European banks focus on risk, lend selectively

By Douwe Miedema - Analysis

LONDON (Reuters) - Borrowing is set to stay costly for European corporates as long as a downturn raises the risk of bankruptcy, but banks are continuing to lend and scorn suggestions that they have turned off the tap.

Banks face tight capital conditions and need to look hard at prospective borrowers, pointing out that easing terms now could lead to a repeat of mistakes made in the years of cheap credit that triggered a global financial crisis.

"To me my first goal is to defend shareholders' money, avoiding loans which are obviously too risky," said Rony Hamaui, who heads Medio-Factoring, part of Intesa Sanpaolo, Italy's biggest retail bank.

"We are facing a general madness with politicians and media blaming banks for the lack of loans. They suggest us to change our priorities," he said.

Russian Prime Minister Vladimir Putin this week joined a crowd of politicians, central bankers and captains of industry piling pressure on banks to kick-start the economy, saying banks should dole out more loans at lower rates.

The European Central Bank has even threatened to "bypass" the banking system if it felt it had become "dysfunctional," flexing its muscles by saying it was up to "relevant authorities" to ensure banks are lending.

Data show critics have a point -- the annual growth of loans to the private sector in the euro zone, slowed to 1.8 percent in May, its lowest level since 1992.

Anecdotal evidence across Europe also shows investments are delayed because financing is tight.