2/1/2015: Credit and Growth after Financial Crises

Generally, we think of private sector deleveraging as being associated with lower investment by households and enterprises, lower consumption and lower output growth, leading to reduced rates of economic growth. However, one recent study (amongst a number of others) disputes this link.

Takats, Elod and Upper, Christian, "Credit and Growth after Financial Crises" (BIS Working Paper No. 416: http://ssrn.com/abstract=2375674) finds that "declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis. To obtain this result, we examine data from 39 financial crises, which -- as the current one -- were preceded by credit booms. In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery. In the third and fourth year, the correlation becomes statistically significant but remains small in economic terms. The lack of association between deleveraging and the speed of recovery does not seem to arise due to limited data. In fact, our data shows that increasing competitiveness, via exchange rate depreciations, is statistically and economically significantly associated with faster recoveries. Our results contradict the current consensus that private sector deleveraging is necessarily harmful for growth."

Which, of course, begs a question: how sound is banking sector 'return to normalcy at any cost' strategy for recovery? The question is non-trivial. Much of the ECB and EU-supported policies in the euro area periphery stressed the need for normalising credit operations in the economy. This thinking underpinned both the bailouts of the banks and the bailouts of their funders (bondholders and other lenders). It also underwrote the idea that although austerity triggered by banks bailouts was painful, restoration of credit flows is imperative to generating the recovery.

31/1/2014: January Credit Supply Conditions: Germany

Credit supply survey from Germany shows slight tightening in credit conditions, but continues to trend at the levels consistent with historically low credit constraints:

No surprise then that German policymakers are not to phased about the issues of credit supply... 

16/7/2013: Sovereign --> Private Risk Transmission

Is ECB policy too tight, about right or too loose? Well, the answer depends on many factors and metrics of choice. One metric is the cost of credit to the private sector - influenced in part by the ECB benchmark rates and in part by lending conditions and environments. The two forces are not independent of each other, however. More specifically, markets conditions (e.g. raging sovereign debt crisis in the euro area in the 2010-2011) can have impact on how monetary policy is transmitted. Put differently, in addition to banks --> sovereign transmission of risks, there is also sovereign --> private sector credit transmission mechanism.

"The Impact of the Sovereign Debt Crisis on Bank Lending Rates in the Euro Area" by Stefano Neri, June 20, 2013, Bank of Italy Occasional Paper No. 170  argues that "since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions". This resulted in constriction of "the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households." The study looks at the role that the sovereign markets tensions played in determining bank lending rates in the main euro-area countries. The author finds that sovereign debt markets tensions "have had a significant impact on the cost of [private sector] credit in the peripheral countries". More specifically, "if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011."

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284804

Few charts, showing simulated interest rates against actual rates. Note: red lines: actual data; blue dotted lines: simulated data starting from May 2010; blue dashed lines: simulated data starting from July 2011. Percentage points.

Interest rates on new loans to non-financial corporations: counterfactual simulations - peripheral countries:

30/4/2013: German credit keeps flowing to firms... & still there's no growth

Per German Ifo institute: " Credit constraints for German trade and industry edged downwards by 0.1 percentage points compared to March. Around a fifth of the companies surveyed reported a restrictive credit policy on the part of banks. Despite recent developments in the euro crisis, there have been no significant changes in the favourable financial environment of German companies.

"After last month's decrease, credit constraints for large and small firms rose again, with the latter experiencing the sharpest increase of 1.3 percent. Medium-sized companies reported an easing of credit constraints."

So things are going swimmingly in terms of credit for German enterprises. Ease of getting credit is about as good as 2005-2007 average - the years when German banks were not just lending with abandon to domestic enterprises, but were also funding massive property booms in Spain and Ireland... yet, for all the credit access, German growth is... tanking.

So much for the Irish (and other governments') thesis that if only credit flows were improved, growth will return...

23/08/2011: July Banks Survey - Euro area credit supply - Expectations

3 months forward expectations for lending conditions in Euro area, based on July 2011 data from the Banks Lending Survey run by ECB indicate that:

• Overall lending standards by Euro area banks are expected to tighten in 3 months following July 2011 by 9% of survey respondents - a number that has been rising now consecutively for 3 quarters.
  
• Overall lending standards are expected to ease by just 2% of survey respondents, down from 5% reporting back in April 2011.
• The respondents expect virtually no change in lending conditions for SMEs
• Lending to large enterprises is expected to tighten over the next 3 months by 10% of the banks surveyed, while only 3% are expecting lending to ease.

