Falling bank lending to 'exacerbate' eurozone recession
by Daniel Mason
09 October 2012
The eurozone recession is likely to be made worse by banks retreating behind national borders, with lending falling faster than immediately after the peak of the crisis, Ernst & Young has warned in its financial services report – adding to the gloom after the International Monetary Fund downgraded its global growth outlook.
According to today's report there will be a decline of 2 per cent, or some €262bn, in bank lending across the 17-nation eurozone this year as companies reduce their assets and limit their activity outside of home markets.
The forecasts see lending collapsing by 8.8 per cent in Spain and 4.5 per cent in Italy in 2012. In the region as a whole credit conditions will tighten twice as quickly as they did when the global financial meltdown hit, and in struggling southern euro area countries lending will stay below 2011 levels until after 2016.
Andy Baldwin, Ernst & Young's head of financial services in Europe, said: "In response to market conditions and regulation, banks are beginning to retreat behind national borders, which is fragmenting the eurozone financial system." German bank lending is expected to be up1.3 per cent this year.
Loans to households will be the most dramatically affected, down 6.6 per cent in the single currency bloc. But, highlighting the disparities between the north and the periphery, while Spain is expected to see household lending fall 15 per cent it is set to rise by 7 per cent in the Netherlands. Corporate loans will be down by a more moderate 1.9 per cent across the region.
In a statement Baldwin said: "In today's global economy capital is ever more mobile and the retrenchment of the banks is resulting in lending constraints that will exacerbate recessions in the peripheral economies." He also called on policy-makers to be "mindful" of the rising costs for banks of complying with new regulations designed to prevent a repeat of the financial crisis.
Ernst & Young senior economic adviser Marie Diron said: "Only a full banking union with jointly-guaranteed deposit insurance will be sufficient to stem this retreat behind national borders. Given the time needed to develop banking union we see no upswing for lending in the peripheral states in the near future."
The report predicts that deleveraging by banks would deepen but the process would be prolonged and there would be no recovery in banking assets until 2016. Diron said that there was "more pain to come for financial services firms and their dependents while the eurozone works through its structural problems".
The warning on banks comes on the day the International Monetary Fund downgraded its estimate for global growth next year to 3.6 per cent from its previous figure of 3.9 per cent. It said the euro area economy would contract 0.4 per cent in 2012 before returning to weak growth of 0.2 per cent in 2013.
In its World Economic Outlook, the Washington-based said: "A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component. The answer depends on whether European and United States policy-makers deal proactively with their major short-term economic challenges."
According to today's report there will be a decline of 2 per cent, or some €262bn, in bank lending across the 17-nation eurozone this year as companies reduce their assets and limit their activity outside of home markets.
The forecasts see lending collapsing by 8.8 per cent in Spain and 4.5 per cent in Italy in 2012. In the region as a whole credit conditions will tighten twice as quickly as they did when the global financial meltdown hit, and in struggling southern euro area countries lending will stay below 2011 levels until after 2016.
Andy Baldwin, Ernst & Young's head of financial services in Europe, said: "In response to market conditions and regulation, banks are beginning to retreat behind national borders, which is fragmenting the eurozone financial system." German bank lending is expected to be up1.3 per cent this year.
Loans to households will be the most dramatically affected, down 6.6 per cent in the single currency bloc. But, highlighting the disparities between the north and the periphery, while Spain is expected to see household lending fall 15 per cent it is set to rise by 7 per cent in the Netherlands. Corporate loans will be down by a more moderate 1.9 per cent across the region.
In a statement Baldwin said: "In today's global economy capital is ever more mobile and the retrenchment of the banks is resulting in lending constraints that will exacerbate recessions in the peripheral economies." He also called on policy-makers to be "mindful" of the rising costs for banks of complying with new regulations designed to prevent a repeat of the financial crisis.
Ernst & Young senior economic adviser Marie Diron said: "Only a full banking union with jointly-guaranteed deposit insurance will be sufficient to stem this retreat behind national borders. Given the time needed to develop banking union we see no upswing for lending in the peripheral states in the near future."
The report predicts that deleveraging by banks would deepen but the process would be prolonged and there would be no recovery in banking assets until 2016. Diron said that there was "more pain to come for financial services firms and their dependents while the eurozone works through its structural problems".
The warning on banks comes on the day the International Monetary Fund downgraded its estimate for global growth next year to 3.6 per cent from its previous figure of 3.9 per cent. It said the euro area economy would contract 0.4 per cent in 2012 before returning to weak growth of 0.2 per cent in 2013.
In its World Economic Outlook, the Washington-based said: "A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component. The answer depends on whether European and United States policy-makers deal proactively with their major short-term economic challenges."
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