Eurozone bank sector on mend, ECB survey shows
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(FRANKFURT) - Europe's battered financial sector is showing further signs of mending and banks are increasingly competing for custom by easing credit standards, a key European Central Bank survey showed on Tuesday.
The ECB said its quarterly bank lending survey (BLS) showed banks are easing credit standards for loans to enterprises, an encouraging sign, since the chronic weakness of credit activity in the euro area has previously been blamed for the absence of any noticeable recovery in the 19 countries that share the single currency.
"In the October 2015 bank lending survey, euro area banks reported a net easing of credit standards on loans to enterprises in the third quarter of 2015, which was stronger than banks' expectations in the previous survey round," the ECB report said, attributing the development to "competitive pressures".
At the same time, banks reported a net tightening of credit standards on loans to households for house purchases, saying that tighter national regulation was offsetting the easing effect of competition.
Demand for loans is also increasing, the ECB found.
"Net demand for loans to enterprises increased, due mainly to the general level of interest rates, as well as to increased needs for fixed investments. Net demand for housing loans continued to increase due to the low level of interest rates and housing market prospects," the ECB said.
The eurozone central bank has previously complained that its ultra-easy monetary policy had not been feeding through into the real economy, because banks are not passing the money on in loans, particularly to the small and mid-sized enterprises (SMEs) which are the region's economic backbone.
- QE effect -
In an attempt to address this, the ECB embarked on a controversial programme of sovereign bond purchases, known as quantitative easing or QE.
The ECB said the additional liquidity made available to banks via QE was being used to grant loans.
"Regarding the impact of the expanded asset purchase programme (APP), banks reportedly used additional liquidity from the programme to grant loans over the past six months," the ECB wrote.
"The APP had a net easing impact on credit standards and particularly on credit terms and conditions."
The QE programme also had a two-fold effect on banks' profitability, boosting the institutes' capital gains, but tightening net interest margins, the ECB said.
"Overall, a slightly positive net percentage of banks report an increase in profitability over the past six months, as a result of the APP, though a marginally negative effect is expected over the next six months," it said.
Looking ahead to the fourth quarter, "banks expect a further net easing in credit standards on loans to enterprises," the ECB said.
And on the demand side, "banks expect a further considerable increase in demand from enterprises in the fourth quarter of 2015," the ECB said.
- 'QE good news' -
Analysts welcomed the results of the bank lending survey.
"The loosening of credit standards is encouraging against a backdrop of continued weak lending," said Capital Economics economist Jennifer McKeown.
"But the loosening seen so far has been modest compared to the aggressive tightening applied during the previous six years or so, implying that lending criteria are still relatively tight," she cautioned.
The fact that the QE programme was also having a positive effect was "good news for the ECB given the importance of bank lending in the eurozone and it may well encourage the ECB to up the pace of its purchases to try and boost lending growth further," the expert said.
The ECB is scheduled to hold its regular policy meeting in Malta on Thursday and president Mario Draghi could use it to signal an increase in QE, some analysts say.
Natixis economist Johannes Gareis said that Draghi could "utilise the survey results to justify a QE extension (if needed)."