Bank Lending To The Real Economy

Can you believe banks use less than a fifth of their balance sheet to lend to non-financial firms?

Why should we be concerned?

The financial system uses a small part of its capacity to lend to the productive economy, and in particular, to projects that help tackle climate breakdown, our destruction of biodiversity, and social problems including inequality. To better serve society, finance needs to start investing not betting. It needs to finance long term projects, instead of speculating on short term price changes in debt, equity and other financial instruments.

The indicator...

One indicator of this problem is the amount of balance sheet that banks dedicate to lending to non-financial firms. Banks are the core of the financial system. Yet at the moment, only 18% of EU banks’ balance sheet is taken up with loans to non-financial companies. They dedicate more capacity to deals with financial firms and lending to households, mostly for mortgages where they rely to a large extent on ever rising house prices.

Finance Watch Bank Lending To The Real Economy

Source: ECB Consolidated Banking Data

What should we change?

To make finance a servant not a master, we need more democratic ways of deciding which projects society finances. We can’t leave it to giant private financial firms to decide which projects make them the most profit. Society should have a much greater say in how much gets lent or invested where, in what form and in which parts of the economy.

There are many ways we could do this. We could sometimes use strict limits or quotas, or we could change the incentives for private financial firms. We can also give more democratic financial institutions, such as public and green investment banks, a more important place in the financial system.

You can find more detailed policy ideas elsewhere on the Finance Watch website and on the Change Finance website.

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