Europe Needs More Bank Lending

Here is the euro area’s real problem: bank lending to the private sector has been falling at an annual rate of 1.4 percent during the third quarter of this year, despite the fact that banks can get all the money they need from the European Central Bank (ECB), and more, at an interest rate of 0.05 percent.

This should give pause for thought to people calling on the ECB to (over)flood the euro area financial market with massive new liquidity. Indeed, what purpose would that serve at the time when the ECB is trying to get more bank lending from the existing huge volume of loanable funds?

Apart from issues related to the ECB’s recent asset quality review (AQR) in the banking system, the cause of weak bank lending is entirely on the demand side: high unemployment and stagnant (real personal disposable) incomes are depressing the demand for money from businesses and households.


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