UPDATE 1-Euro zone private sector loans contract further in Feb -ECB
(Adds detail, background)
FRANKFURT, March 27 (Reuters) - Lending to households and firms in the euro zone shrank further in February and money supply growth remained subdued, adding to the European Central Bank's list of concerns ahead of its policy meeting next week.
The ECB has cut interest rates close to zero, pumped extra liquidity into the banking system and announced a fresh government bond purchase programme, but the measures have so far not managed to unclog lending to the real economy.
The ECB's health check of the euro zone's largest banks' balance sheets before it takes over banking supervision in November is exacerbating the situation, with lenders reluctant to take on more risk and trying to slim their loan books instead.
Bank balance sheets declined by around 20 percentage points of gross domestic product last year, partly in anticipation of the health check, ECB President Mario Draghi said on Tuesday.
And more is to come this year.
UniCredit, for example, posted a record 14 billion-euro loss this month due to huge writedowns on bad loans and past acquisitions as it moved to clean up its balance sheet.
The ECB welcomed the move and encouraged other banks to not to wait with any corrective measures until the review's results are released in October.
Loans to the private sector fell by 2.2 percent in February from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in January.
"The fall in bank lending to businesses has clearly reflected an ongoing combination of limited supply and muted demand," said Howard Archer, economist at IHS Global Insight.
Corporate borrowing in the euro zone overall declined by 2.9 percent compared with a 3.0 percent decline on the year in the previous month.
The biggest decline was in Slovenia, where lending to companies fell 15.8 percent, the sharpest decline on record.
Bank lending to Spanish firms fell at an annual pace of 9.5 percent in February, improving from a decline of 10.7 percent a month earlier.
Bank lending to Irish firms fell at an annual pace of 6.5 percent in February, the strongest decline since October 2011.
Only five euro zone countries saw corporate lending grow in February, with France the only large economy among them. Finland showed the biggest rate of increase, at 6.1 percent.
Companies in Finland pay an interest rate on loans of around 2 percent on average, a third of that charged to counterparts in Greece and Cyprus, ECB data from January showed. The big variance in borrowing costs for firms across the euro zone is cited as one reason for the uneven levels of corporate lending.
Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 1.3 percent, picking up slightly from 1.2 percent in January. (Reporting by Eva Taylor and Jonathan Gould; Editing by Alison Williams)
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