This Week's Focus: Bank credit is not growing
Friday, 27 of November 2015
This week focus
We need to get credit flowing to strengthen the economic recovery, say our rulers. They are right? Does the economic recovery is feasible with the state of our financial system?
A look at the data shows a high correlation between the amount outstanding of credit to households and businesses and the evolution of the Gross Domestic Product (GDP). According to data released by the Bank of Spain in its Statistical Bulletin, credit developments (to other domestic sectors) of the financial system to households and businesses it peaked in December 2008 and since then has continued to decline.
In terms of GDP, as we discussed in our post IMF Report, also the path of uninterrupted growth that came to record the Spanish economy was abruptly disrupted by the financial crisis of 2008. Thus, real GDP peaked at 1.11 billion in 2008 to remain below that level until today.
Relationship between bank credit and "real economy"
The Spanish GDP consists of consumption, investment, government spending and the net balance of external accounts. The main component is consumption, which accounts for about 60% of GDP, followed by investment and public spending. The net balance of exports (exports minus imports) represents a residual percentage.
The financial system has, in Spain, a major role in financing economic activity, channeling savings into investment and consumption by way of bank credit. Thus, it is logical that a period of GDP growth will associated with one credit expansion and vice versa.
The graphics shown that direct relationship (although the credit balance is deflated and GDP itself) between bank credit and GDP. Although recently emerging alternative ways to bank financing, especially for businesses, therefore the issuance of bonds on the market directly by the companies (large) as direct access to savers by crowdlending systems or direct loans, credit banking remains the core funding of the economy.
For this reason, it is worrying that bank lending decreases in the current recovery of the growth rate of the economy. From January to September 2015, credit has declined by -2.97% which contrasts with GDP growth in the period of 2.7% accumulated in the three quarters, (with an annual rate of 3.4% ).
The reasons behind the decline of outstanding bank credit have to do with regulatory changes such as increased capital ratio (capital, primarily) based on risk-weighted assets, the accumulated arrears during the previous bullish cycle and financial deleveraging of firms and families. If you continue this divergence between the evolution of bank credit and GDP growth could be reduced again in no time.