ECB Says Tightening in Access to Loans Points to ‘Persistent Weakening of Credit Dynamics’

2 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank’s latest quarterly Bank Lending Survey, released on Tuesday, showed another strong decline in demand for credit and a significant tightening of financing conditions.

The survey results showed that banks ‘tightened further substantially’ their credit standards for loans to firms. The ECB said the net tightening in credit standards ‘was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics’.

The percentage of banks reporting a tightening of credit standards was substantially larger than the percentage of banks reporting an easing, the ECB said, with a net percentage of banks of 27% reporting a tightening, after 27% in the fourth quarter of 2022. The pace of net tightening in credit standards for the last two quarters was ‘the largest seen since the sovereign debt crisis’, the ECB said.

Banks reported a strong net decrease in demand from firms for loans in the first quarter of 2023, according to the results of the survey. A net percentage of -38% of lenders reported a increase in demand, down from -12% in the previous quarter. The fall in demand was ‘stronger than expected by banks in the previous quarter and […] the strongest since the global financial crisis’, the ECB said.

The decline in demand for housing loans ‘remained strong and was close to the sharp net decrease reported for the previous quarter’, the ECB said, with a net percentage of -72% of banks reporting increases, up slightly from -74% in the previous quarter.

‘Rising interest rates, weakening housing market prospects, low consumer confidence and a decline in spending on durable consumer goods’ were contributing factors to the strong decline in demand for housing loans, the ECB said.

Credit standards for mortgages were also ‘tightened further substantially’, the ECB said, at 19%, following 21% in the previous quarter. The pace of tightening remained ‘below the tightening peaks reached during the pandemic, the sovereign debt crisis and especially the global financial crisis’, according to the survey results.

Banks reported ‘a moderate further net tightening’ of credit standards on consumer credit and other lending to households in the first quarter of 2023, the ECB said. This fall was less pronounced than in the previous quarter, falling from 17% in the previous quarter to 10%.

The ECB reported that the banks surveyed observed that ‘access to retail and wholesale funding deteriorated in the first quarter […] possibly reflecting the March 2023 market turmoil and the lower overall level of excess liquidity’.

Going forward, the survey results showed that banks expect a further tightening in credit standards in the second quarter of 2023 for all lending to households and a slightly less pronounced decrease in demand for housing loans and consumer credit.