Eurozone Lending Standards Tighten as Geopolitical Risks Mount
ECB survey shows eurozone banks tightened lending standards in Q2, driven by geopolitical risks and weaker risk tolerance. Corporate loan demand edged higher while housing demand fell sharply.
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Euro area banks tightened lending standards in the second quarter, driven by weaker risk tolerance and higher perceived credit risks, the ECB's Bank Lending Survey showed.
Credit standards for corporate loans tightened by a net 7%. Housing loans saw a net 9% tightening, and consumer credit by a net 12%. Banks also reported an increase in the share of rejected loan applications across all borrower groups, with consumer credit seeing the steepest rise.
Tighter lending terms came mainly through higher interest rates. Banks expect further tightening across all loan categories in the third quarter.
Corporate loan demand edged higher – a net 3% – supported by financing needs for inventories, working capital, and debt refinancing among large firms. The increase was stronger than banks had anticipated. Housing loan demand fell sharply, down a net 15%, as weaker consumer confidence, higher borrowing costs, and a softer housing market outlook weighed. Consumer credit demand slipped a net 2%.
Tighter lending standards act as a drag on the euro area's growth outlook at a time when the ECB remains hawkish and geopolitical uncertainty is elevated. If the situation in the Middle East does not improve quickly, growth risks could soon replace inflation worries as the dominant concern for eurozone assets, traders said.
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