Eurozone April 20, 2021 / 11:17 am UTC

EZ Banks Less Reticent to Lend

By Andrew Wroblewski

Bottom line: In the latest (April 2021) ECB-compiled bank lending survey (BLS), EZ banks indicated only a moderate net tightening of credit standards on loans to firms in Q1 2021, to a level back in line with the long-term average and less perturbing than the results of the two previous surveys. Company credit demand was even weaker, a result of large buffers having built up. As we have stressed, these welcoming results from the central bank perspective will be a key, but far from decisive, ingredient in the ECB meeting this week, save to underscore that it points to still-easy financial conditions (perhaps more than recent swings in bond yields). 

Figure 1: Company Credit Demand and Supply Moving in Unison

Source: ECB, Continuum Economics

What the ECB can take credit for is that it has prevented a corporate credit crunch by not only helping cap banks from tightening credit standards for companies as markedly as in previous risk periods, but also preventing credit demand from being excessive by providing and incentivizing abundant direct credit supply itself through the likes of its market operation. Hence, credit supply and demand are now moving in tandem as opposed to being at divergent loggerheads as seen in the GFC a decade ago and in the banking crisis of 2012 (Figure 1).

Credit Tightening for Firms Back Down to the Norm

According to this April BLS, the net tightening was lower than expected by banks in the previous survey round and contrasted with the significant tightening in the previous two quarters. The tightening for the EZ as a whole, and each of the four main economies, was also back down in line with the long-term average (Figure 2) and was driven by a tightening of risk perceptions and banks’ risk tolerance, albeit less so than during the previous two quarters. 

It seems that the lower net tightening may be related to fiscal support measures continuing to be in place, the continued support from monetary policy and supervisory measures, as well as the broader improvement in risk sentiment in the last quarter. In Q2 2021, the net percentage of banks reporting a continued tightening of credit standards for loans to enterprises is expected to be similar. Banks reported, on balance, a further decline in firms’ demand for loans or drawing, mainly driven by a continued dampening impact of demand for financing fixed investment as firms, especially in sectors more affected by the pandemic, tended to postpone investment. In addition, in net terms, firms did not demand additional financing for working capital, reflecting available liquidity buffers and direct government liquidity support especially for small and medium-sized enterprises (SMEs). Notably and very much more reassuringly, EZ banks expect a rebound in firms’ loan demand from this quarter.

Figure 2: Company Credit Supply Back to Norm

Source: ECB, Continuum Economics

Mixed Household Signals

A small net percentage of banks reported an easing of credit standards for housing loans, a reflection of competition from other lenders, while risk perceptions related to borrowers’ creditworthiness and banks’ risk tolerance continued to have a tightening impact on all lending to households. Banks reported, on balance, a decline in net demand for loans to households last quarter. 

Weak consumer confidence and low spending on durables contributed negatively to net demand, while the low general level of interest rates and solid housing market prospects contributed positively. Banks expect a net tightening of credit standards and a net increase in demand for loans to households in Q2 2021, the interesting aspect here being that this pickup in credit demand is not seen being affected by the apparent huge household saving surge.

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I, Andrew Wroblewski, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.