1 euro of credit for each extra euro saved between 2007 and the end of 2012

In previous years the growth in lending by the financial sector to businesses, households and governments was stronger than the growth of the entire economy. Each extra euro in savings that was received was converted into at least one euro of credit. Between the end of 2007 and the end of 2012 the economy received an injection of EUR 87.5 million. At the end of last year, thanks to that injection of additional credit, a total of around EUR 393 billion worth of loans was outstanding.

Lending

Since the financial crisis of 2007, lending in Belgium has grown steadily. By the end of 2012, the volume of loans to households, businesses and public authorities had risen by 20.2%, 31.5% and 34.8% respectively compared with the end of 2007. As a result of this increase, the volumes in the three credit segments reached historic peaks during 2012.

This situation proves that the financial institutions have always taken the first of their core tasks to heart, even in the difficult years following the financial crisis, despite the tightening of regulations and the fact that they were busy reducing their balance sheets, lowering their leverage and increasing their core capital. They did so mainly be reducing their exposure to foreign assets, but continued to finance the economy, partly thanks to cheap financing via the broad deposit base.

Moreover, in its 2012 annual report, even the National Bank of Belgium confirms that the banks have fulfilled their role as the financiers of the economy outstandingly. In that report, the regulator specifies that the institutions are falling back on their core activity, namely the converting of deposits into loans. Page 50 of the report states: “In Belgium, the credit institutions are continuing the restructuring of their balance sheets that began following the outbreak of the financial crisis. In 2012 they reduced their claims on the peripheral countries of the euro zone. At the same time they again focused on their intermediation activities in Belgium and on their strategic markets: deposits from retail clients increased and by and large lending was maintained.”

Study of the importance of deposits for the Belgian economy and the relationship with the financial crisis

Professor Nancy Huyghebaert of KU Leuven draws comparable conclusions in her “Studie naar het belang van deposito’s voor de Belgische economie en de relatie tot de financiële crisis” [Study of the importance of deposits for the Belgian economy and the relationship with the financial crisis]. This paper studied the interaction of deposits and lending with certain external variables such as the economic climate, inflation and market volatility. The study also revealed that since 2007 banks have granted plenty of credit, increasingly so within the national borders (see  How savings deposits oil the Belgian economy).

The study also revealed that this lending was largely achieved with the help of the stable financing of banks via Belgian savings deposits, and that interbank financing was scaled down considerably. This means that financial institutions are more stable and more autonomous.

In any event, an over-dependence on market financing seems to have created liquidity problems for certain financial institutions worldwide in 2007 and 2008. In the climate of mistrust of that time, interbank funding dried up in a flash, as a result of which certain institutions were no longer able to meet their payment obligations on the financial markets. It then became clear that interbank financing is compromised more readily in a crisis of confidence than the more stable volume of deposits.

Precisely because savings deposits ensured stable financing of the banks at a reasonable price, the financial sector has been able to finance the economy at a low cost in recent months.

Low interest rates

Both private individuals and businesses can borrow at extremely low interest rates in Belgium. At the end of 2012, for example, the cost of a business loan had fallen to its lowest level ever: in December 2012 the average weighted interest on new bank loans to Belgian businesses was 2.92% according to the European Central Bank (ECB). That percentage has since risen to 2.98%. In 2006 it was still in the region of 6%.

Belgian interest rates are also much lower than those of the banks in our neighbouring countries. The difference in cost can sometimes run to several percentage points. That is down to the large volume of deposits, but also to the diversified Belgian banking landscape, which stimulates competition among the various players.

The question is whether these low interest rates will remain tenable in the future. Low interest is a consequence of, among other things, the large and relatively stable deposit base in Belgium (see How sustainable is the Belgian savings volume?), but also of the low reference rates applied by the European Central Bank (ECB). This low ECB reference rate forms an integral part of the stimulus policy of the European Union, which is counting on the fact that cheap loans will again boost economic growth. But this is not guaranteed to last for ever (sometimes not even for the term of the loans granted by banks).

Aside from a change in the ECB’s reference rate, low interest rates on loans are also threatened by often well-intentioned initiatives that have unintended effects. A proposal like that of the Livret B, which was on the political table last autumn, is one example.

The Livret B idea involved creating a special savings account on which the bank would pay interest that would yield as much as the notional interest deduction (NID) for companies. The money brought in by such a account could only be used for lending to SMEs, the self-employed and households. Undoubtedly this was a well-intentioned initiative that could have served a social need. Yet the initiative would also have pushed up the cost of lending: a bank that has to collect money via a savings account that costs the bank 3.5% will never be able to lend money for less than 3%, as it currently does.