As broadly discussed, one of the most desirable effects of the long-awaited Quantitative Easing programme and low interest rate regime is the improvement of monetary policy trasmission in the Eurozone. However, many doubt the effectiveness of the ECB’s strategy as there is no formal model that can explain a strong correlation between excess of liquidity and investments in the real economy. All these considerations lead to a simple but crucial question:
Are ECB policy measures actually working?
The April 2015 Bank Lending Survey (BLS), published on April 14th, showed that euro area banks reported a further net easing of credit standards on enterprise loans in the first quarter of 2015 (a net percentage of -9%, after -5% in the previous quarter), which was stronger than banks’ expectations in the previous round of surveys. Moreover, the banks’ cost of funds and balance sheet constraints, as well as competition were driving them further net of easing of credit standards, for loans to enterprises.
By contrast with the development for enterprises, there was a slight net tightening of credit standards on loans to households for home purchases (2%, from -4% in the previous quarter). According to new evidence, there have been substantial improvements in the level of credit standards, when compared with indications from banks one year ago. At the same time, according to euro area banks, the level is still tight in historical comparison.
For the first time in the survey, banks also disclosed the manner by which they changed their rejection rate for loan applications. According to euro area banks, the net share of rejected applications (i.e. the difference between the sum of the percentages of banks reporting an increase and that of banks reporting a decline in the share of loan rejections) for loans to enterprises decreased in the first quarter of 2015 (-5%). Among the largest euro area countries, the rejection rate declined in Italy and Germany (-13% and -10% respectively), whereas it remained unchanged in Spain, France and the Netherlands.
Net demand for loans (i.e. the difference between the sum of the percentages of banks reporting an increase and that of banks reporting a decline in demand) to enterprises continued to improve but fell back from the high level reported in the fourth quarter of 2014. The net increase in demand for loans to enterprises stood at 6%, after 18% in the previous quarter, remaining above its historical average, but below banks’ expectations for this quarter at the time of the previous survey round. At the same time, banks expect in net terms, a considerable increase in demand for loans to enterprises in the second quarter of 2015.
Regarding the impact of the Asset Purchase Programme on the liquidity situation of banks, in net terms, 21% of the euro area banks reported that their liquidity improved considerably over the past six months and expect this development to continue over the next six months, on account of both their sales of marketable assets and an increase in deposits from enterprises and households, the latter source expected to become the dominant one over the next six months. In addiction, Euro area banks indicated that they have used the additional liquidity in particular for granting loans. Specifically, 28% of the euro area banks indicated that they have used the funds for granting loans to enterprises, while 17% and 18% respectively indicated a housing loans and consumer credit purpose.