Eurozone banks cut cross-border #lending as stability fears grow

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 eurozone 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."

Cross-border loans between eurozone banks were down 6% 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% 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.

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.