The July 2023 Euro Area Bank Lending Survey (BLS) revealed that credit standards for loans or credit lines to enterprises further tightened during the second quarter of 2023. Although the net percentage of banks reporting a tightening decreased to 14%, compared to 27% in the previous quarter, the cumulative net tightening since the beginning of 2022 has been significant. This tightening has contributed to a notable weakening in lending dynamics observed since the previous autumn.
For loans to households, credit standards also tightened in the second quarter, with net percentages of 8% for house purchase loans and 18% for consumer credit. The tightening was less pronounced for housing loans but more significant for consumer credit, influenced by higher risk perceptions related to the economic outlook and borrower-specific situations, lower risk tolerance, and higher costs of funds for banks.
Looking ahead to the third quarter of 2023, euro area banks anticipate a further but more moderate net tightening of credit standards on loans to firms. Credit standards on loans to households for house purchase are expected to remain unchanged, while a minor net tightening is predicted for consumer credit.
Banks’ overall terms and conditions for loans to firms and households also tightened further in Q2 2023. The main contributors to this tightening were widening loan margins and rising interest rates, reflecting the pass-through of higher market rates to lending rates for both firms and households.
Additionally, banks reported a strong net decrease in demand from firms for loans or credit lines during the second quarter, reaching an all-time low since the start of the survey in 2003. This significant decline was attributed to rising interest rates and lower financing needs for fixed investments. For the third quarter of 2023, banks expect a further but smaller net decline in demand for loans to firms.
Similar to firms, banks also observed a strong net decrease in demand for housing loans, although less pronounced compared to the previous two quarters. Contributing factors included higher interest rates, weakening housing market prospects, and low consumer confidence. Furthermore, there was a net decrease in demand for consumer credit and other lending to households, mainly influenced by rising interest rates and low consumer confidence.
The survey also highlighted a deterioration in access to funding for most market segments in the second quarter of 2023, particularly for retail funding. This trend may be linked to increased competition for retail deposits amid higher interest rates and outflows of overnight deposits.
Furthermore, non-performing loan (NPL) ratios impacted lending conditions for loans to enterprises and consumer credit in the first half of 2023, with higher risk perceptions and lower risk tolerance being the key drivers of the tightening lending conditions.
Regarding the impact of climate change on bank lending, euro area banks reported a net tightening effect of climate risks on credit standards and terms and conditions for loans to brown firms over the past 12 months. Conversely, they observed a net easing impact for loans to green firms and firms in transition. Demand for loans to firms owing to climate-related risks and opportunities increased, driven by firms in transition and green firms, while brown firms showed a net decrease in loan demand.
The Euro Area Bank Lending Survey provides valuable insights into bank lending behavior in the euro area. The survey is conducted four times a year to help improve understanding and analysis of lending trends. In this round, 158 banks were surveyed with a 100% response rate.