Regulation / banks

Central bank purchasing programs – their benefits and their side effects

When central banks buy bonds, borrowers and investors in high-risk asset classes such as shares both benefit. As borrowers, companies naturally also benefit from such programs: they make it easier and cheaper to finance takeovers, and the size of the takeovers increases. In addition, less profitable companies are subsidized by the low interest rates they have to pay. Such extremely low yields in the corporate sector thus result in a gradual process of concentration, average company size tends to increase in individual sectors and market forces are sapped accordingly. But the greatest beneficiary of such programs is the state. States are the biggest borrowers and they accordingly also enjoy the biggest interest-rate savings. In addition, it also becomes very easy for countries to place their bonds as the central bank is always there to act as backstop buyer. These two effects reduce countries’ incentive to implement reforms. Accordingly, it comes…

„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…

Monetary policy is changing

Since the global financial crisis monetary policy around the globe has pointed in only one direction: expansion. What started as a traditional (albeit aggressive) easing cycle soon turned into a deluge of unorthodox measures as one crisis followed closely on the heels of another. But times are changing. There are clearly mounting signs that a world-wide process of monetary-policy normalization is beginning. It has recently become ever more apparent how much concern there now is about missing the right time for a trend reversal and thus, in the worst case, about triggering renewed turbulence in the financial markets. The US central bank has pioneered the new monetary-policy orientation. But the ECB has also embarked on the path towards normalizing its monetary policy, albeit extremely hesitantly. Even the British central bank is thinking out aloud about slowly entering the exit despite all the concern about Brexit. There are undoubtedly still central…

Italy bails out banks with taxpayers’ money

Although it was already apparent in the last few days, it is now official since Sunday evening: the crisis-ridden banks – Veneto Banca and Banca Popolare di Vicenza – will be liquidated and wound up under Italian insolvency law. The EU Commission had already approved the plan yesterday evening. Given that the two institutions, which were classified by the ECB as failing or likely to fail, are not systemically important banks, they can be wound up under national insolvency legislation. The Italian government is likely to score the solution found as a political success. It would have been a disaster for the social democrats, who were seen to be foundering in the polls, if private investors had incurred losses. Both the left-wing and right-wing populists could have exploited this to their benefit in the forthcoming election campaign. However, political success comes at a price. The entire rescue package corresponds to…

Decline in number of residential construction permits issued in Germany – a healthy development

As the Federal Office of Statistics has announced, the number of residential construction permits in Germany has fallen by 6.6 percent in the first quarter of this year and now stands at 79,200 units. This is the first decline since the first quarter of 2012. Most affected are single-family dwellings. Here, the number of newly issued permits slumped by 15.3 percent. The still high level of construction permits and the bottlenecks in the construction industry continue to point to a slightly rising number of house completions for the time being and to demand for mortgage loans remaining high. Even if the recent fall consolidates into a new trend, there is no reason for panic. A collapse in house building is not to be expected, but rather a cushioned fall from current levels, which are meanwhile high.  

ECB’s monetary policy is heightening the pressure on banks

The monetary measures of the European Central Bank (ECB) are increasingly burdening the profits of banks in Germany and Europe. This is revealed in the ECB’s Bank Lending Survey for April on the lending business of banks. While the extended asset purchasing programme of the Eurosystem has directly or indirectly improved the liquidity position and financing conditions of banks in the last six months, the improvements in Germany resulted primarily from clients‘ cash asset reallocations into bank deposits and to a lesser extent from the sale of banks‘ own securities. However, a significant majority of the institutions surveyed in Europe also reported contracting net interest margins and a deterioration in the overall earnings situation of banks. The reduction in lending rates, boosted by the asset purchasing programme, has particularly contributed to this development. The average European effective interest rate on new business with corporate clients fell in February to a…

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