The Economy

ECB Stimulus: Good for Loan Volumes, Bad for Profits

Bankers say the European Central Bank's stimulus is leading to more loans but is also cutting into profitability.
Matthew HellerApril 19, 2016
ECB Stimulus: Good for Loan Volumes, Bad for Profits

The European Central Bank’s asset purchase program (APP) is encouraging banks to make loans but is hurting their profitability, according to an ECB survey.

As part of its economic stimulus policies, the ECB has been buying 80 billion euros worth of securities, mainly government bonds, from banks every month. The purchases increase the amount of cash in the euro zone’s financial system and drive down interest rates.

In its latest six-month survey of lenders, the ECB found that 16% of banks had used the additional liquidity provided by the asset purchase program to grant loans, with the largest share of those loans going to businesses. The previous survey in October showed 29% of banks making loans.

Only 5% of banks said they have used the funds for refinancing. “Banks have mainly used the additional liquidity related to the APP during the last quarter of 2015 and the first quarter of 2016 for lending,” the ECB said.

According to the survey, the impact of the program on banks’ finances has been “broadly neutral,” except for profitability. “Euro area banks have indicated that, overall, the APP has had a negative impact on their profitability over the past six months (-19%, down from 2% in the October 2015 survey round),” according to the survey report.

“Over the next six months, euro area banks expect profitability to continue to decrease as a result of the APP,” it added.

According to Reuters, the modest results from the survey “may draw more criticism of ECB President Mario Draghi, who has come under renewed fire from Germany for printing money to boost the economy.”

On Tuesday, the former president of Germany’s Bundesbank warned that central banks in Europe and Japan have reached the limits of monetary stimulus. “We are now at a point … probably [where] the net benefits of further monetary easing, in particular in Europe but also in Japan, are outweighed by the costs and side effects,” Axel Weber said, according to the Wall Street Journal.

The survey also showed that the ECB’s negative deposit rate “had a positive impact on lending volumes, in particular for loans to households,” while hurting banks’ interest income and loan margins.