Euro zone banks cut cross-border lending as stability fears grow

[February 27, 2017]  By Francesco Canepa

FRANKFURT (Reuters) - Euro zone banks have cut lending to their peers in other members of the currency bloc over the past year, European Central Bank (ECB) data showed on Monday, as questions mounted about the health of some lenders and the very future of the euro.

Loans between banks and to the rest of the economy have been growing in a slow but steady fashion for the past 1-1/2 years but this picture belies increasing fragmentation along national borders.

The retrenching makes euro zone countries more vulnerable to domestic downturns and contradicts the ECB's objective to create a banking union in which credit flows wherever it is needed.

Triggered by the 2008 financial crisis, banks' retreat to their home turf had paused in 2014-15 as markets calmed, largely thanks to ECB intervention.

But it resumed last year amid increasing tensions in countries such as Italy, where a handful of banks including the third-largest, Monte dei Paschi <BMPS.MI>, failed to raise capital and may need state help.

"We haven’t had consolidation in the banking sector and a cleaning up of issues that banks have to deal with," Martin Goetz, a professor at the University of Frankfurt, said.

"Banks are more problematic as credit risk and as a result other banks are lowering their credit exposure to them."

The European Central Bank (ECB) headquarters is pictured in Frankfurt, Germany, January 21, 2015. REUTERS/Kai Pfaffenbach/File Photo

Cross-border loans between euro zone banks were down 6 percent year on year to 1.26 trillion euros in January 2017, having hit the lowest level since 2004 one month earlier, the ECB data showed. They had surpassed 2 trillion euros in 2008.

Loans between banks in the same country rose 11 percent in the year to January to 4.6 trillion euros, according to Reuters calculations on ECB data.

Banks in Germany, France and Luxembourg, where cash is at its most abundant, have all cut their cross-border lending over the past year, the data showed.

The ECB does not provide break-up figures of where the cross border loans are directed.

Fears about countries falling out of the currency union were also likely to play a role in banks' decision.

Ralph Hamers, chief executive of ING <INGA.AS>, told the Financial Times earlier this year that the Dutch bank was seeking to match more closely its loans and deposits in each European country.

(Editing by Ed Osmond)

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