CROSS-BORDER lending by German banks to the weaker parts of the euro zone has dropped by nearly a fifth since January and stands at the lowest level since 2005, according to new central bank data.
German banks cut their net lending to Greece, Ireland, Italy, Portugal and Spain by €55 billion to a total of €241 billion between January and the end of May, Morgan Stanley’s analysis of Bundesbank figures show.
German and French banks have been retrenching their cross-border exposure within the euro zone since the middle of 2010 but the latest data suggest the home bias is accelerating.
German banks’ net loans to Italy, for example, fell 25 per cent in the five months to June 1st, versus a 7 per cent drop for all of last year. The shift reflects growing fears that a break-up of the euro zone will lead to capital controls in exiting countries as well as regulatory pressure on banks to reduce their reliance on wholesale funding and match their local lending more closely to their local deposits.
“We’re concerned the Balkanisation of banking markets will act as a drag on lending, economic recovery and be a source of systemic instability,” writes Morgan Stanley analyst Huw van Steenis.
These numbers underpin warnings last week about “financial fragmentation” from Mario Draghi, president of the European Central Bank. The ECB is due to meet on Thursday and Mr Draghi has said it is “ready to do whatever it takes” to preserve the single currency.
The ECB and the European Commission warned in separate papers this spring that the years since the 2007 financial crisis had dealt a “clear setback” to European financial integration. But the latest data make clear the extent of the decline in cross-border lending. – (The Financial Times)
