ECB: Banks Limit Credit Most Since Debt Crisis as Mortgage Demand Sees Record Fall

31 January 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – In a sign monetary policy tightening is working its way through to the real economy, the European Central Bank’s latest Bank Lending Survey (BLS), released Tuesday, showed declining demand for loans and tightening credit standards in the Eurozone.

The survey showed that 74% of euro area banks reported a fall in demand by households for housing loans in Q4 2022, the sharpest decline the BLS has ever recorded.

The decline in mortgage demand was driven by rising interest rates, falling consumer confidence and poor housing market prospects, the survey said. The fall was particularly pronounced in Germany and France, the ECB noted, where 93% and 90% of banks, respectively, reported decreases.

In its report on the BLS results, the ECB said that ‘this highlights a strong negative impact of recent interest rate increases on housing loan demand’.

Demand for consumer credit also decreased strongly, by 29%, after -11% in the previous quarter. Loan demand from small and medium-sized enterprises (SMEs) and large firms’ demand for long-term loans also fell.

Regarding lending to businesses, the survey reported the largest recorded net tightening of credit standards since the sovereign debt crisis, with 26% of banks reporting tougher standards.

Going forward, banks said in the survey that they expected another tightening of in Q1 2023 for all lending to households and a strong decrease in housing loans and consumer credit.

The news of tightening credit standards and falling demand for loans could give ammunition to the doves on the ECB’s Governing Council seeking smaller rate hikes at the central bank’s upcoming monetary policy meetings.