Credit Crunch in Germany Cannot be Confirmed

There is yet no proof of a shortage of bank credits for German firms. On the contrary, the credit volume in Germany, without credits for the German government and among banks, has increased slightly but continually since the beginning of 2008. This is the case despite recession and modest demand for credits. These are the findings of an empiric analysis conducted by the Centre for European Economic Research (ZEW) in Mannheim.

In the last 1.5 years, the growth rate for the outstanding credit volume in Germany also developed positively. In May 2009, the growth rate was about 2.8 percent. "The absolute level as well as changing rates of the credit volume in comparison to the previous year can not confirm the alleged credit crunch in Germany, says Dr. Michael Schröder, head of the ZEW research department International Finance and Finance Management. "In the last few weeks, there was an ongoing economic discussion in which banks were accused not to grant the private economy enough loans and therefore intensifying the recession. This accusation cannot be proved by the facts currently available."

However, the ZEW analysis also indicates that granting credits largely varies in the different bank groups. Private regional banks and banks with special functions registered a double-digit growth rate. Major banks and real estate credit institutions on the other hand had a negative growth rate in comparison to the previous month.

On a closer look, a credit crunch occurs when the credit volume is limited immensely in a recession. Such a credit crunch can not be proved easily with empirics. The observed changes of the outstanding credit volume are defined by changes in both supply and demand. To draw the conclusion, the credit supply function has to be estimated. This leads to the methodical problem that it is not simply possible to separate credit demand and credit supply functions in empirics. The ZEW analysis therefore aims at displaying the current situation on the German and European credit market. Another aim is to investigate whether there are any signs for a credit crunch.

Looking at the credits granted to German firms, without the German government and credits among banks, both time series for Germany and the Eurozone developed very differently between January 2007 and May 2009. The credit volume in the Eurozone (without Germany) considerably increased until the end of 2008 and has decreased slightly since. The credit volume in Germany has increased slightly but continually since the beginning of 2008.

The growth rate of the outstanding credits indicates an even larger difference in comparison to the previous year. The growth rate in the Eurozone (without Germany) decreased from more than 16 percent at the beginning of 2008 to 1.9 percent in May 2009. In Germany, the growth rate increased steadily in the same period and stood at around 2.8 percent in May 2009, outweighing the rate in the Eurozone considerably.

To analyse whether there is a credit crunch in Germany, the development of the credit demand has to be considered, too. Like the credit supply, it cannot be observed directly. Auxiliary quantities have to be used. A certain factor of the credit demand in the whole economy is the interest rate, the economic development. This is represented, for instance, by the Gross Domestic Product (GDP) or the industrial output. Since a couple of months, the development has been considerably regressive for the whole Eurozone as well as for Germany. The GDP has decreased by 4.9 percent in the period from the first quarter 2008 to the first quarter of 2009. In Germany, it even declined by 6.9 percent in the same period. Compared to the previous year, the industrial output (without construction) has decreased even more than the GDP. It declined by 17.9 percent in the Eurozone and 23.7 percent in Germany in April 2009.

Even the slightly declining credit volume in the Eurozone (without Germany) is far away from keeping up with this decline of the economic performance. The development of outstanding credits in the Eurozone is compatible with a declining credit demand due to the recession. The huge economic slump in Germany on the other hand makes the development of the outstanding credit volume in Germany look brighter. The numbers rather suggest an increase in the credit supply of banks, not a decline. At least this is the case for credit terms of less than five years. Long-term credits in Germany, however, are at a standstill.

Contact

Prof. Dr. Michael Schröder, Phone: +49/621/1235-140, E-mail: schroeder@zew.de