Assessing bank lending to corporates in the euro area since 2014

Prepared by Ramón Adalid, Matteo Falagiarda and Alberto Musso^[1]

Published as part of the ECB Economic Bulletin, Issue 1/2020.

1 Introduction

Bank lending is the most important source of external finance for euro area firms and is therefore crucial for the transmission of monetary policy and, more generally, supporting economic growth. Despite the increasing relevance of non-bank financing over the last decade, bank lending remains a key element in the financing of euro area corporates. In particular, bank loans accounted for around 45% of total non-financial corporation (NFC) debt financing in 2018, down from around 60% in 2007.^[2] During this period, credit markets were subject to multiple sources of stress, with the banking sector and its intermediation capacity being particularly affected. As a result, it has become even more essential from a central bank perspective to carry out careful analysis of bank lending.

This article provides an assessment of the recovery in lending to NFCs observed in the euro area since 2014.^[3] It focuses on two main aspects of this assessment.

First, the article shows that, following the period of adjustment of bank balance sheets in 2008-13, improving bank credit supply conditions have supported the growth in corporates’ business investment. More ample credit supply has thus complemented the stronger demand for credit, which in turn reflected improvements in the macroeconomic outlook, corporate balance sheets and corporate profitability. At the same time, the strength of the relationship between business investment and bank lending to corporates has differed across the major euro area countries, owing in part to the varying use of alternative sources of financing and different deleveraging needs.

Second, the article provides evidence that the recovery in NFC lending has been supported by the ECB’s monetary policy measures. This evidence includes quantitative model-based estimates together with survey-based information. This analysis is complemented by a forward-looking assessment suggesting that the new series of targeted longer-term refinancing operations (TLTRO III) will help to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.

2 The recovery in bank lending to corporates

Bank lending to euro area corporates has gradually recovered since 2014, broadly in line with economic activity, although growth remains below pre-crisis levels. Annual growth in loans to NFCs, which had reached a trough in early 2014, returned to positive territory in 2015 and increased gradually thereafter, peaking at 4.3% in September 2018. It has stabilised at around 3.5-4% in recent quarters, reflecting the slowdown in real economic activity observed during 2018.^[4] Overall, the recovery in bank lending to firms since 2014 has been rather moderate, with current growth rates remaining well below pre-crisis levels, despite very favourable financing conditions in particular since the ECB adopted non-standard monetary policy measures in 2014.^[5] Evidence based on a Bayesian vector autoregression (VAR) model suggests that the pattern of the recovery since 2014 has been broadly in line with macroeconomic developments, given past business cycle regularities (Chart 1), although it tends to be at the lower end of the estimated confidence band. This assessment is based on a comparison between actual loan growth and what should have been expected taking the observed main macroeconomic variables in the recovery period as given and assuming that the relationship between bank lending and economic activity has not fundamentally changed over the past twenty years.

The overall moderate pace of the recovery in NFC bank lending since 2014 mainly reflects the post-crisis deleveraging process and the growing relevance of alternative sources of finance. While receiving strong support from the ECB’s non-standard monetary policy measures (see Section 4 of this article), bank lending to corporates since 2014 has been restrained by at least three factors, with a number of demand factors playing a role. First, loan growth dynamics during the recovery have reflected the somewhat weaker economic activity compared with pre-crisis levels (Chart 1).^[6] Second, the strong balance sheet adjustment process affecting borrowers in the post-crisis period (Chart 2) has weighed on the demand for bank loans in some countries more than others. Bank borrowing has mainly been weaker in sectors whose indebtedness increased the most during the pre-crisis boom, such as construction.^[7] In a context of strong deleveraging needs, the ample availability of internal funding, as evidenced by the significant increase in retained earnings and liquid asset holdings recorded after the financial crisis, has also dampened the demand for bank loans in recent years.^[8] Third, since the crisis firms have increasingly met their financing needs from alternative sources of external funding, mostly by issuing corporate bonds. Corporate bond issuance has become a more important source of funds for euro area firms (Chart 3), particularly for large corporates: initially (2009-10 and 2012-14) as a substitute for bank borrowing, reflecting a significant decline in the relative cost of market-based debt (Chart 4) and restrictions in bank credit supply, and subsequently as a complementary source of finance to bank loans, in particular after the ECB launched its corporate sector purchase programme (CSPP) in 2016.

A conclusive assessment of the factors behind the moderate pace of the recovery in bank lending to corporates requires a careful analysis of credit supply forces. For instance, given the endogeneity of both lending and economic activity, it would be possible to conclude that the latter has been constrained by the lack of bank financing. By the same token, resorting to other sources of finance could be the result of concerns about the ability to access bank loans, and would be indicative of supply-side constraints. The next section provides some evidence that helps to distinguish between these competing interpretations.

