Banking Turmoil: The Return of Credit Risk Amid Macroeconomic Uncertainty

Isolated Losses but Symptomatic

Last week, two regional American banks—Zions Bancorp and Western Alliance—disclosed losses on certain loan portfolios, amounting to approximately $50 million for the former in the third quarter of 2025. Some of these loans are now suspected of fraud, according to information reported by Bloomberg. While these cases remain isolated for the moment, they reignite concerns about underestimated credit risk within the US banking system, already weakened by the economic slowdown and defaults by heavily indebted companies such as First Brands or Tricolor, which have recently filed for bankruptcy.

These incidents have triggered a resurgence of volatility in credit markets and banking stocks. Several major players, including Jefferies and UBS, have acknowledged being indirectly affected by these failures. For Jamie Dimon, CEO of JP Morgan, the message is clear: « When you see one cockroach, there are probably others. Everyone needs to be warned. » The warning is significant. The US private credit market now reaches nearly $2 trillion in outstanding credit, according to estimates from the US Treasury. This rapid growth, often outside the traditional regulatory framework, fuels concerns about the transparency and quality of the collateral used.

The Fed on Alert, European Banks Under Pressure

In this tense climate, the Federal Reserve is closely monitoring interbank liquidity indicators, particularly the rise in the Secured Overnight Financing Rate (SOFR) and the increased use of the Standing Repo Facility, its permanent refinancing mechanism. So far, reported losses remain limited, but analysts fear a domino effect if several regional institutions were to announce simultaneous write-downs.

A scenario the Fed wants to avoid at all costs. According to sources cited by the Financial Times, it does not rule out strengthening its liquidity support measures or even temporarily halting the reduction of its balance sheet, an issue discussed the previous week by Jerome Powell. He suggested that further cuts to key interest rates could occur before the end of the year, despite differences within the Federal Open Market Committee on the strategy to adopt. Meanwhile, major US banks are striving to reassure. BlackRock, Goldman Sachs, and Citigroup emphasize the diversification of their portfolios and the quality of the associated collateral. However, confidence remains fragile, especially as the sector is still shaped by the bank failures of 2023.

A Political and Fiscal Context Still Under Pressure

On the domestic front, the French political climate presents a more tranquil contrast. The two no-confidence motions against Sébastien Lecornu's government have been rejected after concessions were made to the Socialist Party regarding the 2026 budget. These concessions include a relaxation of the budgetary trajectory, a pause on pension reform until 2027, and a promise not to invoke Article 49.3. This compromise has led to a slight narrowing of the OAT-Bund spread, now around 78 basis points, indicating a temporary return of confidence.

However, the situation remains fragile. The recent downgrade of France’s credit rating by S&P from AA- to A+ had only a limited impact on the markets, but it highlights the country's reduced budgetary leeway. In the long term, adopting the 2026 budget could prove challenging, balancing financial discipline with increasing social pressures. Meanwhile, diplomatic signals are becoming more positive: the upcoming meeting between Donald Trump and Xi Jinping, scheduled for two weeks from now, offers hope for a calming of the global trade climate, especially as China's third-quarter GDP slightly missed the 5% mark. Investors remain cautious: with banking turbulences, controlled yet persistent inflation, and uncertain monetary policy, fall 2025 is shaping up to be a pivotal period for rate and credit markets.