ECB Bank Survey Points to Continued Credit Squeeze
Date: 1 February 2012
Written by Richard Reid
The ECB’s survey of bank lending for the last quarter of 2011 confirms a significant tightening in credit standards and suggests that credit growth will remain elusive for some time yet. The tightening in standards was considerably greater than the banks themselves had anticipated in the previous survey (see blue line below compared to the green line). As might be expected, many of the banks covered in the survey indicated that important factors driving the tighter standards included their capital position (to some extent of course related to regulatory changes), access to market funding, and liquidity. What is also noticeable though is that there was a major deterioration in expectations for the general economic outlook, this in turn partly affected by the intensifying sovereign debt crisis (see graph below). The poorer economic outlook of course also reduced the demand for loans.
Factors Driving Credit Standards for Enterprises*
Source: ECB Bank Lending survey, Jan 2012. Net % of banks contributing to tighter lending standards
Interestingly, there was a somewhat greater tightening of standards for larger firms in the fourth quarter than for SME’s. This may have been related to the emphasis on the tightening of longer term loans. The survey suggests that there will continue to be a tightening of standards in this quarter for non-financial corporates, once again being focused on larger businesses and on longer term loans. There was also a big tightening in standards for lending to households both for house purchases and consumer credit. This reflected in part a big decline in the demand for house purchase loans. It’s worthwhile bearing in mind that of course this is aggregate data and experiences may differ from country to country or even by region. So for example, while the survey notes that the decline in demand for mortgages was widespread, it was particularly noticeable in Spain, Italy, Belgium, Malta and the Netherlands.
It does seem though that the ECB’s provision of more secure long term funding for the banks is having an impact. So, while access to wholesale funding was hard in the fourth quarter, banks are already becoming a little more optimistic on that front now. The sovereign debt crisis did hit funding availability and terms but by and large banks seemed to indicate that to some extent they were able to shield their lending activities from sovereign debt problems.
This survey also tried to get some response to the impact of new regulatory requirements. These range from the Basel III measures to any national actual or anticipated measures. As might be expected a large proportion of respondents noted a big decline in risk weighted assets and expect a further fall in the next six months, with an ongoing adjustment in their capital position. Most of the rise in capital in the last six months has been achieved via issuance rather than by retained earnings. The adjustment in risk weighted assets is expected to accelerate in the first six months of this year. And over the same period, banks generally expect a net tightening in credit standards due to regulatory pressure.
Given that this survey is based on replies form the banks themselves, it might be expected that they will not be shy in highlighting the strain on their ability to provide credit to struggling economies arising from regulatory pressures. It is also difficult to determine with certainty the degree to which low credit growth is due to a shortage of supply or a shortage in demand. To some extent of course the two are linked by the sentiment about the extent and duration of the economic downswing. But this survey does underscore that the authorities must be very careful about finding the right balance between ensuring financial stability and allowing the financial sector to function. We have seen the EU Commission indicate that it may delay or moderate some regulatory measures. It should be careful not to over-interpret any improvement in funding conditions or expectations for growth as economies will remain fragile for some time. An overly aggressive application of new rules could prove very counterproductive. On the other hand, sureness and certainty of policy is also important so that it may also be advisable for policy makers to try to remain clear and consistent.