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8/2/2019 Deutsche Bank - Five years after subprime: Lending trends in Europe and the US
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Talking point
Five years after subprime: Lending trends in Europe and the US
March 7, 2012
Lending trends in Europe and the US are currently diverging. Indicators point to a further slowdown in the
euro area, even though a credit crunch has so far not materialised. In the US, by contrast, the outlook has
considerably improved in recent quarters and loan volumes are growing again.
In recent years, it has been feared repeatedly that troubled European banks could trigger a credit crunch and
thereby curtail economic growth. So far, such a credit crunch has not materialised. In the euro area, loan volume
with companies at the end of 2011 was 1.1% higher than a year earlier; loans to private households were up by
1.4%. Even in the financial and economic crisis of 2008/09, lending hardly declined at all. Admittedly, given
inflation of about 2.5% yoy, current growth rates amount to a deleveraging in real terms and most of the factors
driving lending volumes signal a further deterioration. The euro area may fall back into recession this year, which
is likely to suppress credit demand especially in the peripheral countries. In addition, banks have tightened their
lending criteria in response to a wholesale funding squeeze in the second half of 2011. With the ECB flooding the
sector with medium-term liquidity and private funding markets
partially reopening this year, the worst has probably been averted
but banks may remain cautious about committing themselves to
significantly higher lending volumes. Pressure from the authorities
to increase capital ratios much faster and further than previously
anticipated has triggered a renewed wave of restructuring and
deleveraging particularly at the most-affected institutions. Though
banks intend to mainly cut back their foreign and capital-markets
exposure, scope for expanding loan volumes with the domestic
private sector may also be limited.
As refinancing constraints persist, it is of little help that deposit
trends stayed weak after the end of the recession. Private-sector
deposit growth of now 2.3% yoy is the lowest on record since
statistics began in 1999, despite efforts by banks to enlarge this
stable source of funding which is also treated favourably by new
regulation. The most important reason for this may be the sluggish
recovery, which already seems to be over again: it is keeping wage
(and therefore disposable income) growth down and unemployment
high, forcing many households to draw on their savings to make a
living. Record-low interest rates are doing their bit as well. It may
take a few years once the ongoing painful economic adjustment process in several European countries haslargely been completed before both deposit and lending volumes can again rise appreciably.
The other side of the Atlantic is showing some remarkable differences compared to Europe. In the US,
deleveraging has been much more pronounced, with lending to enterprises shrinking by a cumulative 19% or
USD 600 bn from peak to bottom (Q3 08-Q1 11, ten consecutive quarters) and lending to households declining by
a total of 12% or more than USD 500 bn (13 quarters in a row between Q4 07 and Q1 11). The US is thus the
only major developed country so far where households have substantially reduced their indebtedness.
8/2/2019 Deutsche Bank - Five years after subprime: Lending trends in Europe and the US
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However, in line with the improved macroeconomic outlook, recent
developments clearly point upwards. Household lending has
increasingly improved since last spring, though the expansion is
still weak and levels are down yoy. Corporate lending has staged a
classic V-shaped recovery and is now back in positive territory.
Apparently, lending in America has turned the corner.
Even more striking is the fact that private-sector deposit volumeshave continuously outpaced lending since the demise of Lehman
Brothers. Growth rates have recently entered the double digits and
are at their highest level for the past two decades. Most of the
growth, however, has come from flows into large non-interest-
bearing transaction accounts that are fully government-insured
(beyond the normal USD 250,000 threshold). This crisis-induced
measure, a part of the FDICs Temporary Liquidity Guarantee
Programme, is due to expire at the end of the year. It therefore
remains to be seen whether the strong rise in deposits can be
sustained. Moreover, the bulk of the funds probably relates to the
build-up of liquidity by highly profitable businesses in an unsteadymacroeconomic environment, while household savings rates continue to be low. Hence, once brighter corporate
sentiment prompts firms to increase investments, banks may experience deposit outflows. This could lead to
lending and deposit growth rates converging again and possibly even before the end of this year.
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Talking Point - Archive
Copyright 2012. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite Deutsche Bank
Research.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do
not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ
from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and
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Talking Point
Jan Schildbach (+49) 69 910-31717
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