Corporate and household debt worries supervisors

A report published on Monday May 23 by the Bank for International Settlements (BIS) sounds the alarm about the level of corporate and household debt, which could threaten the equilibrium of the financial system. For its part, the Banque de France (BDF) reports a rise in credit repayment incidents. Zoom in on the supervisors' concerns.

Borrowers more vulnerable to economic shocks

The Bank for International Settlements, in a recent report entitled " Private sector debt and financial stability", expresses concern about the risk to the financial system posed by high levels of corporate and household debt " in the uncertain macroeconomic context that has followed the COVID-19 pandemic and the start of the war in Ukraine ".

According to the BIS, an organization that describes itself as "the bank of central banks", household and corporate debt represents a threat to financial stability: when it reaches high levels, it increases the vulnerability of borrowers in the event of an economic shock.

The latter see their repayment capacity diminish, creating a " higher risk of financial tensions and economic slowdowns ".

Furthermore, " high private sector debt could also have an indirect impact on financial stability by hampering resource allocation, weakening aggregate demand or reducing the effectiveness of countercyclical policies ", says the BIS report.


An uncertain economic environment

In 2020, private sector debt, which includes households and non-financial companies, reached an all-time high of 170% of global GDP. Last year, the global economic recovery brought this level down slightly, but it remains high.

The uncertain economic climate is increasing the threat posed by debt to the financial system. Households could see their ability to repay mortgages undermined by the rapid rise in inflation, while companies are already facing a number of difficulties, such as rising interest rates and higher raw materials and energy prices.

In order to mitigate the risks associated with household and corporate debt, the BIS calls on supervisors to set aside sufficient reserves to deal with non-payments, and to use various tools such as debt ceilings, along the lines of the recommendations issued by the Haut Conseil de Stabilité Financière (High Council for Financial Stability) concerning the conditions for granting home loans.

For its part, the Banque de France recorded a rise in credit repayment incidents in April, up 10% year-on-year, with 64,065 entries in the national file of personal credit repayment incidents (FICP).

In addition, the institution recorded 60,759 entries in the Central Cheque Register (FCC), representing an 8% year-on-year increase in the number of people on file for issuing NSF cheques. These various payment incidents are up on 2021, but remain fewer in number than before the start of the pandemic in 2019.

However, inflation could put a strain on the repayment capacity of households, who have benefited from very low mortgage rates in 2021. At present, however, the French authorities remain confident, not least because of the surplus savings accumulated by households during the health crisis.