20150429-NATIXIS-Would_it_be_possible_to_finance_a_significant_recovery_in_corporate_investment_in_the_euro_zone__12页_884kb

Summary of FLASH ECONOMICS: Financing Corporate Investment in the Euro Zone

Core Content

This document analyzes the potential for financing a significant recovery in corporate investment in the euro zone, focusing on the capacity of financial intermediaries and institutional investors to meet the required external financing needs.

Main Questions

1. To what extent would companies need external financing?
2. How far could banks increase their lending to companies under new regulations?
3. Could institutional investors provide the remaining financing if banks fall short?

Key Findings

• Corporate Investment Recovery: For the euro zone to recover from the crisis, corporate investment would need to increase by 13%, bringing it back to pre-crisis levels.
• External Financing Requirement: This would result in an additional 1.8% of GDP in external financing needs.
• Banks' Capacity:
  • The increase in corporate credit would be 3.4% per year.
  • Banks would need to increase their capital by 0.22% of GDP per year, which is considered manageable.
  • Banks are currently able to provide the required financing due to their capital ratios and regulatory frameworks.
• Institutional Investors' Role:
  • Institutional investors could cover half of the companies' additional financing needs.
  • They are increasing their holdings of corporate bonds by ~1% of GDP per year, which is close to half of the required external financing.
  • Regulations like Solvency II limit their ability to finance companies, but they still have the capacity to support a significant portion of the demand.

Supporting Data

• Chart 1A: Energy imports have declined due to the fall in oil prices.
• Chart 1B: The euro's depreciation has stimulated demand.
• Chart 1C: Very low interest rates have also supported economic activity.
• Chart 1D: Fiscal adjustments in several countries have been postponed, providing a temporary boost.
• Chart 2A: Real GDP growth is expected to be temporary without a recovery in corporate investment.
• Chart 2B: Weak capital accumulation is a key issue.
• Chart 2C: Small productivity gains further limit growth potential.
• Chart 2D: Corporate investment remains low compared to pre-crisis levels.
• Chart 3A: Corporate investment rate relative to GDP.
• Chart 3B: Self-financing rate and corporate profitability.
• Chart 4A: Banks' capital relative to risk-weighted assets.
• Chart 4B: Capital to total assets ratio.
• Chart 5A: ECB survey shows favorable credit supply conditions.
• Chart 5B: Banks have increased interest rate margins on loans.
• Chart 6: Loans to companies are expected to increase by 3.4% annually.
• Chart 7A & B: Institutional investors are increasing their holdings of corporate bonds.
• Chart 8: Companies are increasing their bond financing, indicating a shift in funding sources.

Regulatory Frameworks

• Basel III Capital Requirements: Banks must maintain a Core Tier 1 capital ratio and adhere to risk-weighted asset (RWA) rules.
• Liquidity Coverage Ratio (LCR): Banks must hold sufficient highly liquid assets to cover 30-day cash outflows, with 100% as the minimum requirement.
• Net Stable Funding Ratio (NSFR): Banks must ensure stable funding for medium to long-term assets, with 100% as the target ratio.
• Solvency II for Insurers: Limits the amount of risk insurers can take on corporate assets, affecting their ability to provide financing.

Conclusion

• The recovery in corporate investment in the euro zone is not constrained by financial limitations.
• Banks are capable of providing the necessary financing, given their current capital and regulatory positions.
• Institutional investors can support half of the required financing, indicating a diversified and robust financing ecosystem.

Author

• Patrick Artus

Disclaimer

• This document is not a financial analysis and is not prepared in accordance with legal requirements to promote investment research independence.
• It is provided for informational purposes only and does not constitute personalized investment recommendations.
• The document and its attachments are not offers or solicitations and are not intended to be used as a basis for investment decisions.
• The document is subject to regulatory restrictions in certain jurisdictions, and users are advised to comply with local laws.
• Natixis does not assume any responsibility for the accuracy, completeness, or appropriateness of the information or assumptions presented.