Lifesaver for the banking industry

The European Central Bank (ECB), with the reluctant acquiescence of Germany, is stockpiling some heavy-caliber monetary measures to put an end to the financial turbulence in the euro zone. The bank headed by Mario Draghi has decided to grant to the European banks, concretely to 523 entities, almost half a trillion euros in three-year loans at one percent interest so that they can comfortably cover the upcoming maturity of their debt. In other words, the ECB is rescuing the European banking industry from its refinancing predicament. In the background is the old idea that the banking crisis is at the origin of the financial crisis (and of the recession too), and that if the tightness of bank balance sheets is not relieved, the chance of the European economy recovering is nil.

With the massive injection of loans at three years, the longest term ever offered, the ECB has eliminated the banking industry's anxieties about the due dates of their debt. As a first effect, the flood of cheap credit will allow bank profits to rise in view of the fact that it opens a wellspring of business (money borrowed at one percent can be invested in better remunerated assets).

The final link in the ECB chief's chain of reasoning is that by enabling the banks to cope with these due dates at a cost far lower than that of the market, they will have greater capacity to grant loans to companies and households. The supposition is a rather weak one, at least during the first months of 2012, but it seems to be one of the few indirect mechanisms capable of inducing the banks to leak some trickle of money into the real economy.

The other effect intended is that, with the capital thus obtained, the banks, or many of them, will decide to purchase euro-zone sovereign debt, thus alleviating the pressure on it. Again we are looking at a probable effect. The certain thing is that the banks have at hand a fertile mechanism for increasing profits. The part of the liquidity that will reach companies is questionable, and can raise few hopes.

The case is that if economic recovery is to be something more than an unattainable daydream, credit has to be brought back to normal. Non-financial companies are aware that, until now, the huge injections into the banking industry, in liquidity or in capital, have not achieved the aim of credit normalization. And this is so despite the fact that the reduction of credit also produces a shrinkage of profit margins. The banking industry's fear of shortfalls of capital, and its terror of rising bad loans are, for the moment, stronger than the expectation of new business from lending.

It is no secret that the financial reform the government intends to implement under the management of Luis de Guindos will have to play some tune more complex than that of the jingle that we need more mergers among Spanish banks. What matters more is the health of their balance sheets, and the profit margin permitted by their damaged real estate assets rather than their sheer size.