Bottom line

Today's ECB release of 'MFI' data for July shows that euro area MFIs have continued to expand their domestic balance sheets (see charts below). 
 
While some of this expansion has come from lending to other financial institutions, it is also noteworthy that lending to households, particularly housing-related loans, has continued to expand gradually on a monthly basis, with the annual growth rate picking up somewhat - by 2.8% y/y in July (with loans for housing up 3.5%). Within this, the country analysis shows often surprising growth rates, particularly for Italy (where loans to households grew by 8.3% y/y in July), France (6.3%), Portugal (4.0%), and even Spain (1.1%) and Greece (1.4%). Meanwhile, loans to non-financial firms are continuing to contract, down 1.3% y/y in July, though the annual pace of decrease has continued to moderate somewhat. The country data showed, however, that loans to non-financial firms grew very slightly in France (0.1% y/y), Greece (3.6%), Portugal (1.3%) and the Netherlands (4.2%).
  
Today's data release also provides information about MFI deposits in July - of note, these showed that the series representing deposits excluding those from MFIs and central government has continued to decrease in Greece in July, by EUR4.5bn - a cumulative decrease of EUR25.8bn since end-2009 (-10.6%). However, the deposit series have been relatively stable in Spain and Portugal in recent months, though there was a large fall in the Irish series in June.  
 
In conclusion, the ECB Governing Council is likely to continue to interpret today's data as indicative that the euro area banking sector is continuing to improve gradually, with both loan demand and supply picking up with respect to households (in response to high saving ratios, low debt servicing costs and strengthening consumer sentiment). While the weakness in bank lending to non-financial firms continues, the pace of decrease has been moderating and earlier in the year large non-financial firms were able to issue significant amounts of debt plus some equity. That said, given the potential for negative feedback loops between financial markets, the financial sector and the non-financial sector, in the context of some slowdown discernible in global economic data, then the Governing Council looks likely to tread very warily in terms of any future policy changes.
 
In our view, those Governing Council members attending the Jackson Hole symposium tomorrow are likely to hear squarely from the Fed that policy should be very nimble and flexible, given the uncertainties that are present. Overall, in keeping with our views, we continue to look for the ECB to announce at next week's Council meeting that it is continuing to provide the one week, one month and three month refinancings in full allotment until at least mid-January.
 

See full report for further details.

source: BarCap