Bank credit crunch, loan applications declining
The credit standardsor internal bank guidelines or loan approval criteria, for loans or credit lines to businesses they tightened further in the second quarter of 2023 in the euro area. The net percentage of banks reporting a tightening was lower than in the previous quarter. Coming in at 14%, versus 27% in the first quarter, in line with banks’ expectations. This is what emerges from Bank lending survey (BLS) of the European Central Bank (ECB) of the month of July.
“Significant weakening” of loan dynamics
“L’widening margins of loan and therate increase of interest represented the main restrictive effect. Reflecting the continued pass-through of higher market rates to lending rates for businesses and households,” the document reads. The cumulative net squeeze since the start of 2022 has been “substantial”. And the results of the BLS provided the first indications of the “significant weakening” of the dynamics of loans observed since last autumn.
Banks also reported a further net tightening of their credit standards for i household loans for the purchase of houses and for the consumer credit and other loans to households (net percentages of 8% and 18% respectively). For households, the net squeeze was less marked than in the previous quarter for home loans, while it was more marked for consumer credit.
For the third quarter of 2023, euro area banks expect “a further, albeit more moderate, net tightening” of credit standards on loans to businesses and credit standards unchanged on loans to households for house purchase. For consumer credit, euro area banks expect less net tightening of credit standards.
Request of business loans
Banks have registered a sharp decline in business demand for loans o use of credit lines in the second quarter of 2023, which decreased to historical low since the survey began in 2003. The net decline was again substantially stronger than banks expected in the previous quarter. Rising interest rates and lower financing needs for fixed investment were the main drivers of the reduction in loan demand. For the third quarter of 2023, banks expect a further sharp decline in demand for business loans, albeit much smaller than in the second quarter.
Funding
According to the banks interviewed, theaccess to funding has worsened in most market segments in the second quarter of 2023, in particular for retail funding. The reported net deterioration in access to retail finance may reflect a increased competition for retail deposits. Also in light of the current environment of higher interest rates and overnight deposit outflows. For debt securities, the deterioration reflects slightly higher bank bond yields than at the end of the first quarter. While access to money markets has remained substantially unchanged.
Impaired loans (Npl)
In the first half of 2023, euro area banks recorded a “significant tightening” of NPL ratios on their loan terms. The Npl ratios had a substantially neutral impact for real estate loans. Banks referred to a higher perception of risk and their own lower risk tolerance. as the main factors behind the contribution of Npl ratios to the tightening of lending conditions.