The ECB confirms the bleak outlook for the eurozone’s lending activities.  Photo: Shutterstock

The ECB confirms the bleak outlook for the eurozone’s lending activities.  Photo: Shutterstock

The European Central Bank on 31 January released a survey reviewing lending activities in the euro area. Loan demand has gone down for both firms and households in response to rising interest rates and tightening credit standards.

As every quarter, the ECB in its January 2023 euro area (BLS) looked at the activities of banks in lending activities. The study, which took place between 12 December 2022 and 10 January 2023 and reached out to 151 banks (99% responded), found that, in light of the current economic state of the euro area, companies and individuals applied for fewer loans and that this decreased borrowing was likely to continue during Q1 of 2023.

Rate hikes and tight credit standards

To blame are the net tightening of credit standards--the largest since the 2011 sovereign crisis--and the . Banks’ overall terms and conditions in loan contract for firms and households also became stricter at the end of 2022, due to new regulatory and supervisory requirements but also “margins on riskier and average loans, collateral requirements and other terms and conditions” for the firms and “a widening of margins on both average and riskier loans.”

But the downwards trend is not just due to the banks’ decreased risk tolerance: firms and households, faced with the uncertainty the current economic climate presents, are also more averse to taking out loans. According to the ECB, “the decline in net demand [from firms] was stronger than expected by banks in the previous quarter,” though energy-intensive companies seemed to display a slight increase in lending demand.

Lower demand leads to decreasing housing prices

“The decrease in loan demand by households for house purchase was the strongest recorded since the beginning of the survey in 2003,” the survey also found. “Demand also decreased at a lesser but still strong pace in net terms for consumer credit,” as households deal with more instability. For Bert Colijn, senior Eurozone economist, , this is a strong indication that housing prices will continue to decline at the start of 2023.

Though lending activity is down and access to retail funding and securitisation has also deteriorated during the final quarter of 2022, banks noted improved access to debt securities and money markets as well as a strengthening of their capital position in 2022 in response to new regulatory and supervisory requirements.

“For the ECB, the decline in bank lending for December and the bank lending survey for January together indicate that we see transmission at work now, months ahead of its expected peak in the policy rate,” said Colijn, who expects a 50 basis point hike in the days to follow.