Economics Chart of the week ... CHART OF THE WEEK . . . CHART OF THE WEEK . . . CHART OF THE WEEK . . . CHART OF THE WEEK 24 October 2014 ECB AQR: less a watershed moment than a gradual accelerator Lending growth remains subdued even in Germany 15 Loans to the non-financial private sector, Germany yoy %, nsa 10 Loans to the non-financial private sector, Eurozone, yoy %, sa 5 0 -5 2004 2006 2008 2010 2012 2014 Change in MFI loans to non-financial private sector, yoy %, sa. Source: ECB • • • • A milestone on the Eurozone’s journey towards banking union. The publication of the results of the ECB’s bank asset quality review and the EBA’s third stress test on Sunday is a historic event. Sovereign states transfer the supervision of their largest banks to one transnational institution. The Eurozone steps closer to cutting the link between sovereigns and their banks, which led to negative feedback loops during the bond market panic of 2011/12. The ECB can be tougher on banks and better assess the systemic consequences of trouble therein. The exercise has been costly. Beyond the direct cost of the exercise, banks have had to spend time and resources on accommodating the assessment teams from the ECB. The test may have drawn attention away from the core business of lending to companies and households. Moreover, banks shied away from taking on new risks in order to look as safe as possible. Their uncertainty slowed the credit cycle over the last year, and prevented job-creating business investments from going ahead. This uncertainty should fade now. Besides making the financial system safer, the review is also an important milestone in restoring the functioning of the Eurozone’s financial system. Eurozone banks continue to mistrust one other. As they lend less to each other than before the crisis, the ECB had to step in. It tripled its balance sheet by €2trn from 2007 to the peak in 2012 and incurred imbalances into the hundreds of billions in its payment system Target2. Its late but decisive intervention in the bond market panic in 2012 reversed the trend. But interest rates for entrepreneurs still vary widely between the Eurozone core and the periphery. A credible AQR is a necessary condition for normalisation to continue. The credit cycle is turning slowly but surely. The gradual recovery and ECB monetary easing has stabilised credit demand. A credible AQR should boost credit supply modestly over time. We expect the recovery to be gradual. Even in Germany, where credit availability has been ample and cheap throughout the crisis, credit growth remains meagre (see Chart). New tough regulations and the experience of the financial crisis will weigh on banks’ risk-taking behaviour for years. This will warrant low central bank policy rates for a long time. Holger Schmieding Chief Economist +44 20 3207 7889 [email protected] Christian Schulz Senior Economist +44 20 3207 7878 [email protected] Robert Wood Chief UK Economist +44 20 3207 7822 [email protected] Economics Chart of the week Disclaimer This document was compiled by the above mentioned authors of the economics department of Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”),. The Bank has made any effort to carefully research and process all information. The information has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press. However, we do not assume liability for the correctness and completeness of all information given. The provided information has not been checked by a third party, especially an independent auditing firm. We explicitly point to the stated date of preparation. 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