Home > Uncategorized > Are Eurozone national banks providing credit to their governments? Wonkish

Are Eurozone national banks providing credit to their governments? Wonkish

In the comments to this post, there is some discussion about credit provided by Eurozone banks to their governments. I stated that ‘credit to the government’ is at this moment (!) the most important reason the stock of money in the Eurozone is increasing, some comments are skeptical. A re-investigations shows that it is all slightly complicated. According to the Eurozone law, national central banks are not allowed to provide credit to their governments. Normal banks are however allowed to do so. And according to ECB statistics, they do (see the graph, source). Bank ‘credit’ to the government is growing at a 10% a year rate, while the growth rate of credit to other Euro area residents is barely positive.  I do however seem to have misread or at least misunderstood the word ‘credit’ in this graph.


According to this source (p. 111), credit is defined by the statisticians of the ECB as:


The source is alas not clear if this ‘credit’ is provided on the primary market (i.e. the banks are using freshly printed bank money to buy bonds directly from their governments) or on the secondary market (i.e. the banks are using new bank money to buy government bonds from non government/non bank parties like pension funds). But whatever – it does leads to an increase in the amount of money and the tables behind the graphs make clear that the amount of ‘credit’ to the government is at this moment by far the most important source of Eurozone money growth. In 2015, ‘credit’ to the government increased with 284 billion, while credit to ‘other Euro area residents’ increased (net) with 97 billions.

  1. April 26, 2016 at 4:27 pm

    Hi Merinj. Good to see your response here. We can explore this further collectively perhaps, so for now I expand on my previous point. I am corrected: private banks do purchase sovereign debt, between perhaps 10% in the UK to 30% in some Eurozone countries, though of course in the first instance it is the NBFIs (Non-Bank Financial Intermediary, as the Bank of England usefully terms them) that purchase them at the point of issue. However, as I pointed out before, the private banks’ balance sheet is not much expanded by this, so the money supply is hardly affected. To take the UK, my estimate (now you have helpfully provided figures earlier) is that about 5% of the private banks’ balance sheet is made up of Treasuries, perhaps it is more like 10% in the Eurozone? So in answer to your question: no, private banks do not use ‘freshly printed [private] bank money’ to buy government debt: they have to use reserves to do that, and anyway even if government borrowing went up by 100%, private bank balance sheet expansion would only be 10-20%.

    Unless, that is, private banks make conventional loans to government? Do you have evidence of that?

    • merijnknibbe
      April 26, 2016 at 8:31 pm

      Dear Mikeralph, if there are conventional loans they are artfully concealed in the phrase ‘credit’! And I should have been more careful with the use of the phrase ‘freshly printed’: I meant new M-3 money. And the amount of M-3 money, be it in the shape of reserves turned into M-3 money or created by conventional loans, is increasing because of ‘credit’ provided to the government and not because of lending to the private sector. As is clearly shown by the graph in the monthly Monetary Developments in the Eurozone release of the ECB: https://www.ecb.europa.eu/press/pdf/md/md1602.pdf (a shift from long term saving accounts to overnight accounts also plays a role).

  2. April 27, 2016 at 5:10 am

    If a bank buys government bonds it does so with its equity and no money is created. If a bank lends a third party which buys government bonds (presumptively for resale: the loan interest would normally exceed the bond rate) money is certainly created. Isn’t that what Wolfe’s “Bonfire of the Vanities” was about?

    • April 27, 2016 at 9:55 pm

      Absolutely, a bank cannot create money to buy anything. But “Bonfire of the Vanities”? A great novel, but I don’t recall any grasp or interest in monetary theory therein.

  3. April 27, 2016 at 8:31 am

    Most interesting! The ECB press release you linked to shows a period of broad money destruction up to Oct 2014, followed by a period of broad money creation, all attributed to “credit to general government”. Now, normally government borrowing does not expand the balance sheet of the private bank sector (and hence become recorded as broad money growth) because the government’s own deposit account is not held by the private sector. Putting it another way, when the private sector purchases Treasuries it is paid for by reserves moving to the government account at the central bank – an operation that has zero net effect on the balance sheet of the private sector banks, and hence zero effect on broad money. The reverse is also true of course, that when government pays off debt there is no broad money destruction.

    So, what is being shown in the ECB graph at https://www.ecb.europa.eu/press/pdf/md/md1602.pdf ? I suspect the clue is in the phrasing “credit to general government”. Perhaps “general government” includes the regional cost-centres (councils in the UK, not sure how they are termed in Europe). Councils have accounts with private sector banks, so any borrowing or repayment they make creates or destroys broad money. Perhaps this is what the graph is showing? A query to the ECB would clear this up.

  4. April 27, 2016 at 11:18 am

    That is correct. General Government includes the central government but also councils, state governments, etc. But while Central government is excluded the money-holding sector, the rest of it is included.

    You can see this in the Manual of the ECB statistics*, in the definition of Monetary Aggregates and Counterparts (pag. 109): “Monetary aggregates: For euro area monetary statistics, the money-holding sector comprises all non-MFIs resident in the euro area except central government, i.e. households, non-fi nancial corporations, fi nancial corporations which are not MFIs, state government, local government and social security funds. Central government is considered to constitute a money-neutral sector, except that central government liabilities with a monetary character are included in monetary aggregates. Central government holdings of monetary assets issued by MFIs (the deposits that central government holds with MFIs and central government holdings of other monetary instruments issued by MFIs) are not counted as holdings of the money-holding sector.”

    (*) Further info in the manual: https://www.ecb.europa.eu/pub/pdf/other/manualmfibalancesheetstatistics201204en.pdf

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