ECB’s Interest Rate Rise is Working: Demand for Credits and Mortgages Plummet

If what he intended European Central Bank with the rise in interest rates was to curb the demand for credits and mortgages On the part of companies and households (as an intermediate step to reduce demand and inflation), it seems that it is achieving its objective, and with flying colors. The banks are hardening their conditions to grant credits, at the same time as the demand for financing of companies and families plummeted, to levels typical of the global financial crisis of 2008 and the euro crisis of 2011. This is clear from the survey on bank loans in the euro area corresponding to the first quarter of 2023 (period in which some regional banks in the US fell and Credit Suisse in Europe sank) that the ECB has published this Tuesday, two days after a new meeting from which a new round of nut in the monetary policy of the European Central Bank.

In particular, the demand for business loans decreased in net terms in the four largest euro area countries (Germany, France, Italy and Spain). In addition, the drop in net demand for housing loans was particularly sharp in Germany, Spain and France.

“Substantial” Hardening

In the first quarter of the year, banks once again “substantially” tightened credit conditions for companies and did so more intensely than they themselves expected and at the strongest rate since the sovereign debt crisis in the euro zone in 2011. On the other side of the table, business demand for credit it also fell “sharply” in the first quarter, posting the biggest decline since the global financial crisis, late 2008, as a result of the rise in interest rates. In addition, the entities expect a further tightening, “albeit more moderate” of loans to companies and a new drop in demand for the second quarter.

Mortgages and consumption

Something similar happened with the mortgage credit to families for the purchase of homes, while the tightening was somewhat less pronounced for loans for the consumption. “The net decline in the demand for housing loans remained strong and close to the sharp net decline in the fourth quarter of 2022, which was the highest since the start of the survey in 2003,” the ECB notes in its bulletin. The drop in mortgage demand is being driven by “higher interest rates, prospects for a weakening housing market and low consumer confidence”, he points out. On the contrary, the net decrease in the demand for consumer credit slowed down. Demand for consumer credit decreased in net terms in Germany, Spain and, to a lesser extent, Italy, while it remained unchanged in France.

Demand

Of the 158 eurozone banks surveyed by the ECB between March 22 and April 6, 38% have detected a drop in the demand for credit from companies among their clients (triple the 12% registered in the fourth quarter of 2022), while the drop in demand for mortgages reaches 72% of them ( it was already 74% at the end of 2022). The lower demand for financing for consumption reached 19% of them in the first quarter of the year.

tougher criteria

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Not only are the conditions for loans to companies and families tightening (with higher interest rates and more demanding terms), banks in the euro zone are also tightening their credit standards; that is, in the criteria for the approval of the loans. “From a historical perspective, the pace of tightening of credit standards remained at the highest level since the sovereign debt crisis of the euro area in 2011”, the survey concludes. All of this has to do with the banks’ higher perception of risk, but also the lower liquidity position from financial institutions, in a context in which the ECB is requiring them to repay the financing lines it has been providing them in recent years. In addition, entities are expanding their margins “in the riskiest loans”, both to companies and families.

rejected applications

“In the first quarter of 2023, banks reported a widespread increase in the ratio of rejected applications for all loan categories, reaching, for business loans, the highest net percentage recorded since the question was first asked in 2015.