According to a report by investment bank Jefferies based on data from the European Central Bank (ECB), at the end of May, credit to businesses in Italy decreased by 2.3% year-on-year. To put this in context, it was up 7.7% in Germany and 6.2% in France. The Eurozone average showed an increase of 4% year-on-year, and apart from Italy, only Spain recorded a decrease (-1.4%), albeit to a lesser extent than Italy.
The ECB did not provide specific explanations for the different lending trends in the various European countries, limiting itself to stating that the restrictive stance of monetary policy is affecting bank financing conditions, with an increase in lending rates and a tightening of the criteria for granting credit. The slowdown in bank lending to businesses is therefore, according to the ECB, attributable to weaker demand for loans and the tightening of credit granting criteria.
The Fragilities of the Italian Banking System
According to analysts, there are some reasons that could explain this Italian anomaly in the gap between credit and GDP trends. The first concerns the uneven conditions of the sectors of the economy. The manufacturing sector in Italy continues to weaken due to lower global demand and more restrictive financing conditions in the euro area, while the service sectors show greater resilience. Since the manufacturing sector requires more access to credit than the service sector, this mismatch could partially explain the difference between credit and GDP trends in Italy.
A second reason concerns bank balance sheets, particularly those of Italian banks. In fact, at the end of June, the LTRO loans granted in previous years by the ECB expired, and the main European banks had to organise themselves to support repayment. Half of the Italian operators, especially the small and medium-sized banks, did not have sufficient liquidity to repay the loans and would therefore have had to resort to new and more expensive forms of financing or reduce their credit exposure. This could have led not only to a contraction in the demand for credit in Italy, but also to a reduction in supply (remember, however, that this problem did not seem to involve the largest banks).
A further reason could concern the remuneration on bank deposits, which in Italy is among the lowest in Europe. During the pandemic, many companies accumulated large amounts of bank deposits, which are now shrinking rapidly. Moreover, for cash-strapped companies, self-financing business growth may be cheaper than borrowing from banks and paying expensive interest.
Italian banks gain from rising interest rates
One indisputable fact is that banks are benefiting from rising interest rates at this stage. According to ECB data from the end of April, only 12% of the increase in official rates was passed on to depositors, while 61% of the Euribor increase was applied to loans to customers. This difference between lending rates on deposits and borrowing rates on loans places Italian banks at the top of the ranking of the main European countries. As of April, the gap between the two rates, representing the interest margin for banks, was 3.29% in Italy, while the Eurozone average was 2.94%. Consequently, Italian banks have a higher margin than France (2.78%), Germany (2.92%) and Spain (2.99%).
In conclusion, we can say that the differences in the Italian banking system compared to other European countries certainly contribute to making access to credit more difficult, especially for small and medium-sized enterprises. As we know, in Italy traditional banks still dominate the financial sector, while in other European countries, financial alternatives such as venture capital, mini-bonds or crowdfunding are more developed. Although still less used in our country, these alternative solutions are a valuable asset to offer Italian small businesses greater accessibility to financing than traditional banking institutions.
Source : Alessandro Graziani for Il Sole24Ore