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European Banking Sector Regulation

Dáil Éireann Debate, Wednesday - 18 April 2012

Wednesday, 18 April 2012

Questions (136)

Richard Boyd Barrett

Question:

123 Deputy Richard Boyd Barrett asked the Minister for Finance if he discussed the growing credit crunch across the EU and the phenomenon of European banks depositing funds with the ECB rather than lending into the economy; and if he will make a statement on the matter. [13953/12]

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Written answers

The question of whether there is a credit crunch underway across Europe has been a subject of discussion in recent months, both at a European level and in wider public forums. This was largely the result of the sharp contraction in lending in the Eurozone during December. During this period of heightened stress, many financial institutions experienced great difficulty in raising funds in the inter-bank market, and subsequently there was a significant tightening of the credit supply to both companies and households. Following this contraction in December, the flow of credit in both January and February has markedly improved, due in large part to the European Central Bank's (ECB) Long Term Refinancing Operation (LTRO). Recently released figures by the ECB indicate that loans to households and companies increased significantly in January, while only falling slightly in February; the February figures failing to account for the second round of LTRO which was only released on the 29th of that month. These are signs of an improvement in lending across the Eurozone, and continuing attention will be focused on the situation in an effort to further improve lending conditions while banks continue to raise capital, deleverage assets and also to roll funding commitments.

As stated recently by Mario Draghi, President of the ECB, it is inaccurate to say that the liquidity is simply being deposited back in with ECB. The rise in the deposit facility is an accounting identity — as the ECB lends out more money which raise its assets, its liabilities must also increase by an equal amount. Additionally, the banks which have placed deposits with the ECB are not identical to the banks that drew down the funding, indicating that the liquidity provided is circulating throughout the system as intended. It is also important to note that the purpose of the LTRO was to maintain price stability across the Eurozone and to prevent the onset of a credit crunch. These efforts were taken to return confidence to the financial environment across Europe, and as stated by the ECB, it may take several months before the full impact of this additional liquidity becomes available to businesses and households.

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