Eurozone lending hit by higher rates; ECB flags risks from funds running into trouble
BANK lending in the eurozone slowed again in April, supporting the case for careful interest-rate hikes in the months ahead as weak growth and surging borrowing costs are already denting demand for credit, European Central Bank (ECB) data showed on Tuesday (May 30).
The ECB has raised rates at the fastest pace on record over the past year to combat high inflation, weakening demand for bank credit and slowing everything from the housing market to construction and consumer spending.
Lending growth to businesses in the 20-nation currency bloc slowed to 4.6 per cent in April from 5.2 per cent a month earlier. Household credit growth dipped to 2.5 per cent from 2.9 per cent, with the banking turmoil of March also likely proving a drag.
“April’s weak monetary data adds to a sluggish economic outlook for the rest of 2023 and provides an argument for the doves at the European Central Bank’s coming meetings,” said ING economist Bert Colijn.
Many policymakers and financial investors anticipate another two ECB rate hikes in the coming months, taking the deposit rate to 3.75 per cent by July. But the jury is still out on whether further steps will be needed.
While headline inflation has come down sharply, underlying price growth is still accelerating on robust demand for services, a sector normally less affected by rate hikes.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Banks have already warned they expect to tighten access to credit even further this quarter, responding to higher funding costs and general caution, given sluggish economic growth.
The monthly flow of loans to households was a mere two billion euros in April, while in the case of businesses, it was a negative two billion euros.
Growth in the M3 measure of money circulating in the eurozone slowed to 1.9 per cent from 2.5 per cent, coming below expectations for 2.1 per cent in a Reuters survey.
Also on Tuesday, the ECB warned that the eurozone’s top banks could take a hit if their financial clients, such as funds, insurers and clearing houses, withdraw their deposits or otherwise run into trouble.
The ECB study looked into the risk of spillovers from so-called shadow banks – for instance funds and other financial companies that provide funding in one form or another – to traditional lenders, and vice versa.
It found the exposure both in terms of bank assets, such as loans, and liabilities, such as deposits, is concentrated in the eurozone’s top 13 lenders, including its eight globally important banks.
The biggest risk it identified was that posed by shadow banks withdrawing their funds, such as deposits and repurchase agreements. These account for 13 per cent of all traditional banks’ liabilities – or more for larger banks.
This could happen if the shadow banks – or non-bank financial intermediaries (NBFI) in the regulators’ jargon – are themselves hit by outflows or lost confidence in a bank.
“This funding may be highly sensitive to the credit quality of the recipient banks and can amplify the funding pressures faced by banks if the soundness of their fundamentals has been called into question,” the ECB said.
Other spillover channels include forced sales of assets by shadow banks, which would cause losses at traditional banks because their portfolios often overlap or are correlated, the ECB said.
It added that distress at systemically important lenders would also spell trouble for shadow banks.
“If one or a group of such (banks) were to become distressed, there would probably be substantial ramifications in terms of the ability of significant parts of the NBFI sector to manage liquidity and market risks,” it said.
The ECB, which used confidential data it obtained in its role as the eurozone’s top banking watchdog, did not name any firm in the report.
The eurozone’s global systemically important banks are BNP Paribas, Deutsche Bank, BPCE, Credit Agricole, ING, Santander, Societe Generale and UniCredit.
Share with us your feedback on BT's products and services
