German banks cut back periphery lending

Cross-border lending by German banks to the weaker parts of the eurozone has dropped by nearly a fifth since January and now stands at the lowest level since 2005, according to new central bank data.
Between January and the end of May, German banks cut their net lending to Greece, Ireland, Italy, Portugal and Spain by €55bn to a total of €241bn, Morgan Stanley’s analysis of Bundesbank figures show.

German and French banks have been retrenching

their cross-border exposures within the eurozone since the middle of 2010, but the latest data suggests that the homeward bias is accelerating.

German banks’ net loans to Italy, for example, fell 25 per cent in the five months to June 1, versus a 7 per cent drop for all of 2011.

The shift reflects growing fears that a breakup of the eurozone will lead to capital controls in exiting countries as well as regulatory pressure on banks to reduce their reliance on wholesale funding and match their local lending more closely to their local deposits.

“We’re concerned the balkanization of banking markets will act as a drag on lending, economic recovery and be a source of systemic instability,” writes Morgan Stanley analyst Huw van Steenis.

These numbers underpin warnings last week about “financial fragmentation” from Mario Draghi, president of the European Central Bank. The ECB is due to meet on Thursday and Mr Draghi has promised it is “ready to do whatever it takes” to preserve the single currency.

The ECB and the European Commission warned in separate papers this spring that the years since the 2007 financial crisis had dealt a “clear setback” to European financial integration.

But the latest data make clear the extent of the decline in cross border lending.

Country by country lending statistics were not available for French banks, but Morgan Stanley found their net cross-border lending to the rest of the eurozone has fallen by half since April 2010 and stood at €489bn at the end of May.

Société Générale and BNP Paribas may shed further light on the contraction when they report half year results this week.The fragmentation is contributing to the growing split in the fortunes of the various parts of the eurozone.

Deposits and lending are up in the year to June in the northern part of the eurozone, led by 4 per cent growth in Belgium. French and Dutch lending is up 1.2 and 1.3 per cent respectively, while deposit growth is higher than 2 per cent in France and Austria.

But banking capacity is shrinking elsewhere. Loan books are down by about two per cent since the start of the year in Portugal, Spain and Greece, and deposits are falling as well, with Greece suffering the biggest drop of 15 per cent. Italy was the only country to see deposits rise but lending fall. The two moved in tandem in all the other countries analysed.

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