Slightly more than a year ago, the European Central Bank launched, with as much fanfare as can be expected from a central bank, a new incentive programme for commercial banks to lend to euro zone businesses, which they had been doing less and less of over the previous few years. An increase in lending was key, ECB President Mario Draghi argued at the time, to reviving growth in the euro area – and particularly to get inflation, which the central bank targets at just under 2%, to rise up from low digits. Euro zone inflation was last reported at 0.2%. The new programme – dubbed Targeted Long-Term Refinancing Operations, or TLTROs, to just roll off the tongue – would provide hundreds of billions of euros’ worth of essentially free loans from the central bank to commercial banks, with one string attached: a portion of the money would need to be set against lending to businesses. More than a year down the line, the best that can be said is that net lending is no longer contracting. The rot has stopped, but there has been no surge in bank lending growth that many predicted, certainly nothing like the kind before the financial crisis. That leaves it more a case of pushing on a string than attaching one. The latest ECB bank lending survey showed that an additional net 13% of 142 euro zone banks participating reported an increase in demand for loans made to companies in the second quarter compared with Q1. That means roughly 18 more banks joined the ranks of those saying things were getting better. Overall credit standards eased, but at a weaker pace than in the first three months of the year. On lending to businesses, the ECB said lenders predicted a bigger increase was right around the corner. While this was below banks’ expectations, they expect a further considerable increase in demand for loans to enterprises in the third quarter of 2015. With the exception of France, all of the largest euro area countries reported an increase in demand in the second quarter of 2015, with reported demand highest in the Netherlands and Italy. When you consider that not only has the TLTRO programme been open for more than a year, but that the ECB started in March a scheme to purchase 60 billion euros of bonds a month on the open market – a move very few ever thought the central bank would make – it is difficult to underplay just how lacklustre these results are given the extraordinary amount of stimulus with interest rates at or below zero. The latest data support the critics who argued that the problem was not supply of bank loans, but demand for them. The figures only started to improve around when the ECB started its bond purchases, which coincided with the best quarter for economic growth in a long time. The survey results also underscore the fundamental trouble in trying to incentivise bankers to do the right thing, even when essentially free money is on the table. Regarding the impact of the targeted longer-term refinancing operations (TLTROs) conducted by the Eurosystem, banks continue to report that participation is mainly driven by profitability motives and the main effect of the TLTROs on credit supply continues to result from changes in terms and conditions, rather than from changes in credit standards. In other words, banks still aren’t finding it terribly profitable lending to businesses, but when it is, they will lend, and of course why not take some nearly-free central bank money to make it easier. After all, when you can get a double digit return on the stock market in just a few months, who in their right mind would choose a risky lending proposition with no certain return? Still, there has been some improvement. According to Loredana Federico, economist at Unicredit, a bank no doubt surveyed by the ECB in its poll, which the central bank claims, had 100% participation. The net increase in loan demand from corporates was also related to M&A and corporate restructuring, and, to a lesser extent, working capital and inventories. Still, the use of firms’ internal financing and the issuance of debt securities continued to have a slight dampening effect on the net demand for loans to firms. What has mainly been going on at European banks is a lot of lending for house purchase – much more. Nearly half of the 142 banks – a net 49% of them – reported an increase in demand for mortgages. If you believe that propping up housing market turnover and house prices at zero rates is going to bring inflation back to target, that’s a good thing. But the past decade of history tells us that house prices only really drive consumer price inflation through the deflationary pull on the economy if they crash back to earth after a boom. That is what the Chinese authorities have been worried about for months, and that is definitely is not what the ECB is targeting. Ross finley is global editor at reuters polls & economic data, who commissions consensus forecasts and edits related news stories on everything from foreign exchange rates to stock markets to expectations on monetary policy from major central banks.
