Banks further tighten credit standards, while loan demand drops lower

Banks further tighten credit standards on all types of loans ...

The ECB has published its Bank Lending Survey (BLS) for 2022 Q3. On balance, banks have stepped up the tightening of credit standards on all types of loans in Q3. The net percentage of banks that tightened credit standards on loans to enterprises rose to 19 in Q3, up from 16 in Q2, while net tightening on loans to households for house purchases increased to 32 from 24 and that on loans to households for consumer credit to 21 from 9. Risks related to the economic outlook and banks’ declining risk tolerance had a considerable tightening impact on credit standards. However, with the ongoing monetary policy normalisation, banks’ cost of funds and balance sheet constraints had a noticeable tightening impact on credit standards as well. Indeed, from a historical perspective, aside from the pandemic, the report mentions the highest impact of cost of funds and the banks’ balance sheet situation on credit standards since 2012Q2. Besides the tightening of credit standards, banks also reported an increase in the share of rejected applications for loans to enterprises (net percentage 8% after 1% in Q2) and housing loans (net percentage 31% after 28% in Q2).

... while loan demand drops lower

As regards demand for loans, banks reported a sharp drop in demand for housing loans (net percentage of higher minus lower fell to -42 in Q3, from -10 in Q2). Demand for consumer credit dropped lower as well (to -11 from +11). Demand for loans by enterprises increased slightly, but this was totally due to higher demand for working capital and inventories due to inflated energy and production costs and growing inventories. In fact, loan demand by enterprises to finance fixed investment continued to decline in Q3 (balance -11 in Q3 after -10 in Q2), which is in line with a slowdown in fixed investment. The general level of interest rates had a modest negative impact on loan demand by enterprises, but a large negative impact on demand for housing loans. All in all, the results from the BLS survey seem consistent with an economy that is in recession. They underline that besides the impact of high energy costs on households’ real income and corporate profitability, policy normalisation and interest rate hikes by the central bank are also playing a major role in the economic downturn. The result of the BLS seem in line with our base scenario for the eurozone economy of modest contraction in GDP in Q3 and sharper contractions in 2022Q4-2023Q1.