As can be seen from the ECB’s July Euro Area Bank Lending Survey, the banks in the Euro area still expect increasing credit demand. Although the number of more optimistic banks has shrunk somewhat compared to April, they are nevertheless still clearly in the majority. Above all, the banks take a positive view of credit demand from enterprises and households. Nor do they plan to tighten their credit standards. That sounds good. So is there hope that the upturn in bank lending that is gradually emerging will pick up momentum and stimulate investment in the economy? Ultimately, this is what the ECB’s very expansionary monetary policy aims to achieve.
A closer look at the statistics shows that the inundation of very cheap central bank funds has not been very efficient so far: while the volume of loans granted by commercial banks “to Euro area non-financial corporations” grew a considerable 3.1 per cent from the end of May 2015 to the end of May 2016, the volume of “loans to enterprises and households” increased by only 0.6 per cent whereas “loans to general government” virtually exploded at +11.9 per cent. One reason for the extreme differences is to be found in the broad statistical definition of “loans to non-financial corporations” which include not only book credits but also the provision of funds in the form of securities. And indeed, the volume of government bonds purchased by the banks increased by 17.8 per cent while book credits to enterprises increased by barely 0.3 per cent.
There are many reasons why lending to enterprises is growing so slowly. In Germany the main reason is the weak credit demand. Here, companies are benefiting from their good cash flows, which make it easier for them to finance their investments themselves. In Southern Europe supply aspects play a greater role: admittedly, the ECB ensures that adequate funds are basically available in the market and that refinancing channels are open to the banks. However, several banks in Italy and other countries are not yet in a position to extend their lending business significantly because the healing process after the crisis is not over yet. The main problems are “bad loans.” Although the share of doubtful and non-performing loans has been reduced somewhat recently, the situation still remains extremely strained. Basically demand for credit is high, but in Southern Europe there is a lack of credit demand with acceptable risks. This will emerge only gradually as the economic upswing firms.
Despite the positive signals from the Bank Lending Survey, lending in the Euro area is still picking up only slowly. On the other hand, the banks’ government bond portfolios are growing. The ECB’s ability to rapidly ramp up investment in the economy by way of lending remains limited. The current development shows that there is no alternative to restoring the health of the banking sector on a sustainable basis and to effective economic policy reforms.