Europe: When $625 Billion Just Isn't Enough
Banks are hoarding rather than lending out the European Central Bank’s record €489 billion ($625 billion) injection into the banking system, thwarting attempts by policymakers to avert a credit crunch in the region. Almost all the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank, ECB data show. Barclays Capital estimates firms used €296 billion of the Dec. 21 three-year loans to pay off shorter-term loans from the ECB that were maturing. That left €193 billion of money for the financial system. Overnight deposits with the ECB have jumped by more than €260 billion since the loans, reaching a record half-trillion euros in mid-January, suggesting the funds haven’t so far reached customers.
European officials want banks to keep lending to companies and individuals. They also have imposed rules that require banks to raise an additional €114.7 billion of core capital—common stock and retained earnings—by June to help them weather the deepening sovereign debt crisis. While banks could meet the new requirements by selling more stock to investors, they can also comply by shrinking the amount of loans they have outstanding.
Lenders across Europe have vowed to trim at least €950 billion in loans from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg. With banks under pressure to shore up their finances, and Europe’s economy weak, Philippe Waechter, chief economist at Natixis Asset Management in Paris, says “it’s illusory to think that the measure will translate into credit generation.”
Instead, banks will use most of the three-year ECB loans, along with a follow-up round the central bank will offer on Feb. 28, to meet their own refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group say. “The ECB loans will largely be used to pre-fund 2012’s and some of 2013’s bank refinancing needs, but it will not stimulate lending,” says Huw van Steenis of Morgan Stanley in London. They will “just stop it falling off precipitously.”
Bank lending plays a bigger role in Europe than in the U.S., where companies rely more on selling corporate bonds than on borrowing. Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. The World Bank forecasts that the euro area economy will shrink by 0.3 percent in 2012, compared with a previous estimate of 1.8 percent growth.
The volume of loans to households and companies in the 17-nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses, and raise equity to boost core capital before resorting to cuts in lending.
For their part, bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows. “All banks I talk to keep lending to small- and medium-size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9.
Even so, companies across Europe say credit is tightening. In France, the majority of company treasurers responding to a December survey by the French Association of Corporate Treasurers said obtaining bank financing was “as difficult as at the end of 2008” after Lehman Brothers collapsed. Lending in Spain shrank by 2.9 percent in November from the previous year, following a 2.5 percent decline in October. Lending to businesses and consumers in November grew at the weakest pace in a year, the Bank of Italy said on Jan. 11.
Draghi has defended the loan program, saying on Jan. 16 that “we have avoided a major credit crunch, even though in some parts of the area this credit crunch” is “already on its way.” The combination of banks’ long-term financing needs and Europe’s deteriorating economy means lending is bound to decrease, says Alberto Gallo, head of European credit strategy at RBS. Says Gallo: “It’s what I call the double punch.”