ECB: Substantial Decline in Firms' Loan Demand Contradicts Banks’ Expectation

9 April 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – The European Central Bank’s latest Bank Lending Survey (BLS), released on Tuesday, showed a significant decline in loan demand from firms, contrary to euro area banks' expectations of a recovery.

‘The substantial decline in loan demand from firms contrasted with banks’ prior expectations of a stabilisation’, the ECB said in a press release. ‘Banks are expecting a moderate net decrease in demand for loans to firms and a net increase in demand for loans to households in the second quarter of 2024.’

In first quarter of 2024, credit standards remained mostly unchanged, according to the survey. For the first time since 2021, banks reported a moderate net easing of credit standards for loans to households for house purchase.

‘Risk perceptions continued to exert tightening pressures across all loan categories, while competition and, for housing loans, also banks’ risk tolerance, contributed to an easing of credit standards’, the ECB said.

Euro area banks expected moderate net tightening for loans to firms and unchanged credit standards for loans to households in the next quarter, according to the BLS.

The surveyed banks reported that the reduction of the ECB’s monetary policy asset portfolio continued to have a negative effect on financing conditions and liquidity positions, while the ECB’s key interest rate decisions had a positive impact on their net interest margins over the past six months, although this effect was expected to diminish in the future.

‘The dampening impact of the ECB’s interest rate decisions expected over the next six months also extends to overall bank profitability, with a moderately negative contribution from provisioning and impairments’, the BLS noted.

For the April 2024 BLS, 157 banks were surveyed about the changes observed during the first quarter of 2024 and expected in the second quarter of 2024.