in the global environment and a resurgence of inflationary pressures. It presented several scenarios in its projections that are consistent with those published by the European Central Bank (ECB) for the Eurosystem on 11 June. In its “adverse” and “severe” scenarios, the path of oil and gas prices is based, respectively, on the 75th and 95th percentiles of the implied price distribution derived from options on energy futures. Both scenarios reflect a more protracted conflict, with stronger pressures on global oil and gas supplies that can no longer be mitigated by available reserves. The “favourable"’ scenario corresponds to a faster and steeper decline in energy prices compared with the assumptions in the baseline scenario. In the adverse scenario, France avoids slipping into recession over the full year 2026, with weak but positive growth of 0.3%. In the severe scenario, gross domestic product (GDP) remains flat in 2026 and then contracts slightly by 0.1% in 2027, while inflation rises significantly, reaching 4% in 2026 and 3.9% in 2027. Lastly, under the favourable scenario, the slightly faster fall in energy prices has positive effects on both activity and inflation.

French firms have demonstrated resilience to the successive shocks since 2020, but their high aggregate debt levels leave them particularly vulnerable to potential revenue shocks. Their debt-service-to-EBITDA (earnings before income tax, depreciation and amortisation) ratio increased in 2025 and remains higher than in the other main euro area countries. This gap reflects a higher consolidated-debt-to-GDP ratio for non-financial corporations (NFCs), and the fact that the rise in interest rates compared with 2021 has already been passed through to corporate balance sheets. 

Since early 2025, business failures have been mounting steadily and can no longer be attributed solely to a post-pandemic catch-up effect. Additional factors need to be considered, including higher energy prices and the trade war. The rise in failures is mainly concentrated among intermediate-sized enterprises and small and medium-sized enterprises (SMEs), while business creations remain largely driven by small enterprises, particularly micro-enterprises.

The French commercial real estate market showed signs of stabilising in 2025 but lost momentum again in early 2026. The sector is particularly sensitive to financing conditions, which affect economic agents’ investment capacity, and to economic activity, which influences rental demand. However, credit risk remains contained in the commercial real estate sector, due to a low default rate and the very limited share of these exposures in banks and insurers’ asset holdings. Moreover, liquidity pressures in real estate investment funds appear to be easing gradually.

Heightened macroeconomic uncertainty is weighing on the recovery in the residential real estate market. Household investment slowed in the first quarter of 2026, and rising household borrowing rates could continue to dampen demand for housing loans. The pick-up in French residential real estate prices is also less marked than in the rest of the euro area. This is in part linked to the prevalence of fixed-rate lending for house purchases in France, which creates a certain amount of inertia in the market that slowed the price falls when interest rates rose in 2022. Defaults on housing loans are continuing to rise at a moderate pace, reflecting the gradual increase in the unemployment rate since 2023 to its highest level since 2021.

Banks and insurers remain resilient in an uncertain environment

French banks benefit from diversified business models and limited exposure to those sectors most sensitive to fossil fuel prices. In the first quarter of 2026, they also appeared to have very limited exposure to counterparties in countries linked to the conflict in Iran. Household and corporate credit risk is rising, but French banks continue to report robust earnings growth and maintain strong solvency and liquidity positions. Their exposure to private credit also remains limited.

The insurance sector’s solvency position has improved and is well above regulatory requirements. Life insurance revaluation rates have been supported by higher investment returns and the mobilisation of profit-sharing reserves accumulated in previous years. These revaluations have made life insurance policies more attractive to savers, resulting in higher gross inflows and lower redemptions, pushing net inflows up to record highs. After deteriorating following the inflationary shock in 2022, underwriting profitability in the non-life segment improved in 2024 and 2025, returning towards levels last seen before the high inflation episode. Insurers remain only marginally exposed to private credit, mainly through their diversified general account holdings.

The materialisation of geopolitical risks is increasing structural risks, particularly cyber risk and energy dependency

Cyber risk is being intensified by the Middle East conflict and the growing threat of hybrid warfare. The Autorité de contrôle prudentiel et de résolution (ACPR – Prudential Supervision and Resolution Authority) and the Banque de France have not observed an increase in the number of cyberattacks targeting the financial sector as a direct result of current geopolitical tensions. Nevertheless, the geopolitical component of cyber risk remains elevated, even though it has only materialised to a limited extent in France to date. The emergence of advanced AI models (or “frontier AI”), which are capable of quickly identifying critical vulnerabilities and can be used for malicious purposes, represents a structural shift that calls for adaptation by financial institutions.

Finally, the initial consequences of the war in Iran are a reminder that Europe’s dependence on imported fossil fuels creates inflationary pressures and financial instability risks. Over the past decade, France has taken significant steps to decarbonise its economy; however, it remains reliant both on fossil fuels and on the countries that export them. These dependencies expose it to geopolitical uncertainties that can generate substantial economic and financial risks. To reduce these dependencies and limit the risks, France is pursuing efforts to diversify its energy supplies and decarbonise its economy.