French bank share prices fell on Monday, as investors feared the consequences of a censure by the Michel Barnier government, which would add a risk premium to French financial stocks.

BNP Paribas lost 2.05% at around 3:33 pm GMT, Crédit Agricole SA 1.93% and Société Générale 3.25%, while the CAC 40 was down 0.61% and European banks 0.52%.

A vote of no-confidence in Michel Barnier's government - a scenario that is becoming increasingly likely with the rallying of the Rassemblement National to the left-wing opposition - is heightening fears about the sustainability of France's public debt and its impact on interest rates and economic activity as a whole.

"There are several transmission channels from the political situation to the banks," said Jérôme Legras, head of research at financial sector specialist Axiom Alternative Investments. In addition to the banking sector's greater sensitivity to market variations, the economist mentioned "the fairly significant connotation of systemic risk on banks and exposure to sovereign debt, a depreciation of which could have balance sheet consequences for banks".

The yield differential between the German Bund and the French 10-year OAT widened further on Monday after Michel Barnier committed his government to the draft Social Security budget. It climbed to 87.4 basis points at around 3:43 pm GMT.

"Jérôme Legras added: "The market movements currently observed on French banks almost exclusively reflect a risk premium demanded by investors, rather than a concrete reality on the income statement. Most of the sovereign bonds held by banks, he explained, do not fall into the accounting category subject to changes in market value.

"The market often thinks the same way: rates are going up, which is not good for financial stocks. But there is some truth in this reasoning through the transmission of political uncertainties and rising rates to the macroeconomy", agreed Catherine Garrigues, Head of Convictions/SRI Equity Strategy at Allianz GI.

In her opinion, what is happening in France is very worrying, as the government's censure is having an impact on the country's fiscal policy, which is worrying the markets and postponing or reducing investment projects by companies and households, putting a strain on the main activity of French banks, i.e. lending.

(Written by Bertrand De Meyer, edited by Kate Entringer)