As we have mentioned, Europe is still in the early stages of recovery. Two recent positive events this week should help get things back on track. Both relate to the banking situation in Europe, a key driver for growth. Banking stress tests and lending standards statistics point to a more positive environment for lending going into the 4th quarter. With geopolitical tensions cooling between Russia and Ukraine, we feel businesses are more likely to take advantage of this situation.
The European Central Bank (ECB) has spent the last year completing an extensive and unprecedented review of 130 of the largest European banks. The “stress tests” were designed to show whether or not banks had enough capital to withstand another economic crisis or downturn. Considering where many banks stood in the beginning of 2014, the results were very positive. None of the banks in larger Euro zone countries like Germany, Spain, or France failed their tests; and of those that did, roughly half had already met capital requirements for 2014. These results should restore confidence in the Euro zone financial sector, and make it easier for banks to raise capital to lend to businesses.
Another positive influence on lending in the 4th quarter is the easing of credit standards. The ECB’s recent survey suggests banks in Germany and France are likely to ease which will encourage loan demand, and hopefully spur growth. Since these countries are a driving force behind the Euro zone recovery, we feel this is a positive first step. Further, now that the stress test evaluations have been completed, we think banks are more likely to start stepping out and loaning more.
EFE NewsService “25 Big European Banks fail stress tests” Thomson Reuters 10-27-2014
Carrel and O’Donnell “Banks see upswing in loan demand across Euro zone” Thomson Reuters 10-29-2014