Positive news for euro activity from bank lending figures

Today’s data for monetary development in the euro area was good compared with the latest trend and if the improvements continue, it will be positive for the growth outlook in the euro area.

M3 money supply improved to 1.5% y/y in June from 1.0% in May. It is the second month in a row of higher growth in M3 money supply and even though the rate is still far below the ECB’s old reference rate of 4.5%, it seems the latest downward trend has reversed.

M1 money supply also improved to 5.3% y/y in June from 5.0% in May. M1 growth has been a good leading indicator for GDP growth and the real rate points to higher growth on a six-month horizon.

Loans to the private sector adjusted for sales and securitisation declined 1.1% y/y in June after a decrease of 1.4% in May and 1.6% in April. Hence, it seems that the improvement in lending continues after the ECB took its snap shot of banks' balance sheets in December. This is very important for the outlook for economic activity.

The monthly loan flows to households and non-financial corporations (NFC) also confirm this. Adjusted for sales and securitisation, loans to households increased EUR3bn and to NFC it only declined EUR2bn after a decrease of EUR5bn in May. Consequently, loans to households increased 0.5% y/y while loans to NFC declined 2.3% y/y from -2.5% in May and -2.8% in April.

Net lending figures provide information about potential take-up on ECB’s TLTROs

Today’s figures also provide additional information about the potential boost to liquidity from the ECB’s TLTROs (see more about the TLTRO details below). Given the observations for net lending in May and June, euro area banks are currently eligible for EUR117.2bn on the TLTROs from March 2015 to June 2016. The potential take-up on the first allowance in March 2015 depends on accumulated net lending until January 2015; hence, the liquidity boost is still uncertain (we have 2 out of 9 data points on a national level).

Euro area banks’ net lending was EUR16.4bn in June, which followed after deleveraging has stabilised somewhat since March 2014. The monthly decline in net lending was EUR3.3bn on aggregate in March to May coming from a monthly average of EUR- 15.4bn in the three months up to February 14. A continuation of this pace of deleveraging opens up for a large potential boost to liquidity as the monthly benchmark is EUR-13.8bn on an aggregate euro area level.

The net lending figures for May and June also show that banks in the core countries on aggregate continue to increase lending. The banks in the periphery were aggregate positive net lenders in June; hence, it currently seems that they have stopped the deleveraging process.

In July, the ECB revealed details about the TLTROs. The benchmark, which determines the potential take-up on the TLTROs from March 2015 to June 2016, is set so that banks in the euro area on aggregate can continue deleveraging. This follows as banks on aggregate enter the TLTRO programme as negative net lenders due to their deleveraging in the benchmark period (12-month period up to April 2014). A bank, which was a negative net lender in this period, will be eligible for the TLTROs 3-8 even if it continues deleveraging, but to do it at a slower pace than in the benchmark period.