Loan appeal

Cleaner Banks Mean Cleaner Lending

Maybe I could count these banknotes a bit more slowly.
  • Why it matters

    Why it matters

    Cleaning up banks’ balance sheets is key to reviving the euro zone’s struggling economy.

  • Facts


    • The ECB’s efforts to encourage bank lending have fallen short of expectations.
    • There is no one reason for sluggish lending, and no easy remedy, the author argues.
    • The ECB will release the results of a comprehensive assessment of banks in mid-October.
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The economy in the euro zone is faltering. Part of the blame lies with sluggish lending, even though the European Central Bank has taken several steps to make lending more appealing to banks – and borrowers. Rarely have interest rates been this low and the availability of inexpensive, long-term central bank liquidity been as ample as it is today.

But the results of the most recent monetary policy measures have been disappointing. The use of targeted longer-term refinancing operations (TLTRO), in which the provision of liquidity is partly tied to bank lending, has remained well below expectations. Whether the liquidity taken up by the banks will be converted into actual loans is uncertain. But why isn’t lending getting underway?

There are three answers to this question, and they are not mutually exclusive. First, businesses and households don’t want to borrow; second, banks don’t want to lend; third, the banks are unable to lend. In the first case, the limiting factor would be the demand for credit, and in the second and third cases it would be the availability of credit. The recommended treatment varies, depending on the diagnosis.

If demand for credit is the limiting factor, we should focus our attention on investment conditions in the euro zone and not as much on the banks. It is difficult to contain uncertainty over geopolitical risks, but a flexible labor market, social welfare systems capable of withstanding future challenges and a functioning and digital infrastructure are the key underlying conditions for a favorable investment climate.

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