23/08/2011: July Banks Survey - Euro area credit supply - costs & controls

In the previous two posts I looked at the supply of credit to enterprises and the core drivers for changes in banks lending within the Euro area over the 3 months through July 2011. Here is a quick snapshot of what these changes mean on the ground.

The survey question this relates to is: Over the past three months, how have your bank's conditions and terms for approving loans or credit lines to enterprises changed?

• Bank margins on average loans to enterprises have tightened across 19% of the banks in 3 months through July 2011, while 18% of the banks reported easing of the average margins. Thus, overall margins remained largely unchanged across 57% of the banks - same as in 3 months to April 2011. However, in 3 months to April 2011, the percentage of the banks reporting easing of conditions on margins exceeded the percentage of the banks reporting tightening by 3 percentage points. This compares against zero percentage points differential in 3 months through July 2011 (note - these are adjusted percentages, compensating for respondents' errors).
• Number of the banks reporting tightening of margins on riskier loans exceeded numbers reporting easing by 23 percentage points in 3 months to July 2011.
• Non-interest rates charges have tightened in 2 percentage points more banks than eased
• Size of the loans granted tightened in 7% of the banks and eased in 3%, with 84% reporting no change in 3 months through July 2011.
• Collateral requirements have become tighter in 6% of the banks, while the requirements eased in 4%, suggesting de-accelerating rate of collateral requirements barriers growth.
  
• There was tightening of loans covenants reported by 9% of the banks and 6% reported easing. In previous quarter, the comparable numbers were 5% and 4%, implying tighter covenants are getting tougher.

While margins and non-interest rate charges are running at virtually no change since early 2010, there is a slight uptick in pressures in these credit costs. Collateral requirements remain on moderating tighter path, while riskier loans are posting second consecutive quarter of tightening of the margins.

Overall, these responses paint a mixed picture of costs of the bank lending to enterprises and suggests that market funding and capital and liquidity concerns drive banks lending dynamics in the Euro area, rather than costs and conditions structures.

22/08/2011: July Banks Survey - Euro area credit supply - drivers

In the previous post I highlighted some new developments in Euro area banks lending to the SMEs and larger enterprises (post link here). In this post, let us consider the data (through July) from the ECB's Banks Lending Survey for the core drivers of the structural stagnation and renewed weaknesses that have emerged in the Euro area credit supply.

The survey question we are considering here is: "Over the past 3 months, how have the following factors affected your bank's credit standards as applied to the approval of loans on credit lines to enterprises?"

• When it comes to the cost related to the bank's capital position, the percentage of banks reporting tighter (higher) costs was 6%, while the percentage of banks reporting easing of capital cost conditions was zero.
• There were zero banks reporting easing in capital costs conditions in April 2011 and January 2011.
• 2010 average for the percentage of banks reporting tighter cost conditions in excess of those reporting easing of conditions at the end of July (6%) was identical to the 2010 annual average.
• As shown in the chart below, bank's ability to access market funding remains on downward trend for second quarter in a row. At the end of July, the percentage of banks reporting tightening of access to market financing was 9%, same as for the three months through April 2011 and up on 4% in H2 2010.
• At the same time, percentage of banks reporting easing of access to market funding dropped from 2% in 3 months to October 2010, to 1% through January 2011, to 0% in 6 months since January 2011.

And a summary plot of banks access to funding markets, showing new tightening trend:

When it comes to the banks' liquidity positions, the story is also that of continued and deepening deterioration:

• 10% of banks in the survey stated that their liquidity conditions tightened in 3 months through July 2011, up from 8% in 3mo through April 2011 and 6% in 6 months before that.
• Only 1% of banks stated that their liquidity positions have eased (improved) in 3 mos through April 2011, the same percentage as in 3 mos through April 2011 and down from 3% in 3 months through January 2011.
  

Meanwhile, banks competition is now running along a flat trend:

• In 3 months through July 2011, 82% of the banks in the Euro area reported no change in competitive pressures from other banks, up from 79% in 3 months to April 2011, while 1% reported tightening and 8% reported easing of competition.
• The same story, but less dramatic, holds for competition from non-banks and for competition from market (non-banks) financing.
• The percentage of banks that observed tighter expectations of general economic activity in the end of July 2011 was 15%, as contrasted by just 4% that reported easing expectations.

