ECB Lending Survey Shows Some Credit Tightening in 1Q, With More Expected

20 April, 2021

By David Barwick – FRANKFURT (Econostream) – Credit supply in the euro area in the first quarter of 2021 was characterized by some tightening of conditions for firms and both tightening and easing for households, depending on the type of credit, the European Central Bank said Tuesday.

Both firms and households demanded less credit in 1Q, banks reported.

On the credit supply side, the credit standards applied by banks to companies seeking a loan tightened moderately in 1Q, with a seven-point difference between the percentage of those banks reporting tightening and the percentage of those that said standards had eased.

Households faced easier terms when seeking to finance the purchase of a house, with a difference of two points meaning that only a few more banks had reported looser credit standards than had indicated a tightening.

However, consumer credit standards tightened somewhat more, with a difference of five points in favor of banks reporting tightening rather than easing.

‘Banks referred mainly to risk perceptions related to borrowers’ creditworthiness and a lower risk tolerance as factors having a tightening impact on their credit standards’, the ECB said. ‘By contrast, competitive pressure contributed mostly to an easing of credit standards.’

Looking ahead, the ECB said that banks anticipated a tightening of credit standards in 2Q for both firms and households.

As for credit demand, the survey showed firms' interest in loans to have decreased further in 1Q, the ECB said.

‘Financing needs for fixed investment continued to dampen loan demand as firms, especially in sectors more affected by the pandemic, tended to postpone investment’, the ECB said. ‘In addition, firms did not, on balance, demand additional financing for working capital, reflecting the availability of liquidity buffers and direct government liquidity support, especially to small and medium-sized enterprises.’

Demand for housing loans, along with loans to households, also dropped on balance in 1Q, according to the survey. Lower lending to households was chiefly due to reduced consumer confidence and less spending on durable goods, the ECB said.

For 2Q, banks expected higher net demand for loans to firms and households, the ECB reported.

Bank access to retail and wholesale funding improved again in 1Q, according to the survey. The survey indicated that the ECB’s asset purchase programme (APP), the pandemic emergency purchase programme (PEPP) and the third series of targeted longer-term refinancing operations (TLTRO III) ‘all had a positive impact on banks’ liquidity positions and market financing conditions.’

These measures and the deposit facility rate ‘had an easing impact on bank lending conditions and a positive impact on lending volumes, mainly for loans to firms’, the ECB said. ‘TLTRO III in particular has strongly supported bank lending over the past six months.’ However, the ECB added, asset purchases and the negative deposit facility rate hurt bank profitability by depressing net interest income, the survey confirmed.

The tiering system offset the negative deposit rate somewhat, the ECB said. The tiering system, which went into effect in late 2019, establishes how different portions of the money a credit institution has on deposit at the ECB are treated under the negative interest rate regime.

In particular, an interest rate of zero is applied to an amount of money up to six times the minimum reserve requirement of a given bank. To the rest of the bank’s deposits, the ECB applies the deposit facility rate, which has been at -0.5% since September 2019.