Important to understand the equilibrium of the bank credit market in the euro zone

We have to distinguish the short and the medium term to understand banks’ situation in the euro zone. I n the short term, there is excess credit production capacity. Banks have a lot of liquidity, and if they do not use it to grant loans, they deposit it at the ECB at -0.40%: this stimulates credit supply. S ince there is excess credit supply, equilibrium interest rates on loans are falling, which shows that the bank credit market is competitive, and this weakens euro-zone banks’ return on equity and profitability. I n the medium term, the decline in banks’ profitability and return on equity reduces their capital, and therefore reduces their lending capacity. There will therefore be a shift from excess credit supply in the short term to excess credit demand in the medium term; from a competitive bank credit market to a rationing of credit demand due to the shortfall in capital , if euro-zone banks, given the competition from financial markets and foreign banks, cannot raise their interest rates.