So in summary, despite (or perhaps because of) the regulatory and recapitalization measures deployed, in 3 months to July 2011, Euro area banks continued to shrink supply of credit to Euro area enterprises because their funding conditions, liquidity positions, capital costs and expectations for economic activity were getting tighter. In the meantime, competition in European banking sector, having eased significantly from the peak crisis period, is running at generally depressed levels and along relatively flat trend.

Surely these are not the signs consistent with stable improvement or the end of the crisis?

22/08/2011: July Banks Survey - Euro area credit supply to enterprises

There are rumors circling euro area banks about the impeding liquidity crunch and rising risk profiles. In this light, it is illustrative to take a look at the latest Banks Lending Survey data from ECB to see if there are new trends emerging in terms of credit supply.

This post will look at some data from the Surveys covering lending to enterprises, while the follow up posts will deal with the core drivers of changes and with banks' lending to the households.

First, consider the aggregates (all data through July 2011) - with Chart below illustrating:

• Overall in terms of lending to the euro area enterprises, 8% of banking survey respondents indicated that lending conditions have tightened or considerably tightened over 3 months through July 2011, while 5% indicated that their lending conditions eased or eased considerably.
  
• The percentage of respondents who indicated tightening of conditions remained unchanged in July compared to June, but is up from 5% reported in May. Year on year, percentage of respondents reporting tighter lending conditions dropped by 4 percentage points, while percentage of those reporting easing of conditions rose 4 percentage points.
  
• 87% of respondents indicated that their lending conditions were unchanged in 3 months through July 2011, down from 89%.
• Over 3 months through July 2011, percentage of the banks reporting tighter lending conditions (8%) was below 9.25% 2010 average and significantly below 35% and 49.5% averages for 2009 and 2008.
• The percentage of banks reporting easing of lending conditions in 3 months through July 2011 (5%) was above 2010 average of 3.75% and above 2008 and 2009 averages of 0.75% each.

For SMEs (Chart below illustrates):

• Percentage of the banks reporting easing of considerable easing of lending conditions in 3 months through July 2011 was 3%, which is 3 percentage points above same period last year, but is unchanged from June and down from 4% in both April and May.
• Percentage of the banks reporting tighter or considerably tighter lending conditions was 7% in 3 months through July 2011, up on 6% in May and June, but down from 15% in April. The percentage of banks reporting tighter lending to SMEs in 3 months through July 2011 was 7 percentage points lower than a years ago and at 7% compares favorably against 11.75% average for 2010 and 35.5% and 39% averages for 2009 and 2008 respectively.

For larger corporate loans (Chart below):

• 9% of the banks reported tightening of lending conditions to large enterprises in 3 months through July 2011, which is 6 percentage points below the level of responses recorded in July 2010. However, the current percentage remains relatively close to 2010 average of 10.5%, although it is substantially down from 37.75% and 52.5% averages for 2009 and 2008.
• Month-on-month, tighter conditions in July 2011 (9%) were less prevalent than in June (11%), but more prevalent than in May (7%).
• Easing or considerable easing of lending to large enterprises was reported by 7% of the banks, up from 5% a month ago and 4 percentage points above the same level in July 2010.
• Easing of conditions in 3 months through July 2011 (7%) is now ahead of the same figure for 2010 average (4.25%) and well ahead of both 2008 and 2009 averages of 0.5% and 0.75%.
  

On the net, data shows some stabilizing momentum in credit supply, but this momentum is extremely anemic. Overall, more lenders continue to tighten lending conditions for large enterprises and SMEs.

Economics 12/11/2009: ECB's latest view

I will be blogging on the latest monthly bulletin from ECB published today, but here are few early previews:

One interesting snapshot showing just how silly is all the talk about decoupling in growth between emerging economies and the West:
Since mid 2008 there is absolutely no difference in leading indicators for two series. So anyone still thinks that emerging markets up 90% in a year is a good thing?

And here is a latent illustration of the trend I described some weeks ago using raw ECB data:
Of course anyone knows by now that money supply is not growing, despite the ECB vastly expanded liquidity pumping operations as banks hoard cash in capital reserves, while Government mop up all and any liquidity they can get into their vast deficit financing exercises. Clearly, M3 is showing that things are going swimmingly in the euro area economy.

Don't believe me? Well, here is another illustration:
So things are not getting much better on the credit markets side. The mountain of debt on private sector side is still intact, the mountain of debt on Governments' side is rapidly rising. Hardly a sound exit from the crisis.