Eurozone banks tighten credit amid economic ‘uncertainty’ and monetary policy shifts

Eurozone banks tightened their credit standards in the second quarter of 2022 for businesses and households consequence of “high uncertainty” and a more restrictive monetary policy to curb inflation.

This is the main conclusion to be drawn from the bank credit investigation published this Tuesday by the European Central Bank (ECB) which was carried out between June 10 and 28 at 153 euro area banks learn about changing credit standards, internal bank guidelines or loan approval criteria.

More specifically, the survey reveals that credit standards for business loans or lines of credit have been significantly tightened at 16% of banks surveyeda percentage that reaches 24% banks in case of home loans for buying a house. As for loans intended for consumer loans and other loans to households, only 9% of banks declared a tightening.

ECB to hike rates on Thursday

The ECB explains that this general tightening is due to a “context of high uncertainty”, “continued disruptions in the supply chain” and high energy and supply prices. For this reason, banks cite perception of increased risk and lower risk tolerance.

The regulator also points to a “less accommodative” monetary policy due to limitations in the cost of funds and their balance sheets, which means that for the third quarter of 2022, a net tightening is expected for all loans “of a similar magnitude” to that of the second quarter.

In this sense, the survey confirms that banks’ access to wholesale funding deteriorated in the second quarter due to the rise in interest rates, but that access to retail funding improved. The ECB will start this Thursday, July 21 to raise its rates a quarter of a percentage point for the first time in eleven years to curb the sharp rise in inflation in the euro zone, which reached 8.6% in June. Rise in rates which could be higher in September if inflation is not lowered.

Profit margins on credit shrink

by country, France this is where more banks are seeing a tightening of their standards of business credit (25% of respondents), followed by Italy (18%), Spain (8%) and Germany (3%). On the other hand, credit standards mortgage they were reinforced in 32% of German banks, in 30% of Spanish, 17% of French and 9% of Italian. And the terms of consumer loans they increased in Germany (20% of banks), Spain (17%) and Italy (8%), but remained in France.

Although mortgage and consumer lending conditions in the euro area are tougher, margins have shrunk in both cases because the relevant market reference rates for Bank funding costs have risen more than interest rates loans to households, adds the ECB.

In addition, the demand for business loans increased in the second quarter of the year (12% of banks said that the demand for these loans had increased), due to the working capital requirements due to increased costs due to rising energy and raw material prices.

Companies postpone their investments in the current environment of uncertainty, according to the ECB, and the the demand for loans for the purchase of a home has fallen in 10% of the banks surveyed, although demand for consumer credit increased by 11%. Banks expect that in the third quarter, demand for business loans and mortgages will decline and consumer loans will hold steady.

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