3 Support for economic activity

Credit supply conditions have supported corporates’ business investment. A range of models show that credit supply conditions (i.e. the availability of bank credit), which depressed business investment growth during the economic downturn, have been supporting business investment in the post-2014 recovery phase. According to these analyses, credit supply conditions have boosted business investment growth by about 1 percentage point on average over the recovery phase that started in 2014 (Chart 5). Replies to surveys by both lenders and borrowers support this view. According to the ECB’s bank lending survey (BLS), which provides information on loan demand and the credit standards applied by banks, an unprecedentedly long period of easing credit conditions has been observed since the beginning of 2014.^[9] The implementation of a number of non-standard monetary policy measures turns out to be a significant factor supporting easing of supply, as discussed in Section 4 of this article. A similar view can be drawn from the Survey on the Access to Finance of Enterprises (SAFE), which covers a very large sample of euro area firms. This shows that the availability of bank loans has improved considerably over the recovery phase.^[10]

Longer-term loans, typically linked to fixed capital and financial investment, have driven the recovery in bank lending to corporates since 2014. Loans with longer maturities have accounted for most of the lending growth to NFCs during the recovery, proving more dynamic than short-term loans (Chart 6). This is in clear contrast to the pre-crisis boom, when short-term lending accounted for more than a quarter of total bank lending to NFCs. The shift towards longer maturities has been favoured by both the flattening and the downward shift of the yield curve, driven to a significant extent by the ECB’s monetary policy, which has supported the demand for long-term fixed rate loans.^[11] Long-term loans contribute to economic growth in two ways. First, they reduce firms’ rollover and cash flow stress. Second, and more importantly, firms tend to have a preference for matching the maturity of their assets and liabilities, meaning that an abundance of long-term financing makes it easier for them to engage in long-term projects. In this respect, the solid growth in fixed investment seen in recent years is consistent with the increased relevance of long-term bank lending. Long-term lending has also favoured financial activities of a structural nature, such as M&A, the magnitude of which has contributed to the recent dynamism observed in syndicated loans.^[12]

Survey evidence confirms the importance of business investment for the demand for bank loans. According to the BLS, the demand for bank loans to euro area enterprises since 2014 has been supported by the funding that corporates need for fixed investment.^[13] Beyond this, M&A activity has also contributed to the growth in demand during the same period. The SAFE confirms that enterprises have mainly used the finance they have continued to obtain primarily from bank loans for fixed investment during the recovery.^[14]

The strength of the relationship between business investment and bank lending to corporates has, however, differed across countries. Business investment has been growing at similar rates across the large euro area countries since 2014 (see panel (a) in Chart 7).^[15] However, the growth in lending to NFCs has increasingly diverged in the large euro area economies as the recovery at the euro area level has matured, with Germany and France enjoying steadily increasing growth rates and Italy and Spain hovering around or below the zero line since 2016 (see panel (b) in Chart 7). Bank lending to corporates has developed in line with business investment in Germany and France^[16] whereas a sizeable gap can be observed in Spain in particular and also Italy. In Germany and France, the recovery in bank lending to corporates has also been supported by dynamic real estate sectors and the need to finance M&A activities. In addition, in Germany, corporate indebtedness has remained particularly low, allowing firms to easily expand their recourse to external financing. In Italy and Spain, the gap between business investment and bank lending can be explained mainly by the severe deleveraging process undertaken by firms in recent years, which has been very pronounced for Spain, and by the use of alternative sources of finance. Indeed, there is a link between the accumulation of retained earnings (Chart 8), and hence the availability of internal funding, and the deleveraging imperative, which has continued to weigh on the demand for loans in both countries, especially from firms in the real estate and construction sectors. These sectors in particular have exercised a significant drag on total loan growth in Spain and Italy during the recovery phase.^[17] In addition, the issuance of debt securities by firms has grown in both Italy and Spain since 2017, in clear contrast to previous recoveries (Chart 9). Moreover, the banking sector in both countries has gone through a process of significant balance sheet adjustment in recent years, which has constrained bank intermediation capacity during the process.^[18] Despite gradual improvements since 2014, in Italy the stock of non-performing loans remains particularly high, which affects the capacity of banks to supply credit.

