Is Bank Tightening Ammo For ECB Stimulus?
The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.
Credit standards were tightened on loans to enterprises and on consumer credit, though housing loans remained unchanged, while demand for loans continued to increase across all sectors of the economy. The loan rejection rate across the bloc reached its highest level since the series began in 2015, though results obviously vary on a country-by-country basis. Enterprises in Italy unsurprisingly faced the most substantial tightening, followed by France. Tightening in the consumer lending sector was most pronounced among Spanish banks. Overall, the general tightening was driven by the banks’ perception of deterioration in the general economy, lower risk tolerances, an increase in their cost of funds, and balance sheet constraints.
It is not overly surprising that after a prolonged period of looser lending standards, we are now seeing some restraint. That said, at the end of 2018 it was US banks that were threatening to restrict lending, though that didn’t actually materialise and it is the euro area banks that have acted first.
While the details of the report are interesting, the impact they might have on the European Central Bank’s thinking is more so – after all, this is an ECB survey and its policymakers are unlikely to ignore it. When the outgoing president, Mario Draghi, spoke in Sintra in June, his dovish rhetoric took the ECB off the side-lines to such an extent that markets are implying a 35% chance of a rate cut at its monetary policy meeting tomorrow.
It might be premature to expect a cut that quickly, but the lending survey does provide the governing council with ammunition to support further action and in particular, with demand for lending still strong and banks citing cost of funds as a reason for pulling back, there is plenty of justification for the next round of targeted longer-term refinancing operations (TLTROs), due to start in September. The report also lends weight to the argument that further asset purchases could be required; the ECB will be loath to allow a tightening of lending conditions to tip the euro area into a recession, after all their work to repair the transmission mechanism and boost lending to the grass roots.
While the survey doesn’t suggest that banks have completely turned off the liquidity taps – indeed, the tightening seems relatively contained – the timing could prove to be opportune, and if the ECB needs another reason to act, this report could provide some helpful additional support.