July 25, 2012 / 11:51 AM / 7 years ago

UPDATE 2-ECB bank lending survey paints bleak picture

* Banks see steady tightening of loan standards in Q3
    * Say demand for credit expected to remain weak
    * Survey findings underscore policy dilemma for ECB

    By Eva Kuehnen
    FRANKFURT, July 25 (Reuters) - Banks expect to toughen their
credit rules further in coming months with demand for loans from
firms and consumers remaining weak, underscoring a dilemma
facing the European Central Bank in its efforts to revitalise
the euro zone's economy.
    Fears about the euro zone's future are making companies and
other borrowers increasingly nervous about taking on credit and
investing in their businesses, sapping the bloc's already weak
    Meanwhile banks have steadily tightened lending standards
over the last three years in response to the region's debt
troubles and to cope with stricter capital rules.
    In its latest quarterly Bank Lending Survey published on
Wednesday, the ECB said 11 percent of banks that took part made
it harder for companies to borrow in the second quarter, while
only 1 percent eased their rules. The net balance of 10 percent
was up from the 9 percent in the first quarter.
    The survey, conducted over a two-week period straddling the
June 28-29 EU summit, highlighted that even exceptional policy
measures such as the 1 trillion euros of three-year money the
ECB pumped into the banking system between December and February
have not been able to calm credit market nerves. 
    "Looking ahead to the third quarter, banks expect a
continued decline in the net demand for loans, both for
enterprises and households, even if less negative than in the
second quarter," the survey said, adding that banks also expect
to keep steadily tightening their lending rules.
    The ECB has not ruled out offering another round of low-cost
loans but, with demand for credit subdued, recent comments from
policymakers suggest it is not on the immediate horizon.
    "Demand for loans remains a problem," said HSBC's top euro
zone economist, Janet Henry. "...There is little the ECB can do
directly to stimulate this, as long as the euro zone sovereign
crisis weighs heavily on sentiment."
    Survey participants said the debt crisis had a greater
impact on funding conditions in the second quarter than in the
    But demand for mortgages, often seen as a forerunner of
broader credit trends, saw a recent demand slump slow. A net 21
percent of banks saw a drop in demand compared with 43 percent
in the first quarter.
    More general consumer demand for loans remained broadly
unchanged with a net 27 percent of banks seeing a slowdown.
    A lending survey published simultaneously by the Bundesbank,
showed banks in Germany did not tighten credit standards for
firms in the April-July period, while the fall in demand was
slower than elsewhere, dropping at a net 6 percent of banks. 
    Germany has suffered much less than its peers from the debt
crisis, while banks on the euro zone's periphery are under
particular strain, facing elevated funding costs in the market
as investors demand ever higher premiums.
    The bleak broader lending figures come the euro zone economy
heads for its second recession since 2009. Business surveys
showed on Tuesday that Europe's private sector looked set for a
prolonged slump. 
    The troubles are driving expectations that the ECB will cut
rates from their current record low of 0.75 percent in the
coming months and may resort to more unorthodox or untested
policy measures.
                                                  Q2    Q1     
 - Loans to businesses     
 Reporting tighter credit standards this quarter  10     9    
 Reporting higher loan demand this quarter       -25   -30
 Expecting tighter credit standards next quarter  10     2    
 Expecting higher loan demand next quarter        -8     7    
 - Mortgage loans to households     
 Reporting tighter credit standards this quarter  13    17    
 Reporting higher loan demand this quarter       -21   -43    
 Expecting tighter credit standards next quarter   5     7    
 Expecting higher loan demand next quarter       -10   -12    
    The survey of 130 banks was conducted from June 21 to July
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