Loan markets adjust for weakening growth – anticyclical capital buffer counterproductive

As the ECB’s current survey of Euroland banks shows, corporate demand for loans held steady in Q1 2019 and the banks also hardly changed their loan approval standards, if at all. By contrast, demand for private housing construction loans continued to grow thanks to the low interest rates and banks tightened their approval guidelines for property financing. The majority of banks also expect to see rising demand in both categories in the coming months. Although the proportion of optimists has edged up marginally since the January survey, compared to 2018 there has been a massive decrease in the size of the majority of credit institutes who believe in growing demand for loans.

This is consistent with the growth trend in European loan markets, which has apparently reached its zenith. For corporate loans, this was the case as long ago as the end of September last year, when growth rose to 4.3 percent only to weaken again afterwards. Private mortgage loans have been heading down a growth track of around 3.2 percent over the last few months, without there being signs that growth would be boosted further.

Above all given the weaker economic growth in Germany and Europe, we expect that 2019 will see loan markets expand more slowly. In this setting, an anticyclical capital buffer for banks imposed by the macroprudential regulators, such as is currently being discussed, would be counterproductive. It is not just that in the light of nominal growth in loans of on average 3-4 percent there cannot yet be any talk of overheating. There is above all the danger that the measures would throttle those loan markets that have already adjusted for weakening growth and this could lead to credit bottlenecks that would be a heavy burden for the economy going forward.

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