I NEVER USED to spend too much time poring over the results of the European Central Bank’s quarterly bank lending surveys. In the past, I’d typically scan-read them on the train on the way home to save office time.
And that was despite a number of people from the Street telling me they see me on the train, something which has made me wary of the perils of prying eyes. Just imagine if I’m found reading not some top-secret report or leaked bank strategy document – supporting the romantic ideal that people maintain towards the media – but was immersed in the ECB’s euro area bank lending survey, my reputation would take a battering.
Hence I’d always hide the cover firmly from view lest fellow travellers thought I was a bit of a data geek. But if the extent to which I’m prepared to maintain my bias to clandestine reading may not change, what has certainly changed is the thematic centrality of the lending story to the capital markets story and the altered state of corporate funding we’re supposed to be heading towards in Europe.
IN ALL SERIOUSNESS, evaluating the results of the ECB’s BLS in parallel with the inter-agency Shared National Credits Review that comes out of the US Fed, FDIC and OCC is key to a fuller global understanding of what is going on in debt capital markets as that world twists and turns in tune with its own regional and broad idiosyncratic factors.
This is not just because of the state of the underlying economies you can deduce from lending stats. Particularly in Europe, it is also because we are locked into this interplay between the direction, quantum, standards and terms of bank lending and the emergence of capital markets solutions for large as well as small and medium-sized enterprises.
And because we’re also locked into a self-generated policy contradiction. The bottom-line rationale for ECB quantitative easing as well as elements of capital markets union (i.e. efforts to revive securitisation) is to incentivise bank lending into the real economy. But this comes at exactly the same time that policymakers are trying to engineer and underpin a pivotal move away from core bank lending towards alternative funding solutions.
An intriguing subsidiary element of interest – again in Europe – is to understand what banks say they do with central bank liquidity and of or how their own QE-derived lower funding costs translate into how they deal with corporate clients.
I say “what they say they do” quite deliberately as elements of telling the ECB what it wants to hear definitely plays into this story. That is my first rider around the stats. The second is an almost self-cancelling or circular paradox, where the monetary policy environment has led to such an artificial set of market price and liquidity conditions that it is difficult not to dismiss the motivations and market behaviours that derive from them as being, well, artificial or at least transitory and subject to abrupt change.
In other words, how should you interpret the extraordinary efforts undertaken by the ECB to effect change if that change is only effected by those extraordinary efforts? And if the behaviourial drivers resulting from that change morph in lock-step when the levers are removed?
Telling the ECB what it wants to hear definitely plays into this story
SO WITH THAT heavy qualification, to the results. The Q1 2015 BLS revealed further recovery in loan growth. That is a plus. The net easing of credit standards on loans to enterprises that banks reported in Q1 was stronger than the previous survey round’s expectations. Banks expect a small net easing of credit standards on loans to enterprises to continue into Q2.
That easing was driven by banks’ lower funding costs, competition and (marginally) higher risk tolerance. Banks reported better access to wholesale funding in Q1 for all main market instruments. Nearly half of respondents reported a positive impact of the ECB’s asset-purchase programme (APP) on their market financing conditions, in particular covered bonds and unsecured bank bonds (in line with their considerably further improved access to bond financing).
For banks with ABS businesses, this source also improved considerably. Banks expect an ongoing improvement of their market financing conditions related to the APP also for the next six months.
Banks say they have used additional liquidity related to the APP over the past six months to grant loans and intend to do so also in the coming months (notwithstanding that the APP will also have a negative drag on profitability, thanks to lower net interest margins). “This suggests that the APP seems to be effective in supporting lending to the euro area economy,” the ECB snuck in in a bold, if slightly muted, note of self-congratulatory vigour.
“The net easing of credit standards on loans or credit lines to enterprises in the first quarter of 2015 translated into substantially more favourable overall terms and conditions which banks apply when granting new loans to enterprises. These developments suggest a further improvement in financing conditions for loans to enterprises,” the BLS report noted.
The disintermediation factor was evident in the survey returns. If debt refinancing, debt renegotiation and M&A financing broadly drove loan demand, the use of alternative finance continued to have a dampening effect on net loans demand by enterprises. “In particular, firms’ internal financing sources and the issuance of debt securities by enterprises contributed negatively to loan demand,” the report said.
One should not, of course, extrapolate too much from one or two quarters’ worth of data returns. But I will be curious to see what emerges at the half-way point in the year. I’ve already booked my train ticket.
