It’s not just American banks that are being extremely cautious with their lending these days. In Europe, they aren’t lending either despite government support.
Bloomberg: For all the cash provided by the European Central Bank to ease the worst seizure in credit markets since World War II, financial institutions in the region are unwilling to lend, using the money instead to invest in the safest, most liquid government securities. Bond investors are offering money like never before as returns on corporate debt reach as much as 70 per cent this year, according to Merrill Lynch & Co. indexes.
Banks are also cutting back on other types of corporate loans. In Europe, a net 8 per cent of lenders reported a tightening of credit in the third quarter, compared with 21 per cent in the previous three-month period, the ECB said in its Euro-Area Bank Lending Survey on Oct. 28. Commercial and industrial lending fell 18 per cent in the U.S. to $1.35 trillion as of Dec. 2 from a record high a year ago, Fed data show.
After years of bad loans, and a recent financial crisis, this is good news. The goal of government support of the banks shouldn’t be for banks to simply lend. The goal is to promote stable banks, which lend intelligently once they have confidence in their own balance sheets. In Europe, as in the U.S., we haven’t reached this point yet. Which is fine.