We can look at the impaired credit to explain 271 billion drop in 7 years in bank loans to businesses?
We know that bank loans to businesses (financial companies plus manufacturing households) have collapsed from the maximum in November 2011 to the latest Bank of Italy survey, March 2019, from 1.016 to 745 billion euros. We have lost 271 billion in just over 7 years, which is 35 billion a year. An overall drop of almost 27%.
One wonders whether it is possible that the decline is the result of the "passage" from live credit, "performing", impaired credit.
The hypothesis is suggestive but let's see the figures. From the end of 2011 to the end of 2018, total impaired loans (households, businesses, other, gross of adjustments) it moved little, falling from 194 billion to 182 billion; of these, 107 billion were gross non-performing loans at the end of 2011, which became 99 billion at the end of 2018. However, a detailed analysis shows that at the end of 2015 total gross non-performing loans had reached 341 billion and gross non-performing loans alone reached 201 billion. So between the end of 2011 and the end of 2018 the values rose a lot and then fell just as quickly above all due to transfers to entities that are not banks and therefore not included in the statistics: a shift that has solved the problem of non-performing loans on banks' balance sheets, certainly not also the problem of the amount of non-performing credit still existing outside the balance sheets, which will require many decades to be dismantled.
An extremely important role in this reduction of non-performing loans is being played by the GACS program (Securitization Guarantee for non-performing loans) promoted by the Italian Government, which has helped, since the end of 2016 but above all in 2018, to remove over 60 billion gross non-performing loans from the balance sheets of the Banks mostly home loans. These credits ended up in securitization vehicles. They will have to be collected according to schedule to prevent the burden of delays or missed collections from falling on the Italian public debt.
Let's go back to the statistics on bank loans to businesses. In addition to "performing" loans, they already take into account credit that has deteriorated, gross of adjustments.
And therefore for this fact alone the answer is that no, the mountain of NPLs that Italian banks have accumulated and are managing and selling or writing off cannot be blamed, however with very interesting results.
If we take into account the fact that loans are gross of non-performing loans, there is actually an effect. It occurs when the bank that has disbursed the credit, regardless of whether it is non-performing or not, transfers it to a non-bank operator, specialized investment fund or securitization vehicle, for example within a GACS program as we have seen a few lines ago. Or it resets it having exhausted the recovery action, in the case of non-performing loans. The phenomenon, as regards non-performing loans, has become significant in the years from 2016 onwards: above all, banks have sold well over 100 billion in gross loans (roughly a half thanks to GACS) a part of which is towards businesses. So it can apparently be said that, at least in part, the reduction in loans to businesses is the result of the deterioration that occurred as a result of the crisis, which led banks to sell these loans on the market, often at a steep discount compared to their nominal value. The losses have passed over time to the income statement of the banks that have sold, while the assignments have reduced the gross amount of these loans.
It seems to me that this phenomenon does not explain the contraction of bank credit to businesses and this for two simultaneous reasons.
- The first is in the numbers: the gross amount of non-performing loans decreased between the end of 2011 and the end of 2018 by an irrelevant amount compared to the size of the phenomenon, and the reduction concerns all loans, therefore also those towards households and other institutions.
- The second is in the way banks work.
For a bank, recording credit losses is an inherent part of the business. Business lending is business; one of the costs of this business is credit losses. These losses must be anticipated, considered an integral part of the business, monitored and managed in the best possible way.
Then it is true that when the country's economy is doing badly, the banking system can act as a shock absorber and record a deterioration in the overall situation of its credit quality (and it happened between 2011 and 2018); but this cannot justify the amounts we are discussing.
Once the period necessary for recovery has elapsed, which can also be achieved through a sale and it does not matter at what price, the banks have a duty to cancel the exposure, and this is always true. It was true in 2011, it is true in 2019.
The only residual effect therefore has to do with the greater attention that banks today place in canceling or transferring loans, compared to 7 years ago, also due to the pressure from the regulator. How much is this effect worth? Difficult to estimate but the feeling is that we can remain on the order of magnitude of tens of billions of euros. It is no small thing but the explanation for the drop of 271 billion in 7 years in bank lending to businesses does not seem to be this.
It is certainly true, however, that something has broken in the bank-company relationship and that the bank, fearing losing on individual credit granted to companies, has simply given less and with increasing attention.
