According to the European Central Bank, which released the results of its bank lending survey over the second quarter of this year, banks have finally started to lend more money to the corporate world. This could be seen as a clear positive, as money starts to circulate again, but this pick-up was mainly related due to those banks lowering their credit standards rather than companies being stronger and more optimistic about the future.
According to the official ECB results, the credit standards decreased by an average of 3% throughout the Eurozone, but there are large difference between some countries. Whilst the credit standards remained relatively stable (except for the occasional spike) in the main five countries, you can very clearly see the Italian banks are just fighting to give companies and households more money. In fact, the credit standard of the average Italian bank fell by 15% in the first quarter of this year, and 10% in the second quarter. This was fueled by competition concerns (the fear of losing business) as well as a lower net interest expense on the funds held in those banks.
It really looks like Italy hasn’t learned anything from the recent crisis in its financial sector as banks are mainly focusing on their status on the lending market rather than making sure it’s giving loans to companies and households which can actually afford to repay their debt. And it won’t stop here, as the banks who responded to the ECB survey have confirmed they expected to be in a position to ease their loan conditions by an additional 2% in the current quarter, making it even easier to get some money from the banks.
Despite all this action, most of the banks actually saw their net interest margins continue to shrink. So not only are they lending out more money (at a higher risk), they are also making less money on those loans. The same issue came up when analyzing the mortgage markets in the Eurozone. The credit standards eased by 4% in Q2 after having eased by 5% in the first quarter of this year, and this seems to be directly contradicting the ECB’s recent policy update requiring banks to limit mortgages to just 80% of the property value.
As you can see on the previous image, the main contributing factor to the reduced credit standards is once again the fear for competition… Banks aren’t lending more money because the economic situation has improved or because they are making more money on those loans, no. The main reason why they are lending more cash is simply because they don’t want their direct competition to run away with the ‘deal’.
Does this remind you of anything? It reminds us of the pre-2008/2009 era where the size of a bank’s balance sheet was much more important than running a good business. We see the exact same thing happening in the Eurozone again. The abundance of available money eases the credit standards as banks are fearing competition more than defaults…
And this results in a dangerous situation. The balance sheets are expanding whilst banks are making less money on the new loans which means the risk is increasing as the higher default possibilities are not being compensated by higher interest incomes to absorb potential shocks. This trend is already visible in Germany where several smaller banks are trying to merge to be able to cut costs. According to a recent article, 10% of the 1,500 small and medium-sized banks are already in merger discussions, and 50% (!) thinks this will lead to mergers in the near future.
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