The European Central Bank has noted a “moderate” decline in banks’ risk tolerance. Photo: Shutterstock

The European Central Bank has noted a “moderate” decline in banks’ risk tolerance. Photo: Shutterstock

Credit conditions are tightening due to the perception of increased risk on the part of banks, according to the European Central Bank. In the view of the Frankfurt-based institution, a further tightening of credit conditions is to be expected for the second quarter.

The Bank Lending Survey for the euro area, conducted four times a year, was developed by the Eurosystem to improve its understanding of banks’ lending behaviour.

According to the April 2022 edition, credit standards--banks’ internal guidelines or loan approval criteria--for corporate loans or credit lines have tightened at the banks surveyed. In other words, the share of banks reporting a tightening of lending criteria was higher than the percentage of banks reporting an easing. Banks cited a perceived increase in risk and a decrease in risk tolerance amid high uncertainty, supply chain disruptions and high energy and input prices as factors behind the tightening.

For the second quarter, 21% of banks surveyed expect a much tighter net tightening of credit standards on corporate loans, likely reflecting the uncertain economic impact of the war in Ukraine and the expectation of less accommodating monetary policy.

In the first quarter of 2022, banks reported an overall increase in the share of rejected applications for business loans. At the same time, demand for business loans was increasing. “Businesses’ working capital financing needs had a significant positive impact on loan demand, reflecting higher working capital requirements due to supply bottlenecks and rising input costs, as well as precautionary stocks and cash holdings. Fixed investment made a positive contribution to loan demand, albeit more moderate than in the previous quarter,” the ECB said. The ECB sees a continued net increase in demand for loans to businesses, driven by short-term loans.

Consumers more confident than banks

As regards loans to households, the trend seems to be in the same direction for mortgage loans. In contrast, credit standards for consumer and other household loans have continued to ease. However, the level of rejected applications remained stable for mortgages and decreased slightly in net terms for consumer credit.

“The net increase in demand for home loans was mainly due to the general level of interest rates. Demand for consumer credit was supported by spending on consumer durables and--to a lesser extent--by consumer confidence,” the ECB stated.

For the second quarter, financial institutions expect a moderate net tightening of credit standards for housing loans and for consumer and other loans to households.

As regards the evolution of the general conditions--the actual conditions agreed in the loan contracts--the tightening is qualified as “moderate” by the ECB. It acknowledged that monetary policy support for credit is showing signs of weakening. This could be bad news for the economy at a time when monetary policies are expected to become less accommodating and the long-awaited rise in interest rates is likely to materialise.

Financial sector professionals will be watching the decisions to be announced by the European Central Bank on 14 April at 2pm.

Originally published in French by and translated for Delano