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French Banks Warned Heavy Corporate Debt Creates a Systemic Risk

French Banks Warned Heavy Corporate Debt Creates a Systemic Risk

Risks in France’s financial system have reached systemic levels and are set to rise further after the coronavirus shuttered the economy and firms loaded up on debt, according to the central bank.

The sudden spike in corporate debt exposes firms to a “heightened solvency risk” that could later hurt asset quality and bank profitability, the Bank of France said Tuesday in its twice yearly report on financial risks. In its last report before the crisis, the institution already flagged relatively high corporate debt levels.

French Banks Warned Heavy Corporate Debt Creates a Systemic Risk

The central bank also said market volatility could return with uncertainty over the strength of the economic recovery and a rise in defaults. Banks’ profitability may suffer with rates now expected to remain lower for longer.

“The crisis exacerbates already identified risks linked to the trend of increasing debt of households and businesses in France,” the Bank of France said.

In a recent note, Barclay’s downgraded BNP Paribas SA and Societe Generale SA to underweight, saying their consumer credit exposure could drive upcoming impairments and has the potential to cut their respective earnings estimate by 30% and 34%.

Unlike in 2008, French banks’ CET1 ratios are at historically high levels, allowing them to be in a strong position to absorb upcoming default-induced losses and finance the economic recovery, according to the central bank. In addition, the cancellation of their dividends for the year, on top of the eased capital requirements decided by regulators, is strengthening their positions further.

Lockdown Fallout

The warnings underscore the longer-term risks for France’s economy from the lockdown of activity and emergency moves to flood the financial system with debt. The government has already granted over 100 billion euros ($113 billion) of loan guarantees for companies, making the country one of the biggest users of the measure.

“Controlling the debt of businesses, households and public finances, will be a decisive objective, as much on a macroeconomic level as for financial stability,” the Bank of France said.

Since its last report in December, the Bank of France revised up its assessment of risks related to markets, low rates and debt to “systemic” from “high.” For markets and financial intermediation, the central bank said risks are rising in the six months.

©2020 Bloomberg L.P.