Maintaining adequate liquidity while stimulating economic growth can be a tricky business for banks.

This became apparent once again during a recent interview with Lucas Papademos, vice president of the European Central Bank (ECB), with the German business newspaper Handelsblatt.

More credit
Papademos pleads with banks to provide more credit for businesses to stimulate economic growth and innovation.

Papademos reacts to recent figures of the ECB that show the credit situation in the Eurozone is grim, especially for businesses. European banks have offered 35 billion euro less credit in June than the month before.

According to the vice president, banks should work to find a balance between remaining solvent and providing credit to other companies. He stresses that, in the long run, this will be for their own benefit.

German worries
The German government too worries about a decline in credit availability. German banks are overly cautious in granting credit, causing problems for medium size businesses in particular. This has led German minister of finance, Peer Steinbruck, to announce “previously unheard of measures” for banks that fail to increase the amount of credit they offer.

One option is to force government support on banks, increasing their solvency, and in return attain a certain amount of control over credit provisions. A similar arrangement has been made in the United States, the United Kingdom and in the Netherlands.

Disagree
The question is whether the German parliament will reach a decision any time soon. The two leading fractions, CDU/CSU (Christian Democrats) and SPD (Social Democrats), disagree on the matter and with national elections coming up it is unlikely either one will compromise.

SPD spokeperson Carsten Schneider expressed his fear that the lack of investments will lead to poor half year results, making banks even more hesitant to provide credit. Medium sized companies are going to have a difficult time this fall, he predicts.

How should banks react to Papademos’ plea? Hard to say. It is understandable that banks are very hesitant when it comes to providing credit, focusing instead on their own organisation and solvency. On the other hand, a lack of investments can stifle economic recovery and prevent companies from innovating. So what would you do?