Eurozone banks tightened their lending standards again during the third quarter and did so more than expected across all lending categories, again weighing on demand for loans and lines of credit from companies and households, according to the bank loan survey prepared by the European Central Bank (ECB), which anticipates a new drop in the data in the fourth quarter, although to a lesser extent.
The consultation, carried out between September 15 and October 2 with the participation of 157 entities, indicates that the internal guidelines or criteria for approving loans or lines of credit to companies “were further tightened in the third quarter of 2023 », although the net percentage of banks fell slightly to 12%, compared to 14% in the second quarter.
Thus, while the net percentage of banks reporting a tightening of their credit conditions moderated slightly compared to the previous quarter, it was slightly higher than what banks had expected in the previous quarter.
“The accumulated net adjustment since 2022 has been substantial, which is consistent with the current significant weakening of credit dynamics,” highlights the ECB.
Likewise, the entities also reported a new net tightening of their credit criteria for loans to households to purchase housing and for consumer credit and other loans to households.
In both cases, the ECB points out that the percentages of entities that applied greater restrictions, 11% in the case of loans to purchase housing and 16% in consumer credit, “far exceeded previous expectations.”
In fact, the pace of net adjustment for housing loans even accelerated compared to the second quarter, while it moderated slightly for consumer credit and other loans.
Contributing to the tightening of European banking lending criteria were greater perceptions of risk related to the economic outlook and the specific situation of borrowers, lower risk tolerance and lower liquidity positions of banks.
For the fourth quarter of 2023, euro area banks expect a further, albeit more moderate, net tightening of credit standards for loans to businesses, and virtually unchanged credit standards for mortgages, while for credit To consumption, euro zone banks expect “a significant new net adjustment.”
DEMAND FALLS.
Regarding credit demand in the euro zone, banks again recorded a substantial decrease in demand for loans or lines of credit by companies during the third quarter, as well as a drop in demand for loans to purchase housing and in consumer credit and other loans to households.
“As in recent quarters, the fall in net demand was significantly larger than banks had anticipated, driven mainly by higher interest rates,” says the ECB, which also points to lower fixed investment by of businesses and lower consumer confidence along with deteriorating housing market prospects.
However, the net percentage of banks reporting a decline in demand was more contained than in recent quarters, which had been at record lows since the survey began in 2003.
Looking ahead to the fourth quarter, the banks surveyed expect to see a further net decline in demand across all loan categories, although they are confident that it will be less pronounced than in the third quarter.
DETERIORATION OF FINANCING AND COMPETITION AMONG BANKS.
Likewise, entities reported a deterioration in access to financing in all market segments during the third quarter of 2023, especially in access to retail financing.
“The pronounced deterioration in access to retail financing, especially short-term financing, reflects growing competition for liquidity from other banks and alternative investment opportunities that offer higher remuneration,” highlights the institution.
Regarding the central bank’s balance sheet reduction, banks reported that this process contributed to a deterioration in market financing conditions and liquidity positions for euro zone entities over the past six months. contributing to tighter credit conditions, while such effects are expected to intensify over the next six months.
POSITIVE EFFECT OF RATES ON BANKING MARGINS.
On the other hand, banks reported that the ECB’s interest rate hike has had a markedly positive impact on their net interest margins over the past six months, although they expect this impact to gradually diminish in the next half year.
While banks reported a positive effect on their overall profitability, there was also a substantial increase in the proportion of banks reporting a negative impact of ECB rate hikes on lending volumes, in line with the significant weakening of the credit dynamics, in addition to warning of the negative effect linked to greater provision needs and impairments.
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2023-10-24 12:49:31
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