How sensitive are French banks to Sovereign ratings and spreads ?

What if France’s political and fiscal instability pressure were to come back before year-end ? What consequences for French banks’ ratings and spreads?As the pressure has been mounting again on the French government (see France 2026 Budget: Impossible mission II from our economists) regarding the 2026 budget, the likelihood of a French sovereign rating downgrade has recently increased.Against this backdrop, we are exploring hereafter the relationships between i/ France’s ratings and French Banks’ ones, ii/ France sovereign spreads/CDS and French banks’ spreads/CDSGood news is that a one-notch downgrade of France’s rating would hardly impact French banks’ ratings, given that Moody’s is the only remaining rating agency applying government support. Therefore, only FRLBP would be at risk with S&P and Fitch, while a couple of French banks would see their Senior Preferred debt ratings downgraded by Moody’s. SNP, T2 and AT1 ratings would most likely be fully unaffected.However, watch out for potential second-round effects (BICRA by S&P…) and above all spread effectsIndeed, French Banks’ credits are exposed to the French sovereign through two main channelsTheir own credit ratings that are to some extent linked to the Sovereign’sThe sensitivity of their credit spreads to OAT moves in times of volatility (eg June 24)Although the French banks spreads’ sensitivity to sovereign’s spreads has declined, it remains significant and tends to increase in times of stress on sovereigns’ spreads. Moreover, the current spread pick-up for French banks SP vs govies is lower than many of its European counterparts, particularly on 2032-2034 maturities, making them most at risk of repricing.