Home Economic Indicator Eurozone borrowers and lenders avoid loans as interest rates rise, impacting credit availability.

Eurozone borrowers and lenders avoid loans as interest rates rise, impacting credit availability.

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Euro Zone Banks Tighten Credit Access as Rates Climb, ECB Survey Shows

Euro Zone Banks Curb Credit Access

Euro zone banks have further restricted access to credit in the third quarter, despite a decline in demand from households and companies. This is due to high borrowing costs and a deteriorating economic outlook, as revealed by a survey conducted by the European Central Bank (ECB).

ECB’s Interest Rate Hikes Impact Credit Creation

The ECB’s quarterly Bank Lending Survey indicates that the central bank’s interest rate hikes, aimed at reducing inflation in the euro area, have had a more significant impact on credit creation than initially anticipated by banks. This reinforces the case for the ECB to consider a pause in its monetary policy tightening.

Banks Tighten Loan Standards

Banks have tightened their loan approval criteria for both companies and households in the three months leading up to September. Pessimism about the economy and reduced liquidity resulting from the ECB’s policy tightening have been cited as the main reasons for this stricter approach.

Higher Than Predicted Credit Approval Criteria

The proportion of lenders tightening their credit approval criteria has exceeded their own predictions from three months ago, especially for mortgages and consumer loans. The ECB states that euro zone banks expect a further net tightening of credit standards for loans to firms in the fourth quarter of 2023, albeit at a more moderate level. Credit standards for loans to households for house purchases are expected to remain broadly unchanged, while significant net tightening is anticipated for consumer credit.

Decline in Loan Demand

In the third quarter, demand for loans across all categories has declined. This decline has been stronger than anticipated by banks and has been driven by higher interest rates, lower fixed investments for firms, and decreased consumer confidence along with a deteriorating housing market outlook for households, according to the ECB.

Funding Challenges for Banks

The survey also reveals that banks faced difficulties securing funding in the third quarter, particularly from retail customers. This reflects increased competition for deposits.

The ECB is expected to maintain its current policy stance at the upcoming meeting on Thursday. The central bank had raised the rate it pays on banks’ own deposits from -0.5% to 4.0% within a span of just over a year. This initially boosted banks’ profits but has now resulted in limited credit creation, especially in sensitive sectors like real estate.