Monday, August 20, 2012

Cross border lending off - dealing with global uncertainty

Cross boarder lending by German banks has declined by over 20 percent since the beginning of the year. German banks will not lend to PIGS. These banks are saving lending power for local borrowers. German banks have cut cross-border lending by 50% since peaks in 2009. French banks are doing the same thing. This change in lending behavior reflects the potential break-up of the euro. It also reflects the fear that there will be regulatory difference across countries. The EU is not moving closer, but further part. Financial integration is less likely.

The reduction in EU bank assets in the US since Sept 2007 peak has been close to 550 billion. The Eurozone bank assets in the US have moved from approximately $1.5 trillion to $1 trillion, back down to 2005 levels. This loan reduction is for an economy that is doing relatively well. 

The problem applies to cross border lending outside of the EU. If there is less financial integration, there will be less growth potential. One of the key roles of banks is to move capital from savers to borrowers around the world. This has not happened since 2008.

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