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European Central Bank data shows the share of interbank funding that crosses borders within the eurozone dropped by a third, to just 22.5 per cent in April from 34.5 per cent at the beginning of 2008. Banks are now lending to other banks across eurozone borders at only about the same rate as when the single currency was first launched, 15 years ago.
"We have seen the banks very much reverting to their domestic markets and not wanting to extend credit abroad", said Tony Stringer, a government debt analyst with ratings agency Fitch. Eurozone banks' stock of lending to their Greek peers was a startling 68 per cent lower in April than in the same month a year earlier - equivalent to €18 billion withdrawn. In Portugal, the decrease was roughly one quarter. The figures, obtained from the ECB, include lending both between separate banks in different eurozone countries and within a single banking group to its cross-border units. Faltering confidence may be responsible for the reduction in cross-border lending, due in part to a bailout of Cyprus that closed one of its two main banks and imposed losses on creditors, making banks in the eurozone appear more risky.
The trend has put Europe's supervisors on alert and stands in contrast with statements by ECB President Mario Draghi that banks in "stressed" countries are finding it easier to get such loans and that the ECB had got "better control of monetary conditions in the euro area". The cross-border freeze also blunts ECB efforts to bolster the economy by cutting interest rates because it prevents cheaper and easier loans for consumers and business, especially in southern Europe, where loan costs are double that of north. Were the system working at its best, southern European banks should be able to borrow from northern ones and pass on the cheap rates to their customers. Joerg Asmussen, the German member of the ECB's executive board, conceded that some banks continue to struggle: "Banks from the countries most severely hit still have only limited access to the money market", he said. Such concerns set the backdrop for a gathering of European Union finance ministers in Luxembourg, which will shape a new EU law allowing the imposition of losses on bondholders and large depositors of a failing bank.