„Bad loans“ impede loan granting and block up the monetary interest rate channel

On the whole, loan granting in the Eurozone has been developing well of late. For example, bank loans to corporate clients have risen from the end of May 2016 to the end of May 2017 by 2.4 percent. The recovery on lending markets is creating the impression that the monetary interest rate channel is flowing far more smoothly. However, considerable differences can be noted in the pace of loan development: contracting credit portfolios in a number of southern countries as well as Ireland and the Netherlands compare with strong lending growth in other countries.

Besides economic reasons, the extremely large portfolios of „bad loans“ in Greece, Cyprus, Portugal, Italy and Ireland are responsible for the weakness on national credit markets. Not only is this acting as a brake on investment; it is also blocking up the interest rate channel in the countries concerned. The ECB is therefore faced with a particularly challenging situation: while the monetary stimulus is having little impact in some countries, the leverage effect in other regional markets is all the greater – with the danger of overheating, particularly in the real estate area.

An acute need therefore exists to tackle the issue of bad loans not only because of the risks these pose for financial market stability but also to ensure a more consistent impact of monetary policy. The action plan just presented by the EU Finance Ministers is essentially heading in the right direction – towards swiftly but also sustainably reducing the volumes of non-performing loans. On the other hand, though, there is no need to introduce restrictive lending regulations throughout Europe and broader reporting obligations in order to achieve this. If tighter regulations are showered over Europe in all directions, they can cause more harm than good. There is concern that new regulations could unnecessarily impede loan granting, particularly in countries whose banks already apply very responsible loan granting policies and which do not have large volumes of bad debt. Instead, it would make more sense to carry out necessary corrections to the bank legislation and insolvency laws at national level in the countries concerned. Where necessary, the ECB or the national regulator should intervene in a given case before a bank accumulates a mountain of bad loans that it can no longer control.

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