MFN - Eurozone lending standards, insolvencies and recessions

Eurozone banks have tightened lending standards since the beginning of 2022. In this Macro Flash Note, GianLuigi Mandruzzato looks at the implications for corporate insolvencies and the risk of a eurozone recession.

Eurozone banks have tightened lending standards to the private sector since the beginning of 2022. According to the ECB's Bank Lending Survey, in the first quarter of 2023 the degree of lending tightening to corporates was the most intense since the eurozone debt crisis. There is now concern that recent banking sector turmoil will exacerbate this trend and that reduced credit availability will lead to an increase in corporate insolvencies.¹

Data on corporate bankruptcies in the main eurozone economies highlight the link with credit availability (see Chart 1).² From 2003-2019, the change in lending standards to firms preceded the turning points in the twelve-month change in corporate bankruptcies by between two and four quarters. This relationship was temporarily interrupted in the post-Covid period when bankruptcy proceedings were effectively suspended, but has since re-established itself, at least in directional terms, since the beginning of 2022.

Source: ECB, ISTAT, Refinitiv, and EFGAM calculations.

If, as many fear, eurozone banks restrict access to credit following recent turmoil, corporate bankruptcies will likely increase further raising the risk of recession (see Chart 2). This would align with the historical pattern seen since 1995 which shows that:

• even when the economy was growing, such as from 1995-2008 and 2013-19, there were, on average, around 30,000 bankruptcies per year;
• business failures rose rapidly during recessions, except during the pandemic period, and peaked at the end of the recessions;
• from the historic low in mid-2020, bankruptcies have normalised despite strong GDP growth, and in the first three months of 2023 were just below the historical average.

Source: Euro Area Business Cycle Network, ISTAT, Refinitiv, and EFGAM calculations.

From these observations it can be concluded that if corporate insolvencies were to increase above the historical average in the coming months, this may be a harbinger of the onset of recession in the eurozone. In this scenario, the need for the ECB to increase interest rates to restore price stability would be limited, if not completely eliminated.

¹ The ECB Bank Lending Survey for the second quarter of 2023 will be released on 2 May.

² Data is available for Belgium, Finland, France, Germany, Italy, the Netherlands and Spain. Data for Belgium and the Netherlands are available up to March 2023, for France and Spain up to February, for Germany and Italy up to December 2022, and for Finland up to September 2022. The missing data up to March 2023 have been imputed on the basis of prevailing trends in other countries. Aggregated data have been seasonally adjusted.

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