The European Central Bank has released the of the quarterly bank lending survey (BLS), which revealed changes observed during the second quarter of 2023 and expectations for the third quarter of 2023.
Credit standards
In Q2 2023, euro area banks tightened their credit standards for loans or credit lines to enterprises further, with a net percentage of 14%, which was smaller than the previous quarter’s 27% but still above the historical average of 9%.
Credit standards tightened more for loans to small and medium-sized enterprises, reaching 17%, compared to 13% for loans to large firms, the ECB said on Tuesday.
Additionally, the tightening was stronger for long-term loans, reaching 15% after 28% in Q1, compared to short-term loans at 10% after 17%.
Moreover, in Q2 2023, the overall terms and conditions for new housing loans tightened to 26%, less pronounced than the previous quarter’s 31%. The net tightening was due to wider margins on average and riskier loans, reflecting the pass-through of higher market rates to mortgage rates and varying attitudes towards credit risks.
Furthermore, banks reported a net tightening of credit standards on consumer credit and other lending to households in Q2 2023, reaching 18%, more pronounced than the previous quarter’s 10%.
The net tightening exceeded banks’ expectations (-12%) and was above the historical average of 5%.
Loan demand
Euro area firms’ net demand for loans experienced a significant decrease (-42%) which was even stronger than the previous quarter’s -38% and exceeded banks’ expectations.
Notably, the net decrease in loan demand was the most substantial ever recorded for SMEs. Additionally, demand for long-term loans saw the strongest net decrease in the survey’s history at -46%, while short-term loan demand decreased to a lesser extent (-22%) but still close to the historical low of the global financial crisis.
According to ECB, the decline in loan demand was primarily driven by rising interest rates and declining fixed investment.
For the fourth consecutive quarter, the general level of interest rates continued to be the primary factor negatively affecting housing loan demand.
Although the net demand for housing loans remained low in Q2 2023, it was comparatively lower than the significant declines witnessed in the previous two quarters (at -47% after -72% in Q1 2023 and -74% in Q4 2022).
Factors such as higher interest rates, weakening housing market prospects and low consumer confidence all contributed to the negative demand for house purchase loans.
Looking ahead, banks anticipate a further, although less pronounced, decrease in housing loan demand in the third quarter of 2023 (net percentage of banks at -18%).
Demand for consumer credit and other lending to households decreased in Q2 2023, with a net percentage of banks at -12%, smaller than the previous quarter’s -19% and in line with banks’ expectations from the previous quarter (-16%).
Loan application rejections
In Q2 2023, banks witnessed a further net increase in the share of rejected applications for loans to firms (16%, up from 15% in the previous quarter).
The increase in rejected loans was more pronounced for SMEs (15%) compared to large firms (9%).
Similarly, euro area banks reported a net increase in the share of rejected applications for housing loans in Q2 2023, although it was lower than the previous quarter (8% compared to 17%).
Additionally, the net increase in the share of rejected applications for consumer credit and other lending to households remained unchanged in Q2 2023 (10%), the same as in the first quarter.