29 July 2013Asset managementThe public’s attitude to banks is a bit like their attitude torain. Both are necessary, but we still like to complain aboutthem. When there is too much rain, you get a flood, justas occurred in eastern parts of Europe in June. When thereis too much banking, you get a flood of liquidity, just asoccurred in the run-up to the financial crisis.In the Eurozone the banking problem is not one of flooding,but rather one of drought. In the US larger firms can relyon the credit market for financing, and the banks thatprovide the rest are in healthier shape than their Europeancounterparts. In Europe banks are responsible for almost allexternal financing for firms. Without bank liquidity, the nextcrop of firms and investments will not take root.In the last two years, lending standards in the Eurozonehave been resiliently tight (see
, 20 May 2013).Numerous factors have constrained bank lending in theEurozone. The biggest factor has been higher borrowingcosts for banks because of concerns over their balancesheets and the balance sheets of the sovereigns that standbehind them. Pessimism about the economic outlookdiscourages banks from lending as well; why lend money toa company that you think might fail due to lack of demand?As if this wasn’t enough to hold things back, extra capitalrules for banks require them to increase their capital ratioseither by finding more capital or by shrinking their balancesheets. When new capital was hard to come by, most banksinstead shrank their balance sheets by reducing the numberof loans that they made (see
, 2 April 2013).After a long dry spell, there are finally some hopeful signsfor Eurozone bank lending. The European Central Bank’sQ2 Bank Lending Survey showed that credit conditions inthe Eurozone are stabilising as fewer banks are tighteningtheir credit standards for loans to firms, and virtually allthe banks expect to keep standards unchanged in Q3 (seechart 1). This may not sound that great, but banks haveon average been tightening credit standards every quartersince the middle of 2007. Just as importantly, the banks areexpecting demand from firms for loans to increase.
Senior Fixed Income EconomistUBS Global Asset Management email@example.com
Fixed Income EconomistUBS Global Asset Managementgianluca.firstname.lastname@example.org
Source: European Central Bank
Chart 1: Forecast of rain
Net percentage of banks reporting looser credit standards for firmsor stronger demand for credit from firms, %
Reporting stronger credit demand from ﬁrms
Expected credit standardsExpected demand
Loosening (tightening) of credit standards to ﬁrms
There has been somewhat of a drought in Eurozone banklending in the last two years. Higher borrowing costsfor banks, pessimism about the economic outlook andregulation on bank capital reserves have all constrainedbank lending. However, after a long dry spell, thereare finally some hopeful signs as fewer banks reportedtightening their credit standards for loans in the secondquarter. But looking at the breakdown across the differentcountries shows that credit availability is very mixed. It willstill take a lot to normalise the banking environment forEurozone firms.