Monthly Report: euro-area lending on the mend

Bank lending to non-financial corporations in the euro area has been on the mend over the past two years, according to an article in the Bundesbank’s Monthly Report for September 2015. Non-financial corporations are all enterprises other than banks, insurance undertakings and other financial intermediaries.

The Bundesbank's economists analysed lending activity in the four major countries of the euro area, and found that credit supply and demand were no longer as tight as it had been after the onset of the financial crisis in 2008 and following the escalation of the sovereign debt crisis which swept through the euro area in 2011 and 2012.

The researchers write that the improved economic backdrop is one of the main reasons why bank lending to enterprises has bounced back in Germany and France and is not quite as tight in Italy and Spain.

French businesses more reliant on loans

In July 2015, credit growth in Germany was up 0.6% on the year but 5.5% higher in France. The Bundesbank's economists believe that France posted a higher growth rate because French non-financial corporations have for years been more reliant than their German counterparts on external financing to fund their capital formation. Demand among German businesses was more constrained on account of their ample supply of internal financing.

Supply of credit no longer quite as tight

In the same period, credit growth was 2.4% down year-on-year in Spain, and 0.9% lower in Italy. However, the Bundesbank's economists found that in both countries the negative factors which had particularly prompted banks to exercise lending constraint during the crisis had diminished. One negative factor that dragged on Spanish and Italian credit institutions for a time was their substantial sovereign bond exposures, which made it very costly for them to procure the funds they needed to finance loans.

The Monthly Report also notes the instrumental role played by efforts to scale back the high levels of corporate debt, much of which dates back to pre-crisis days. Having made progress in easing their debt burdens, businesses now had scope to take out fresh loans.

Non-performing loans drag on earnings

The Bundesbank's economists identified the non-performing loans still lingering in the books of Spanish and Italian banks as a source of risk. "High levels of non-performing loans continue to drag on earnings across the crisis countries' banking systems," they write, advising banks to clear their balance sheets of both realised and anticipated losses. They add that new regulations are needed to make banks more resilient, such as requiring them to back their sovereign bond exposures with capital.