Banks tighten credit standards in Europe

Euro zone banks tightened credit standards again in the second quarter of the year and expect to do so further in coming months, but at a slower pace, the European Central Bank said yesterday. In its latest bank lending survey, the ECB said the ongoing economic troubles were the main driver behind a clampdown on credit to both households and firms. The ECB data showed firms' demand for loans fell in the second quarter with companies requesting less finance for fixed investment, mergers and acquisitions and corporate restructuring. However, banks expect a small pickup in the third quarter. "Looking forward, banks expect the net tightening of credit standards applied to loans to households to weaken somewhat further in the third quarter of 2009," the ECB said. "Net demand for loans by enterprises is expected to turn positive [one per cent] in the third quarter of 2009, which would be the case for the first time since the fourth quarter of 2007." Banks have been raising the bar for companies' and households' access to credit for the last eight quarters, as the financial market crisis has made institutions wary of taking on risk. While economists point to slow demand as the main reason for weak loan growth, politicians and ECB policymakers have pressed banks to do more to bolster the economy by lending on funds they have received from governments and the bloc's central bank. The ECB said that credit conditions had been toughened across the board in Q2, from large firms to small and medium sized enterprises, although larger firms had seen a somewhat greater degree of tightening. The 118 banks that took part indicated that their access to wholesale funding in money markets and debt securities markets was less impaired in the second quarter. At the same time, they said there was little improvement as regards the access to securitisation. Homebuyers had also seen lending standards tightened, the ECB said. A further tightening in standards is expected in the third quarter, although at a slower pace. Demand for mortgages turned slightly positive in the second quarter but is expected to return to negative territory in the coming months. Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here .