ECB: Credit Standards to Tighten Further as Lending Dynamics Weaken

24 October 2023

By Isabel Teles – FRANKFURT (Econostream) – The European Central Bank’s latest Bank Lending Survey (BLS), released on Tuesday, showed that euro area banks expect further net tightening for loans to companies, consumers and households, with minimum changes to housing loans standards.

'Euro area banks expect a further tightening for loans to firms in the fourth quarter of 2023, albeit at a moderating pace', and also 'expect credit standards for housing loans to remain broadly unchanged, while a further net tightening is expected for consumer credit and other loans to households', the ECB said.

The ECB noted 'the build-up of further tightening pressure on the supply of credit' in the wake of the ongoing unwinding of the balance sheet.

In the third quarter of 2023, euro area banks tightened their credit standards to enterprises at a moderate pace (12%, after 14% in the previous quarter, but still above the 9% historical average)', the ECB reported. At the same time, firms' net demand for loans continued to decrease (-36%, after -42% in the second quarter of 2023).

‘The cumulated tightening since 2022 has been substantial, which is consistent with the ongoing significant weakening in lending dynamics’, the ECB said.

The tightening for loans to households ‘strongly exceeded previous expectations’, the survey highlighted.

‘The main drivers of the tightening for both housing loans and consumer credit were higher risk perceptions and banks’ lower risk tolerance’, the ECB said. ‘Meanwhile, the contribution of banks’ cost of funds and balance sheet conditions was broadly neutral.’

According to the BLS, banks in Germany, Spain, France and Italy reported a substantial net contraction in demand for loans to enterprises and a continuous decrease in demand for housing loans and consumer credit.

‘Across all four largest euro area countries, demand for consumer credit decreased’, the ECB said. ‘The general level of interest rates and low consumer confidence contributed negatively towards demand in all four countries.’

The BLS also showed that the percentage of banks expected to report a positive impact of ECB rates hike fell by more than half (from 43% to 20%).

The level of interest rates had been the main negative contributor to housing loan demand, the ECB said. ‘This is in line with the continued increase in euro area mortgage rates.’