European banks have tightened credit standards furtherThe ECB’s Bank Lending Survey (BLS), released last week, showed eurozone banks sharply tightening their lending standards in 2011 Q4.
The percentage of banks answering that they had tightened lending criteria in Q4 approached levels last seen in late 2008, soon after the Lehman failure. Given the panic that characterized financial markets at the time, this underlines the severity of the ongoing credit crunch.
The banks’ unwillingness to lend is in evidence everywhere except Germany, according to the ECB. Given that German banks were among those that tightened lending standards during the Lehman-triggered financial shock, the fact that German banks are still lending is an indication that conditions elsewhere in the eurozone are even worse than the numbers suggest.
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Tougher capital rules have exacerbated credit crunch
The ECB survey also asked banks how they were responding to the tightening of capital rules by the European Banking Authority (EBA). Thirty-seven percent of banks said they had reduced risk assets over the last six months as a result of the new rules, and 47% said they planned to do so over the next six months. This result clearly indicates that the tougher capital rules have triggered a credit crunch that is only likely to worsen, weighing heavily on the eurozone economy.
Eurozone politicians and bureaucrats have said that actions must be taken to prevent the new capital requirements from sparking a credit crunch, but the ECB survey results suggest that outcome has already come to pass. The fact that some of the asset reductions are taking place outside the eurozone has also increased the risk of a downturn in the global economy.
Eurozone loan demand has resumed contracting
The ECB report also points to a continued and marked decline in eurozone loan demand stretching back to 2011 Q3. One reason for sluggish demand is that economic weakness is prompting businesses to put off capital investment.
Eurozone loan demand contracted sharply in 2008 as regional housing bubbles collapsed, and the situation grew worse following the collapse of Lehman Brothers. Later the declines moderated, and by 2010 H2 demand was growing again, albeit at a modest pace, and was helping to fuel a eurozone recovery.
The sharp renewed drop in loan demand is a sign that the eurozone economy is entering a double dip and is once again in a balance sheet recession. That this is happening at a time when euro interest rates are at all-time lows highlights the severity of the crisis.