The key chart

**Annual growth (% YoY) in EA private sector lending split between FIRE-based and COCO-based lending** (Source: ECB; CMMP)

The key message

Is the ECB correct to argue that, “monetary policy measures continue to support lending conditions and volumes” in the euro area? Yes, but only up to a point.

On the supply-side, the APP, PEPP and TLTRO III programmes are having a positive impact on banks’ liquidity positions and overall market financing conditions. On the demand side, borrowing costs are at (mortgages) or close to (NFC loans) historic lows in nominal terms and at historically low and negative levels in real terms. So far, so good.

That said, lending volumes are unexciting in relation to recent trends and previous cycles and currently negative in real terms. No compelling volume story here.

More importantly, current policy measures are supporting the “wrong type of credit”.

Less-productive lending that supports capital gains through higher asset prices (FIRE-based lending) contributed 2.5ppt to the 3.2% total loan growth in September 2021. Worryingly, this is part of longer-term trend. While the outstanding stock of private sector loans hit a new high in September, the stock of productive lending that supports production and income formation (COCO-based lending) remains below its January 2009 peak.

This matters for two key reasons. First, the shift from COCO-based lending to FIRE-based lending has negative implications for leverage, growth, financial stability and income inequality (expect new macroprudential measures for residential real estate soon). Second, it re-enforces the importance of an on-going policy response that remains “fiscal, first and foremost”.

“How much? How productive?”

In its latest “Euro area bank lending survey”, the ECB argues that, “monetary policy measures continue to support lending conditions and volumes” in the euro area (EA). Is this correct?

The supply-side

**“Liquidity-providing” monetary policy operations in EUR bn** (Source: ECB; CMMP)

On the supply-side, EA banks report that “the ECB’s asset purchase programme (APP), the pandemic emergency purchase programme (PEPP), and the third series of targeted longer-term refinancing operations (TLTRO III) continues to have a positive impact on their liquidity positions and market financing conditions” (see chart above).

The demand-side

**Composite cost-of borrowing for house purchases and NFC loans in nominal and real terms** (Source: ECB; CMMP)

One the demand side, borrowing costs are at (mortgages) or close to (NFC loans) historic lows in nominal terms and at historically low and negative levels in real terms (see chart above). In September 2021, the composite cost-of-borrowing for house purchases hit a new low of 1.30% (-2.03% in real terms). The composite cost of borrowing for NFC’s was 1.48%, 0.8ppt above its March 2021 low, but a new low in real terms (-1.86%).

How exciting is the volume story?

**Annual growth (% YoY) in private sector lending in nominal and real terms** (Source: ECB; CMMP)

Lending volumes are unexciting in relation to recent trends and previous cycles and currently negative in real terms. Lending to the private sector grew 3.2% YoY in September 2021 both on a reported basis and after adjusting for loan sales and securitisation. In nominal terms, lending growth has been relatively stable since March 2021 but is 2ppt lower than the recent peak growth recorded in May 2020 (5.2% YoY). Lending growth in the current cycle is relatively subdued, however, in relation to past cycles (see chart above). Furthermore, in real terms, lending in September fell slightly when adjusted for HICP inflation.

No compelling volume story here.

Loan growth from the ECB perspective

**Annual loan growth with ECB breakdown by borrower** (Source: ECB; CMMP)

As an aside, the ECB typically classifies lending by type of borrower – households (HHs), non-financial corporations (NFCs), non-monetary financial corporations (NMFCs) and insurance companies and pension funds (ICPFs) – with further subdivisions based in the type of HH borrowing and the maturity of NFC borrowing.

In September 2021, HH lending contributed 2.2pt to the total 3.2% YoY growth, essentially mortgages. NFCs and NMFCs contributed 0.6ppt and 0.5ppt respectively but lending to ICPFs made a slight negative contribution of -0.1ppt.

Loan growth from the CMMP Perspective

CMMP analysis presents an alternative classification based on the productivity of credit use. Broadly speaking, lending can be spilt into two distinct types: lending to support productive enterprise; and lending to finance the sale and purchase of existing assets. The former includes lending to NFCs and HH consumer credit (and other HH lending) and is referred collectively here as “COCO-based” lending (COrporate and COnsumer). The latter includes loans to non-bank financial institutions (NBFIs) and HH mortgage or real estate debt and is referred collectively here as “FIRE-based” lending (FInancials and Real Estate).

Note that COCO-based lending typically supports production and income formation while FIRE-based lending typically supports capital gains through higher asset prices.

Supporting the “wrong type of credit”

**Annual loan growth with CMMP breakdown by productivity of use** (Source: ECB; CMMP)

Viewed from a CMMP perspective, current policy measures are supporting the “wrong type of credit”. Less-productive lending that supports capital gains through higher asset prices (FIRE-based lending) contributed 2.5ppt to the 3.2% total loan growth in September 2021 (see chart above).

**Annual loan growth broken down by productivity of use since September 2006** (Source: ECB; CMMP)

Worryingly, this is part of a longer-term trend. As can be seen from the chart above, higher volumes in the pre-GFC period were more balanced with more-productive COCO-based lending accounting for 56% of total outstanding loans. Today, that share has fallen to 48%.

**Outstanding stock (EUR bn) of COCO-based lending** (Source: ECB; CMMP)

As noted in August 2021, while the outstanding stock of credit hit a new high in September, the stock of productive COCO-based lending (€5,470bn) remains below its January 2009 peak (€5,517bn). In other words, the aggregate growth in lending since early 2009 has come exclusively from FIRE-based lending which now accounts for 52% of the outstanding stock of loans (see chart below).

**Outstanding stock (EUR bn) of COCO-based and FIRE-based lending** (Source: ECB; CMMP)

Conclusion

The ECB is entitled to argue that monetary policy measures have supported lending conditions and volumes. However, current lending volumes are unexciting in relation to previous cycles and negative in real terms. Policy is also supporting the “wrong type” of credit – fuelling FIRE-based lending rather than productive COCO-based lending that supports production and income formation.

This matters for two key reasons. First, the shift from COCO-based lending to FIRE-based lending has negative implications for leverage, growth, financial stability and income inequality. During the COVID-19 pandemic, some national authorities eased macroprudential measures for residential real estate (RRE). This week, however, the ECB argued that further macroprudential measures should be considered where RRE vulnerabilities continue to build up. (Watch this space.) Second, it re-enforces the importance of an on-going policy response that remains “fiscal, first and foremost”.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.