ANNUAL REPORT 2008 - Polymer Bank Notes of the World

cash flows to compensate for a reduction inloan growth. Similarly, the growth rate ofM3 deposits held by OFIs showed a highdegree of volatility in the course of the yearand declined by more than 5 percentage pointsin 2008 to reach 17.5% on an annual basis inDecember. However, the annual growth rateof OFIs’ M3 deposits remained significantlystronger than that observed in other sectors.This probably reflected the fact that, giventhe current financial environment, investmentfunds needed to maintain cash buffers in orderto accommodate possible redemptions. Thosebuffers may also have been bolstered by loansfrom parent MFIs.GROWTH IN CREDIT TO THE PRIVATE SECTORMODERATEDAfter strengthening in 2007, the annual growthrate of MFI credit to euro area residentsdeclined in 2008, falling from 10.1% inDecember 2007 to 6.5% in December 2008(see Chart 8). This mainly reflected a significantdecline in the annual growth rate of credit tothe private sector, while the annual growthrate of credit extended to general governmentturned positive. Three-month annualised growthrates, an indicator of short-term developments,declined more markedly, falling from 12.0% inDecember 2007 to 6.9% in September 2008 and3.9% in December 2008.In particular, MFI loans to general governmentincreased somewhat, especially in the secondhalf of the year, and while the amount ofgeneral government debt securities in MFIs’portfolios declined at the beginning of theyear, it increased strongly in the final quarter.It should also be mentioned in that regard thatsome volatility was observed towards the end ofthe year, with a decline recorded in Septemberand October in the MFI sector’s holdings ofgovernment securities. That decline is linked tothe deleveraging of credit institutions given theliquidity of government bond markets and thefavourable nature of price developments. Thisdecline can be seen as an indication that creditinstitutions have been using their more liquidassets as buffers in order to absorb the pressureson their capital positions and funding, with aview to shielding their core, relationship-basedbusiness, namely the granting of loans to firmsand households. By contrast, the November andDecember data indicate a substantial increase inthe holdings of government debt securities.The annual growth rate of MFI credit to theprivate sector remained robust in early 2008,continuing the trend observed in 2007, beforedeclining in the second half of the year. Loansto the private sector, despite deceleratingmarkedly, remained the dominant form ofcredit granted by MFIs in 2008, although thecontribution of MFIs’ purchases of securitiesother than shares increased moderately. Thatincreased contribution largely reflected MFIs’purchases of securities issued by OFIs in thecontext of securitisation activities.The annual growth rate of MFI loans to theprivate sector, the largest component of credit tothe private sector, declined to stand at 7.3% in thefourth quarter of 2008 and 5.8% in December,Chart 8 Credit to euro area residents(annual percentage changes; contributions in percentage points)121086420-2shares and other equityprivate sector securities other than sharesgeneral government securities other than sharesloans to the private sectorloans to general governmentcredit to euro area residents2002 2003 2004 2005 2006 20072008Source: ECB.Note: The reporting sector comprises MFIs excluding theEurosystem.121086420-2ECBAnnual Report200837