Eurozone banks scaled back lending to businesses and households late last year as a resurgence in coronavirus cases across the single currency bloc prompted fresh lockdowns which fuelled fears of rising bad debts, according to a European Central Bank survey.
In the final quarter of 2020, banks tightened their lending guidelines and approval criteria for new loans to businesses by the most since the 2008 financial crisis and several of them expected to rein in access to credit further in the first quarter of this year, the ECB’s quarterly survey of banks found.
Banks also tightened their lending criteria for mortgages and consumer credit, and many French banks tightened their mortgage criteria in response to stricter rules from supervisors, according to the survey which was conducted in December.
“The tightening was driven mainly by banks’ heightened risk perceptions, reflecting uncertainty around the economic recovery and concerns about borrowers’ creditworthiness in the context of renewed coronavirus-related restrictions,” the ECB said.
However, the ECB said the pullback on lending to businesses “remained below the peaks observed during the great financial crisis and the sovereign debt crisis”.
Demand for loans to businesses and consumers in the eurozone fell in the fourth quarter of last year, while mortgage demand rose, according to the survey of 143 lenders between December 4 and 29. Businesses had a greater appetite for inventory and working capital financing, but demand fell for loans to fund investment for the fourth consecutive quarter.
The findings are a worrying sign for the bloc’s pandemic-stricken economy and for the central bank’s efforts to avoid a credit crunch.
“At this stage of the recovery, a credit crunch would not help,” said Dirk Schumacher, head of European macro research at Natixis. “But that is not what we are seeing as banks are not pulling credit lines and government support remains sizeable through loan guarantees.”
The sharper than expected tightening by banks will be a concern for ECB officials as they meet to discuss monetary policy on Thursday. They are expected to keep policy unchanged and to underline their determination to maintain “favourable financing conditions” to support an expected economic recovery later this year.
European governments have guaranteed hundreds of billions of euros in loans to struggling businesses, while the ECB has flooded the banking system with ultra-cheap loans at negative rates to avoid companies being starved of credit.
Banks told the ECB that without the government guarantees, the tightening of lending conditions would have been much more severe. They also reported that their funding costs had changed little over the past year.
As part of a fresh stimulus package that the ECB announced last month, it extended a scheme for financing banks at deeply negative rates — in effect paying them to borrow money — as long as they do not reduce lending.
By raising the amount banks can borrow under its targeted longer-term refinancing operations from 50 per cent of their loan book to 55 per cent, the ECB gave them access to an extra €300bn of finance at interest rates as low as minus 1 per cent.
Carsten Brzeski, global head of macro research at ING, said the scheme encouraged banks to lend more, but this was offset by fears of bad loans and lower demand from clients.
“You can imagine a battle going on within banks between the [chief executive] who wants to keep lending and the chief risk officer who is more worried about default risks,” he said.