Euro zone bank lending “glacial” but improving

November 26, 2015

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The European Central Bank is starting to see a bit of what it wants, just as it’s dropped probably the heaviest hints ever for an increase in monetary easing.

Euro zone bank lending – primarily to households but with lending to companies trailing not too far behind – accelerated at its fastest pace in nearly four years in October.

For a central bank that has thrown many hundreds of billions of euros in temporary cash at the banking system to increase bank lending, this news, published by itself, undoubtedly is good.

The trouble is, euro zone bank lending four years ago wasn’t particularly great. You have to go back to before the financial crisis to find anything approaching strong rates of lending to non-financial corporations.

M3 and lending

There isn’t anything in the way of expectations to go by, either. While 28 economists were able to provide a forecast for annual growth in M3 money supply, not a single one was able (or perhaps willing) to provide a prediction for growth in lending to non-financial corporations.

This, despite it being one of the key measures of success for central bank policy that has been trained on stopping banks from just parking their cash and instead putting it to good use.

Euro zone banks are continuing to leave about 160 billion euros in overnight deposits with the ECB.

Part of this unimpressive lending performance has to do with relatively high levels of company debt compared with households, which have deleveraged to a greater extent since the financial crisis and are now taking advantage of zero rates to buy houses.

But much of it has to do with a deficit of demand and plenty of slack in the economy.

When the euro zone was last reporting strong bank lending to companies, in 2008, the euro zone unemployment rate was around 7 percent, not above 10 percent where it is now.

There is also the challenge of wildly varying rates of lending growth across the euro zone — solid in France, strong in Belgium, modest and steady in Germany. But shrinkage in lending by banks in Italy and Greece accelerated.

Teunis Brosens at ING wrote:

The Netherlands continues to be an outlier among the core countries, with bank lending still negative (-1.4%YoY), despite a revival of domestic demand as housing optimism has returned. In most of Southern Europe, deleveraging is ongoing – although interestingly, deleveraging in the Spanish business sector has softened, with bank lending to businesses improving to -0.7%YoY from -2.1%YoY previously.

Overall, today’s M3-report shows that the credit environment in the Euro zone continues to improve, albeit at a glacial pace.

Jack Allen at Capital Economics wrote:

Lending growth remains slow, particularly to firms.

Indeed, looking at the so-called “credit impulse”, which puts credit on a comparable basis with economic growth by looking at the change in the flow of credit to the private sector, the data point to annual GDP growth of around 2%. While the latest ECB Bank Lending Survey suggested that QE had led to an increase in bank lending, this credit impulse is still weaker than before QE began.

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