ECB Bank Lending Survey Shows Credit Standards Expected to Tighten
26 October 2021
By David Barwick – FRANKFURT (Econostream) – An expected tightening of credit standards could limit corporate investment in the coming months, according to the European Central Bank’s latest Bank Lending Survey, released Tuesday.
Banks surveyed in October on balance expected credit standards for loans to corporates to become moderately tighter and demand to rise in 4Q, the report said, while housing loans to households were seen subject to more tightening of credit standards amid unchanged demand.
Credit standards for loans to firms were broadly unchanged again in 3Q as the shares of banks reporting a tightening or loosening of credit standards were approximately the same.
‘This suggests that despite supply bottlenecks banks maintain a balanced view of their credit risks, in line with the economic recovery in the last two quarters and the continued support from monetary, fiscal and supervisory authorities’, the survey said.
Demand for loans to firms was sightly higher in 3Q and was driven by fixed investment, low interest rates, mergers and acquisitions and debt refinancing and restructuring, with a further positive contribution from financing needs for inventories and working capital, the ECB reported. Other sources of financing, internal and external, held demand back, it said.
According to the survey, banks regarded housing loans more cautiously, with relevant credit standards tighter, while credit standards for consumer credit were broadly unchanged. Demand by households for housing loans and consumer credit was up on the back of higher consumer confidence, low borrowing costs and real estate market expectations, the ECB said.
In other findings of the survey, ECB asset purchases ‘had a positive net impact on banks’ liquidity position and market financing conditions as well as their lending volumes, and a negative impact on their profitability over the past six months’, with ‘a similar impact’ expected over the next six months.
On balance, QE made loans to firms easier and over the next six months would contribute to easier terms and conditions for loans to firms and housing loans while also boosting lending volumes to firms and households, the report said.
The ECB’s negative deposit facility rate (DFR) was reported to have reduced lending rates in all categories, and to have boosted lending volumes to firms and for housing.
‘According to banks, the DFR had, on balance, a continued negative impact on bank profitability over the past six months’, the survey revealed. T’his was however contained by the two-tier system, which had a positive impact on bank profitability compared to the counterfactual situation without such a system, mainly via a positive impact on net interest income. In addition, the two-tier system mitigated the decline in deposit rates for firms and households.’