Euro zone bank lending to businesses still in the doldrums

June 26, 2015

About a year ago, the European Central Bank singled out a recovery in bank loans to private businesses as crucial to a lasting economic recovery – and even more crucially for the ECB, a rise in inflation which it targets at 2 percent.

A year on, following an injection of 384 billion euros of cheap money into the system by the central bank that is meant to be tied to an increase in bank lending, there has been no major improvement. (Keep in mind that is larger than the gross domestic product of Austria and slightly short of Belgium’s.)

After years of annual declines, aggregate private lending is back on the rise – just barely – up 0.5 percent in May on a year ago, and slightly more than a Reuters poll consensus of 0.4 percent. But that was driven by a 1.4 percent rise in mortgage lending. Lending to businesses declined by 0.3 percent. Even if you adjust the figures to account for sales and securitisations, all you get is a 0.1 percent increase in lending to businesses.

Recall that private lending before the financial crisis struck in 2008 was rising at double-digit rates – at much higher interest rates and without gobs of free central bank cash to incentivise loan officers to drum up business.

One could be forgiven for noting the link between a decent base rate of interest and commercial bank propensity to loan on money for a profit secured by deposits that pay a decent rate of interest. One could also be forgiven for noting that bank lending is primarily driven by demand for loans, not the supply of them.

Two-thirds of economists polled by Reuters last week said private lending growth in the euro zone will never return to the heady rates from before the financial crisis.

Still, many will applaud the small rise as a sign of success and some will tie it to the ECB’s sovereign bond buying programme, which the central bank launched in March of this year after no material signs of any improvement in lending or inflation based on the Targeted Long-Term Refinancing Operations (TLTROs) it announced around this time last year.

The trend is definitely an improving one — from a low base.

euro zone private lending

A more skeptical view is that the connection between zero interest rates coupled with quantitative easing and asset prices is far more clear than the one between giving incentives for banks to lend and actual lending.

After all, why would you loan money to a risky business with a small prospect for return when you can instead put it in the stock market and get a double-digit return in just a few months?

Broadly speaking, continental European housing markets have been in the doldrums for a long while, certainly not keeping pace with the kind of explosive rally in European stocks so far this year, which just happened to coincide with the launch of ECB quantitative easing.

Rapidly increasing mortgage lending and the price of homes at the expense of real lending to businesses that create jobs and pay people salaries so they can spend and help businesses thrive is not the way to get an economy on a long-term path to prosperity. Just ask Britain. Or the United States, before the crisis.

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