Eurozone Lending To Businesses Dips In April: Not Bad News

The lending dip probably does not reflect increased economic weakness. Rather, the contraction follows a surge in March. It is hard not to see a link with the TLTRO benchmark period that ended in March.

April lending dip first and foremost a monetary phenomenon

Eurozone bank lending to businesses contracted by €12.9bn in April (seasonally adjusted), after a March surge of €50.5bn. It is hard to explain this contraction by a changed economic dynamic in April. Rather, we consider the March surge as an effort by banks to clear the benchmark lending hurdle posed by the ECB's Targeted Longer-term Refinancing Operations (TLTRO). Doing so entitles banks to a better rate on their TLTRO borrowing in the June 2020-June 2021 period. The March lending surge likely represents lending that would otherwise have taken place in April and beyond, thus explaining the April dip, and suggesting that May could be weak as well. 

Corroborating the idea that this was mostly about TLTRO, is the fact that April lending to business was especially weak in countries where it was strong in March: Germany and the Netherlands, and to a lesser extent also Spain and Italy. French bank lending managed to stay positive, though by a much smaller number than what we've seen in recent months. Meanwhile, lending to Eurozone households remains stable, with mortgage lending as the reliable engine of growth. 

Eurozone bank lending to households and non-financial businesses

Source: ECB, Macrobond, ING-calculations 

ECB bond-buying continues to drive deposit inflows

Meanwhile, bank deposit inflows remain slightly elevated compared to the pre-pandemic period. Bank lending has retreated as a source of deposit inflows (bank deposits are created simultaneously when a bank lends and destroyed when a bank is repaid). Yet ongoing government support to locked down economies, financed indirectly by ECB government bond-buying, continues to generate deposit inflows – see our "Money Trumpet" for an explanation of this mechanism. 

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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