The latest bank lending survey, on 25 October by the European Central Bank (ECB), reveals that credit standards have tightened considerably in the euro area. Companies and households are  being affected by the tightening of financial conditions.

In the third quarter of this year, the percentage of banks in the euro area reporting a tightening of credit standards for businesses rose to 19%, a level not seen since 2012. Yet demand for loans by businesses has increased, driven by high input costs and inventory building, the ECB notes.

Banks' balance sheets

Furthermore, the Frankfurt institution comments: "Against the backdrop of an economic slowdown and intensifying recession fears, risks to the economic outlook, as well as sectoral or company-specific situations and banks' lower risk tolerance, have all had a considerable impact on the tightening of lending standards for businesses."

The ECB's continued interest rate hikes, the cost of funds and the state of banks' economic balance sheets are also having an impact on the conditions under which companies can access bank financing.

Lending to households

With regard to households, banks in the euro area reported "a significant net tightening" of mortgage lending criteria. In the third quarter, 32% of banks reported a tightening of access conditions. This is the highest figure since 2009.

By contrast, only 21% of European banks reported a tightening of lending conditions for consumer and other household loans. However, this figure was still 5% down in the second quarter of 2022.

Bank financing

In general, the ECB expects euro area banks to continue tightening their lending conditions by the end of the year, both for business loans and for housing and consumer loans.

If bank financing is becoming more difficult for economic operators, this also reflects the tightening of conditions for banking institutions to access capital markets, as the ECB normalises its monetary policy and ends its net asset purchase programme.