Euro zone bank lending: not as bad isn’t good enough

November 27, 2014

More cheap loans to banks was the European Central Bank’s answer to boost bank lending to private businesses in the euro zone. But the latest data show credit growth is still contracting and the best some economists came up with is that at least it’s not as bad as it was a year ago when it was shrinking faster.

A month after 82.6 billion euros — more than the Fed was injecting into the economy every month through its bond purchases last year — was flushed into banks in the first operation of the ECB’s new cash loans, net lending to private firms contracted at an annual rate of 1.1 percent.

Loredana Federico, economist at Unicredit, explained the disappointing figures this way:

The moderation in the pace of the decline in lending to the private sector continued although at a very gradual pace. The good news is that we are now definitely far from the cyclical low of -2.3% hit in December 2013. This trend has mainly been driven by an easing in the pace of contraction in corporate lending, while household lending still hovering around zero.

ECB lending growth


ECB President Mario Draghi said on Thursday we need to wait longer to see real results.

We already have indications that this credit easing package is delivering tangible benefits, but time is needed for the positive effects to fully materialise.

But the buzz surrounding the new long-term loans, known as TLTROs, has flat-lined after a poor take-up in the September tender. Expectations for how much cash banks will take in the December operation have also been consistently lowered since then.

Economists and euro money market traders in the latest Reuters poll forecast banks to borrow just 150 billion euros at that tender. That would bring the total to 232.6 billion euros, well short of the roughly 400 billion euros that was made available through the two tenders.

A euro money market trader at a large dealer said:

Lack of demand for TLTROs are a clear sign it will do almost nothing to boost lending substantially and so will be ineffective in bringing inflation back up.

So the question is: other than a sudden rush of demand for credit — which is being offered at the cheapest rates ever — what will cause bank lending to rise?

Peter Vanden Houte, economist at ING Financial Markets, wrote:

While the credit supply channel has now been more or less restored, it doesn’t necessarily guarantee a revival in credit demand, which remained lackluster until now.

Some are more optimistic.

Jeff Weniger, an investment strategist and portfolio manager at BMO Global Asset Management, reckons the good news is just around the corner:

The ECB survey data (chart below) has entered the expansion zone, so I suspect your first exhibit will get above the zero bound in short order.

Euro zone credit standards





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