Banks reported that in the first quarter of 2009 net demand for loans to enterprises and for consumer credit and other lending to households continued to decline, while the level of net demand for loans to households for house purchase became significantly less negative. Negative net demand for loans to enterprises was driven by a decline in the financing needs for fixed investment and a further decline in demand stemming from mergers and acquisitions (M&As) and corporate restructuring. Firms’ need to restructure their debt tended to have a positive impact on loan demand. For loans to households, negative net demand mainly reflected housing market prospects, deteriorating consumer confidence and lower financing needs for durable consumer goods.
As in recent survey rounds, the April 2009 survey incorporated a set of ad hoc questions addressing the effect of the financial turmoil on credit standards and lending.
Banks indicated that governments’ announcements of recapitalisation support and state guarantees for debt securities issued by banks were already having a positive impact on banks’ access to wholesale funding and are expected to further ease access to funding in the second quarter of 2009. Nevertheless, banks continued to report that their access to funding remained hampered in the first quarter of 2009 as a result of the financial market turmoil. Indeed, only in the case of very short-term funding did a majority of reporting banks indicate that access was not hampered in the first quarter of 2009. In addition, the majority of banks reported that the financial market tensions continued to have an adverse impact on their capital positions and lending capacity.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards. In the first quarter of 2009, the net percentage of banks reporting a tightening of credit standards for loans to enterprises, while remaining at a high level, declined somewhat compared with the previous quarter (43%, after 64% in the fourth quarter of 2008). While this might give an initial indication of a turning point in the tightening cycle, it still represents a significant degree of additional net tightening of already tight credit standards. The most important driving forces behind the net tightening in the first quarter of 2009 continued to be expectations regarding general economic activity and the industry or firm-specific outlook, which – although their importance abated somewhat – stood at levels of 55% and 59%, respectively. At the same time, the impact of banks’ cost of funds and balance sheet constraints remained at comparatively high levels, although the importance of these factors also diminished somewhat compared with the previous quarter. As in previous quarters, there were basically no competitive pressures on banks to either tighten or ease credit standards.
As regards the terms and conditions related to the provision of loans to enterprises, banks reported that they continued to widen their margins on average loans and on riskier loans in the first quarter of 2009, with net percentages of 58% (against 61% in the previous quarter) and 71% (against 77%), respectively. Moreover, around one-third of the banks tightened their credit standards by reducing the size of loans or credit lines and by tightening collateral requirements. When cumulating the net tightening since mid-2007 of all the non-interest rate charges, collateral requirements were increased most, while banks also became considerably stricter in terms of loan sizes and loan covenants.
In the first quarter of 2009, the net tightening of credit standards was slightly stronger for loans to large enterprises (48%, after 63% in the fourth quarter of 2008) than for loans to small and medium-sized enterprises (SMEs) (42%, after 63% in the previous quarter). This mirrors the overall trend since the beginning of the financial turmoil, as indeed the cumulated net tightening since the second quarter of 2007 has been significantly more pronounced with respect to loans to large enterprises (353 all in all) than with respect to SMEs (265). In recent quarters, the factors underlying the changes in credit standards, for both large enterprises and SMEs, mainly related to the expectations regarding general economic activity and the industry or firm-specific outlook. At the same time, costs related to banks’ capital positions played a somewhat more important role in the net tightening for large firms than for SMEs, which may reflect the fact that, with the current slowdown in syndicated lending and a subdued credit risk transfer market, the allocation of capital to larger loans has become comparatively costly. Moreover, competition from other banks again contributed to only a small extent to the net tightening of credit standards for both SMEs and large firms. With respect to terms and conditions, the net tightening of credit standards continued to be reflected most markedly in net increases of banks’ margins on average loans as well as on riskier loans both for loans to large firms and to SMEs. Regarding non-price terms and conditions, both large firms and SMEs remained broadly at the same elevated levels of net tightening as in the previous quarter.
As regards loan maturities, the net tightening continued to be more pronounced for long-term loans (50%, after 68% in the previous survey round) than for short-term loans (38%, after 53% in the previous. This is consistent with the relatively high net percentage of banks reporting that credit standards were tightened via the shortening of loan maturities.
Loan demand. In the first quarter of 2009, net demand for loans by enterprises declined somewhat less than in the previous quarter, but remained rather low (-33%, after -40% in the fourth quarter of 2008). The negative net demand was driven by a continued strong decline in the financing needs for fixed investment (to -62%, from -60% in the previous quarter). Likewise, weak demand stemming from the needs to finance M&As and corporate restructuring was observed in the first quarter of 2009 (-39%, after -44% in the fourth quarter of 2008). At the same time, the slightly less negative net demand for corporate loans was mainly driven by firms’ needs to restructure their debt and also by perceived difficulties in obtaining loans from other banks and non-banks. In contrast to previous quarters, internal financing (i.e. profitability) did not contribute to lowering the net demand for loans by enterprises in the first quarter of this year, which may indicate a deterioration in the corporate sector’s earnings prospects. In the first quarter of 2009, there is some evidence suggesting a return of investment-grade firms to the euro area corporate bond market. This may explain some banks’ reply that, in contrast to previous quarters, the issuance of debt securities contributed negatively to the net demand for loans by enterprises.
In terms of borrower size, net loan demand was negative for both large firms and SMEs in the first quarter of 2009, although slightly less so than in the previous quarter. Regarding the maturity spectrum, net demand continued to decrease particularly strongly for long-term loans.
Expectations. Expectations regarding credit standards applied to loans and credit lines to enterprises for the second quarter of 2009 point to a further decrease in the net tightening (28%) compared with the actual net tightening in the first quarter of 2009. Net demand for loans by enterprises is expected to further deteriorate (-12%) compared with the actual net demand in the first quarter of 2009.
