ECB Bond Purchases Will Fail to Boost Bank Lending, Fitch Says

The European Central Bank’s planned government bond purchases will probably fail to boost bank profits and credit supply, according to Fitch Ratings.

Quantitative easing “is unlikely to stimulate lending,” Fitch analysts led by Bridget Gandy said in a report from London on Monday. “The economic outlook is still fragile, so demand for credit is likely to remain subdued, and tighter regulatory requirements are making loan growth more difficult for banks.”

The ECB pledged last week to buy government bonds as part of a 1.1 trillion-euro ($1.24 trillion) asset-purchase program to revive the near-stagnant euro-area economy. The effect of that historic plan will probably be temporary unless governments pursue change to stoke growth and banks free up their balance sheets for lending, according to Fitch.

International standards known as Basel III require banks to hold an increasing amount of capital to account for the risk of souring loans, Fitch said. Lenders must also build reserves to meet other rules designed to make them strong enough to weather financial stress without asking taxpayers for aid, it said.

While some banks may be able to generate more trading revenue, that will probably be offset by lower debt yields, “so the balance is likely to be neutral or even slightly negative for profitability,” the Fitch analysts wrote.

Moody’s Investors Service expects the ECB’s purchases to have a “positive, albeit limited” effect on growth as banks set aside funds to meet restrictions on leverage, the ratings company said last week.

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