The key chart
The key message
The outstanding stock of loans that support production and income formation in the euro area (“COCO-based loans”) hit a record high in November 2021 of €5,524bn. Is this cause for celebration? No, not quite…
Remarkably, this new high occurred 155 months after the previous high, recorded back in January 2009 (€5,5517bn). Equally notable/concerning is the fact that the stock of less-productive loans that support capital gains through higher asset prices (“FIRE-based loans”) also hit a new record high of €6,091bn. This was €1,503bn above the corresponding January 2009 level of €4,588bn.
What this means is that nearly all of the aggregate growth in euro area lending since the GFC has been in the form of less-productive lending (that also now accounts for more than half of total outstanding loans). So not only is current lending relatively subdued in volume terms (and negative in real terms) it is also largely the wrong type. FIRE-based lending accounted for 2.7ppt of the total 3.7% growth in private sector lending in November 2021, for example.
Over the past two years, I have been highlighting the associated, “hidden risks” associated with unorthodox monetary policy and the negative implications they have for future growth, leverage, financial stability and income inequality. More recently, I also noted that the ECB has (finally) called for (macroprudential policy) measures to address them with specific reference to “real estate risk” at the end of the year.
It is too early to expect changes in the next few data releases (starting this week on 28 January 2022) but I will be placing added emphasis on the trends in the mix of EA lending during 2022. Three key signals became four…
“It’s a record – (of sorts)”
The outstanding stock of loans that support production and income formation (COCO-based loans) hit a record high of €5,524bn in November 2021. Remarkably, this new high occurred 155 months after the previous high recorded in January 2009 (see chart above).
The outstanding stock of loans that support capital gains through higher asset prices (FIRE-based loans) also hit a new high of €6,091bn in November 2021, €1,503bn above the level recorded in January 2009 (see chart above). FIRE-based lending currently accounts for 52% of total euro area lending.
Current lending in the euro area is characterised by relatively subdued volumes and the wrong mix when compared to the pre-GFC period. In November 2006, for example (see graph above), lending to the private sector was growing at 11.2% YoY in nominal terms and 9.2% YoY in real terms. Productive, COCO-based lending accounted for 6.2ppt of this growth, while less-productive FIRE-based lending accounted for 5.0ppt.
In contrast, according to the latest data point for November 2021, lending to private sector grew only 3.7% YoY in nominal terms but fell -1.1% in real terms. Less-productive lending accounted for 2.7ppt of the total 3.7% growth (see chart above).
As discussed in previous posts, QE has simply fuelled the shift away from COCO-based lending towards FIRE-based lending in the euro area. This trend has negative implications for future growth, leverage, financial stability and income inequality. Hence, the ECB’s calls in November last year for measures to mitigate risks from FIRE-based lending were welcome. Germany stands out in this context, given the combination of house price dynamics, the extent of house price overvaluation and the lack of specific macroprudential measures to address these risks.
Conclusion
Throughout 2021, CMMP analysis focused on three key signals from the money sector: monthly HH deposit flows (behaviour proxy); trends in consumer credit (growth proxy); and the level of synchronisation of money and credit cycles (policy proxy). These remain important indicators in 2022 to which I will add a key focus on the mix of lending and the potential impact on any new macroprudential measures. Watch this space…