Chart of the week: Italian banking system balance sheet

Summary: The Italian banking system’s balance sheet is expanding – this could be good news

What the chart shows: The chart shows the change in the size of the consolidated balance sheet of Italian and German MFIs, set to an index of September 20081=100

Why is the chart important: The bulk of banks’ assets are loans to the public, corporate or household sectors. The bulk of their assets are deposits held by the non-bank private sector. These make up most of what we refer to as ‘money’ (cash is actually quite irrelevant). If banks’ balance sheets are shrinking, the amount of money (and credit) in the economy are probably also shrinking. This is bad news for economic growth. Expanding bank balance sheets usually mean the stock of money is growing and there is scope for more lending. Although the Italian economy is currently very weak, the expanding bank balance sheets therefore hold out at least the hope of a possible improvement.

Chart and comments provided by Stein Brothers (UK)