The latest data have shown tentative signs of improvement in the euro-zone banking sector, with the pace of contraction in lending slowing slightly in September (see Chart) and the Bank Lending Survey pointing to a further loosening of credit conditions. However, the ECB’s Comprehensive Assessment revealed capital shortfalls for some banks, particularly in Italy and Greece, which will act as a further weight on lending there. Meanwhile, with the latest data implying that the euro-zone economy may have stagnated again in Q3 and that unemployment remains very high, demand for loans is likely to stay subdued. Accordingly, we expect weak bank lending to remain a drag on economic activity for some time to come.
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