Bank loan approval criteria tightened further, albeit moderately, in the fourth quarter of 2023, according to a bank lending survey by the European Central Bank (ECB) published this week.
As the risk of a recession looms, banks’ risk aversion has increased and is a major driver of the tightening of credit standards for loans to firms and households, according to the study. Economic growth will remain weak and limited to 0.8% in 2024, say ECB projections.
Terms and conditions agreed in loan contracts tightened moderately for loans to firms and consumer credit, but eased for housing loans.
Additionally, the terms attached to approved loans tightened more in real estate and construction, the survey shows, stating that more tightening is expected this year.
Less favourable loan terms, including higher interest rates, are also responsible for lower loan demand by companies and households.
In the first quarter of 2024, banks expect a small net increase in demand for loans to companies for the first time since the second quarter of 2022 (net percentage of 2%), according to the ECB.
The survey also shows that banks’ access to funding via money markets, long-term deposits and debt securities improved as markets began to expect rate cuts from the ECB. But short-term retail funding and securitisation tightened slightly. The report, however, does not suggest any correlation between banks’ funding and their loan offers to clients.
Euro area banks reported an increase in their capital as well as liquid and risk-weighted assets in 2023 in response to new regulatory requirements. However, banks indicated that regulatory or supervisory action had a broadly neutral effect on their funding conditions.
The pressure to increase liquid assets may have resulted from the renewed attention towards banks’ liquidity brought about by the March 2023 market turmoil, when three US regional banks and Credit Suisse failed.
