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.

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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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    Copyright 2012. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite Deutsche Bank

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    Talking Point

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