Monthly statistics published by the European Central Bank (ECB) show that bank lending to the private sector picked up in July. Credit to households and non-financial corporations grew by 1.7% versus 1.5% in June. The growth rate of loans to households held steady at 1.8% in July; this figure continued to be supported, as we expected, by loans to households for house purchase, which showed an unadjusted annual growth rate of 2.3% in July versus 2.1% in June. Of particular note, and for the first time since November 2011, bank loans to non-financial corporations expanded faster than loans to households, with the annual growth rate rising from 1.7% to 1.9%.
However, strong disparities among individual countries paint a more mixed picture. Bank lending is especially firm in core eurozone countries. For example, loans to non-financial corporations showed annual growth of 5.3% in France and 2.9% in Germany in July, but in peripheral countries this type of lending continued to contract. In July, the annual growth rate in loans to non-financial corporations was -0.2% in Italy, -0.8% in Spain and -1.4% in Portugal.
These divergent trends do not call into question the effectiveness of monetary policy, but they do show that its effects are not the same across the board. The root of the problem lies in the non-performing loans carried by banks in peripheral countries, which hamper the banks’ ability to create new loans. At the end of 2015, non-performing loans represented 18% of banks' total loan portfolio in Italy, 6.3% in Sapin and 12.8% in Portugal.
This situation will dilute the effectiveness of any further monetary easing. Constrained by the size of their portfolio of non-performing loans, banks in these countries cannot create much in the way of new loans despite the highly attractive terms offered by the ECB. At the same time, the ECB’s corporate bond purchases (under its CSPP programme) will not become a substitute for bank lending, because it is mainly large and medium-sized corporations that are currently in a position to issue debt that is eligible for the ECB's purchase programme.
We expect the ECB to announce further measures on 8 September, such as extending the bond purchase programme beyond March 2017 and revising the rules concerning the weighting of these purchases by country in order to expand purchases in peripheral countries. But bank lending across the eurozone will only improve if the ECB acts more decisively in its banking supervisory role. In order to cement long-term growth, European officials will have to develop tools – along the lines of the Paulson plan put in place in 2008 in the USA – that will speed up the process of cleaning up bank balance sheets. Adopting a uniform definition of non-performing loans in the eurozone, which would lead to a market for these securities – as Mario Draghi called for in July – would be a useful, albeit insufficient, first step.