So far, European banks appear to have weathered the ECB’s monetary tightening quite well. Mortgage rates have more than doubled and this led to a decline in demand for new loans. As our Chart of the Week shows, the stock of outstanding loans is still growing, but the latest ECB data that came out this week show that new loans for house purchases have declined substantially. Overall tighter monetary policy should feed through in weaker credit dynamics, with the stock of outstanding loans likely to decline in coming months.
More details should soon be forthcoming, notably in the Bank Lending Survey due at the end of April. “Given the tightening of monetary policy and the tension in the banking sector we do expect a further tightening of credit standards,” points out Ulrike Kastens, Senior Economist Europe at DWS. As Eurozone economies are largely bank-based, such tightening will also be necessary to get inflation back on track towards the ECB’s target of below 2%.
To be sure, there are risks. Significant deficiencies remain in Europe’s current regulatory and bank-resolution frameworks, with progress towards the long-promised banking union incomplete. For example, insolvency procedures vary significantly across member states and plenty of powerful veto players could slow down decision-making, especially for smaller-bank rescues[4].
As with any new regulation, well intentioned rule-making will – inevitably – have had unforeseen behavioral effects, perhaps in seemingly far-removed corners of Europe’s or the world’s financial system beyond regulatory supervision[5]. For now, though, it seems that Europe, at least, is likely to avoid a full-blown credit crunch, where many banks simultaneously stop lending altogether.