Households
Loans to households for house purchase
Credit standards. In the first quarter of 2009, the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase lessened somewhat (28%, after 41% in the fourth quarter of 2008), implying a further, albeit more moderate, overall tightening of credit standards from an already elevated level. Expectations regarding general economic activity and housing market prospects remained the main factors contributing to the continued net tightening of credit standards. In addition, cost of funds and balance sheet constraints also contributed to the net tightening, although much less so than in the previous quarter (7%, down from 22%). Furthermore, as in the previous quarter, competition from other banks did not contribute to the change of credit standards for loans to households for house purchase, and was broadly neutral.
As regards the terms and conditions on loans to households for house purchase, margin requirements, in particular on riskier loans, remained the main element of the net tightening of credit standards. While still contributing to net tightening, in the first quarter of 2009 collateral requirements and loan-to-value ratios became somewhat less stringent compared with the previous quarter.
Loan demand. The net demand for housing loans in the first quarter of 2009 remained negative, albeit considerably less so than in the previous quarter (-30%, down from -63%). The negative net demand, as in previous quarters, reflected mainly housing market prospects and deteriorating consumer confidence.
Expectations. For the second quarter of 2009, credit standards for loans for house purchase are expected to tighten (19%) compared with the actual net tightening in the first quarter of 2009. Net loan demand is likewise expected to decline (-18%) compared with the actual level in the first quarter of 2009.
Consumer credit and other lending to households
Credit standards. In the first quarter of 2009, the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending to households moderated somewhat to 26%, down from its historical peak of 42% observed in the previous quarter. The main factor behind the continued net tightening was banks’ perception of risk, mainly related to deteriorating expectations regarding general economic activity and the creditworthiness of consumers.
As regards the terms and conditions for consumer credit, in the first quarter of 2009 banks continued to charge higher margins on both average and riskier loans, whereas requirements regarding the maturity of loans became somewhat less stringent compared with the previous quarter.
Loan demand. In the first quarter of 2009, net demand for consumer credit and other lending to households remained negative, although somewhat less so than in the previous quarter (-34%, down from -47%). The two main factors dampening demand continued to be consumer confidence and lower financing needs for durable consumer goods.
Expectations. For the second quarter of 2009, credit standards for consumer credit and other lending to households are expected to tighten by 20% compared with the actual net tightening in the first quarter of 2009. Moreover, net demand for consumer credit is expected to improve somewhat, but to remain negative (-21%) compared with the level reported for the first quarter of 2009.
Ad hoc questions on the impact of the financial turmoil
As in previous survey rounds, the April 2009 survey contained a set of questions which aim to assess the extent to which the financial market tensions have affected banks’ credit standards for loans and credit lines to enterprises and for loans to households in the euro area in the first quarter of 2009 and the extent to which they are expected to affect them in the next three months. The questions refer to the access to wholesale funding and the impact on bank lending.
Access to wholesale funding
In the first quarter of 2009, banks reported that their access to money markets as a result of the turmoil in financial markets remained impaired, although some slight improvements were noticed in all market segments compared with the fourth quarter of 2008. Apart from the access to very short-term funding in the money market where 70% of the banks reported that they were not hampered, for all other sources of wholesale funding more than 50% of the reporting banks indicated that their access remained hampered in the first quarter of 2009. In particular, around 80% of the banks reported that their access to securitisation (both true-sale and synthetic) and to medium to long-term debt issuance was hampered. At the same time, the percentage of banks reporting a hampered ability to transfer credit risk off balance sheets declined from 90% in the fourth quarter of 2008 to less than 70% in the first quarter of 2009.
Over the next three months, access to wholesale funding and securitisation is expected to remain hampered to a similar extent as in the first quarter of 2009.
At the same time, banks reported that governments’ announcements of recapitalisation support and state guarantees for debt securities issued by banks had a positive impact on banks’ access to wholesale funding in the first quarter of 2009. This was reflected in the fact that around 50% of the banks (up from 34% in the previous quarter) reported some or a considerable improvement in market access as a result of the announced government support schemes in the first quarter of 2009, and that they expect a further improvement to occur in the second quarter of 2009.
Impact on bank lending
In line with the continued impaired access to money markets and debt securities markets, banks reported that the impact on bank lending, as regards both quantities and margins, of hampered access to these funding options remained broadly unchanged at elevated levels in the first quarter of 2009. The impact continued to be stronger for the margins than for the amount of loans granted to borrowers. Similarly, as regards the impact of the hampered access to securitisation on their lending, banks reported a broadly unchanged impact on the amount of loans granted as well as on margins required compared with the previous quarter. The impact on bank lending of the hampered access to securitisation was broadly similar for margins and quantities. With respect to the next three months, banks reported that they expect a similar impact on their willingness to lend and on margins resulting from their hampered access to money markets and debt securities markets and a somewhat lower impact resulting from hampered access to securitisation than over the past three months.
Finally, as regards the impact of the change in banks’ costs related to their capital positions on their lending policy, in the first quarter of 2009 44% of the reporting banks indicated "some" or a "considerable" impact on capital and lending, which was 5 percentage points less than in the fourth quarter of 2008. At the same time, the percentage of banks replying that there was basically no impact on their capital position remained broadly unchanged at a low level of 29% in the first quarter of 2009 (following 27% in the previous quarter). Hence, these results provide some tentative indications of supply-side effects on bank lending in recent quarters. With respect to the next three months 45% of the reporting euro area banks expect that the financial market events will continue to have some or a considerable impact on their capital and lending.