4 The impact of non-standard monetary policy measures

Credit markets have benefited from multiple and complementary monetary policy measures pursued by the ECB since 2014. The ECB has adopted a number of non-standard monetary policy measures since the summer of 2014. This includes launching targeted longer-term refinancing operations (TLTROs), lowering the deposit facility rate (DFR) into negative territory and expanding the asset purchase programme (APP) to target a variety of investment-grade private and public sector securities. These policies have also been underpinned by forward guidance on the key ECB interest rates and, more recently, the reinvestment horizon for the APP portfolio and the resumption of the APP. The ECB’s measures have stimulated the euro area economy via a number of transmission channels, leading to a significant upward impact on both real GDP and HICP inflation.^[19] The transmission of these measures has operated in part through credit markets, including the direct pass-through channel and the bank lending channel.^[20] Overall, these monetary policies have supported both the demand for, and the supply of, bank lending to corporates by improving the macroeconomic outlook and helping to mitigate banking sector constraints. This assessment is supported by analyses based on macroeconomic models, survey-based evidence and empirical studies based on micro data.

Model-based estimates at the macro level suggest that non-standard measures have significantly supported the recovery in bank lending to corporates. Simulations based on alternative macroeconomic models suggest that, in the absence of the ECB’s monetary policy measures, NFC loan growth would have recovered more slowly.^[21] More specifically, while the growth of bank lending to corporates rose from about -1% in early 2015 to about 4% by the end of 2018, these model-based estimates suggest that, on average, annual loan growth would only have reached levels close to 2% by the end of 2018 if the ECB had not introduced its non-standard monetary policy measures (Chart 10). In other words, these measures are estimated to have induced about 2 percentage points of NFC loan growth between early 2015 and end-2018, affecting both demand and supply factors.

Survey-based evidence supports the view that the ECB’s measures have had a tangible impact on bank lending conditions. Qualitative evidence on the relevance of the ECB’s non-standard measures can be obtained from indicators derived from the BLS. A number of ad hoc questions included in the survey since 2015 have made it possible to compile a synthetic view of how banks perceive the effect of recent ECB non-standard measures, such as the TLTROs, a negative DFR and the APP, on their financial situation and lending decisions. The replies to these questions indicate that these measures have had a favourable impact on banks’ liquidity and market financing conditions. Moreover, the survey responses suggest that the ECB’s measures have had a substantial net easing impact on banks’ terms and conditions, while the effects on their credit standards have been more limited.^[22]

Studies based on granular banking and firm-level data suggest that the impact of the ECB’s non-standard monetary policy measures on credit markets has operated via various channels. With regard to the TLTROs, some evidence suggests that, in combination with the other non-standard measures introduced since June 2014, the first two series of operations have proven effective in supporting the transmission of lower policy rates into improved borrowing conditions for corporates in the euro area. Moreover, these operations appear to have supported higher intermediation volumes in less vulnerable euro area countries and a slowdown of the contraction in bank lending in vulnerable countries.^[23] Concerning the third series of such operations, Box 1 provides an overview of its modalities and the development of banks’ funding conditions in the wake of its announcement.

The introduction of a negative DFR in mid-2014 has provided an additional incentive for banks to lend to NFCs by increasing the opportunity cost of holding excess liquidity. As such, a negative DFR has provided an effective foil to the APP by increasing the cost of holding the reserves injected by the ECB’s large-scale purchase programme. This has given banks an incentive to rebalance towards other assets, notably loans, thereby boosting credit supply.^[24] Although this impact was broad-based, it was not evenly spread across banks, and some evidence suggests that it was stronger for universal banks and for banks with higher holdings of sovereign bond.

5 Concluding remarks

This article provides an assessment of the recovery in bank lending to euro area firms observed since 2014. Evidence reported in the article shows that loan growth has remained below pre-crisis levels during the recovery. While supported by highly favourable financing conditions, the moderate pace of the recovery has mainly reflected the post-crisis deleveraging process and the growing relevance of alternative sources of finance, as well as somewhat weaker economic activity compared with the pre-crisis period.

Improving credit supply conditions have supported the growth of credit and hence the expansion in firms’ business investment. The positive effect of credit supply factors has reinforced the impact of a gradual normalisation in credit demand, which reflects improvements in the macroeconomic outlook and corporate balance sheets. The strength of the relationship between business investment and bank lending to corporates has, however, differed across countries. This heterogeneity is explained in part by the varying relevance of the use of alternative sources of finance across countries, the differing levels of deleveraging needs and country-specific macroeconomic developments.

Finally, ample evidence indicates that the recovery in bank lending to corporates would have been significantly weaker in the absence of the monetary policy measures pursued by the ECB since the summer of 2014. More specifically, model-based estimates at the macro level, survey-based evidence and studies based on granular banking and corporate data all suggest that the ECB’s non-standard measures have accounted for a significant portion of the recovery in bank lending to corporates. A forward-looking assessment suggests that TLTRO III will help to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.