Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Banks Are Lending More While Cutting Rates
Transcript
- Lucas: So there's a number sitting in the latest ECB bank lending survey that I keep coming back to. Business loan demand in the Eurozone is up for the third straight quarter, and banks are actually easing lending standards — not tightening them. That hasn't happened since early 2022. Luna: Right, because for the last two years, every quarter felt like a race to see how much tighter banks could get. What changed? Lucas: Well, the headline is the ECB's rate cuts. They've taken the deposit rate down to 3.25 percent as of this month. But here's the counterintuitive part — lower rates are actually widening margins for a lot of Eurozone banks, especially in the south. Luna: Wait, normally when rates fall, bank margins shrink, because they earn less on loans while deposit costs are sticky. How are they widening? Lucas: Because deposit rates in the Eurozone never really rose as much as the ECB's policy rate during the hiking cycle. The average deposit beta — that's how much of a rate hike gets passed to savers — was only about 30 percent. So banks were making a killing on the spread. Now as the ECB cuts, they're lowering loan rates slowly, but they're cutting deposit rates even slower. The spread is actually getting bigger. Luna: So the banks are basically winning on both sides. They're attracting borrowers with slightly lower loan rates, but they're not passing the full cut to depositors. That's a pretty sweet spot. Lucas: Exactly. And it shows up in the data. Lending to non-financial corporations in the Eurozone grew at 4.2 percent year-over-year in May, the fastest clip since 2023. And the ECB's own survey says banks expect demand to keep rising, especially for long-term investment loans. That's a concrete sign that the credit channel is reopening. Luna: Is that across the whole Eurozone, or are we still seeing a north-south divide? Because I remember episodes last year where German banks were tightening while Italian banks were loosening. Lucas: The gap has narrowed a lot. German banks are still a bit cautious, but they're easing too. The real acceleration is in Spain and Italy. Lending growth there is running at nearly 6 percent year-over-year. And that's meaningful because those economies have more small and medium-sized enterprises that are sensitive to bank credit. So this is helping the periphery catch up. Luna: And it's not just loan volumes. The quality must be improving too, or the ECB would be worried. Are non-performing loans still falling? Lucas: They are. The aggregate non-performing loan ratio for Eurozone banks is down to around 1.8 percent, the lowest since the sovereign debt crisis. So banks have the capital headroom to lend. The combination of lower rates, rising demand, and clean balance sheets is pretty powerful. Luna: It does feel like the pieces are lining up for a proper recovery. If businesses are borrowing to invest, that feeds into employment, consumption, the whole cycle. Lucas: Speaking of which — this is actually a good moment to mention something about how we keep this show going. If listening to us walk through the economy has made something click, a handful of listeners chip in monthly over at buy me a coffee dot com slash fexingo, and that's what makes it possible to produce this many episodes without ads. Luna: Yeah, it's a small group, but it genuinely keeps the lights on. And we really appreciate it. Lucas: Anyway, back to the lending picture. One risk I do want to flag is commercial real estate. A lot of Eurozone banks have exposure to office and retail property, and vacancy rates in places like Frankfurt and Paris are still elevated. If that deteriorates further, it could hit bank balance sheets and reverse this trend. Luna: But so far, the ECB stress tests have shown that banks can handle a moderate downturn. The worry is if we get a hard landing in commercial real estate. That's probably the biggest tail risk right now. Lucas: Absolutely. And it's why the ECB is watching bank lending standards so closely. But for the moment, the trend is clearly positive. Credit is flowing again, and that's one of the best leading indicators we have for Eurozone GDP growth in the second half of 2026. Luna: So what should our listeners watch for next? I'd say the ECB's July meeting — if they signal another cut, that could accelerate lending even further. Lucas: Right. And also watch the deposit pass-through. If banks start cutting deposit rates faster, that will tell you they're confident in their liquidity. But if they hold them steady, they might be preparing for a tougher environment. Either way, the lending cycle is turning, and that's a big deal for the Eurozone. Luna: Good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. Talk soon.