Regarding credit to households, in net terms, euro area banks also reported a tightening of credit standards on loans to households for house purchase (at 13% in the first quarter of 2011, up from 9% in the fourth quarter of 2010) and on consumer credit (at 7% in the first quarter of 2011, compared with 2% in the fourth quarter of 2010). Banks’ increased cost of funding and balance sheet constraints were also generally put forward to explain the moderate increase in the tightening of credit standards. However, by contrast with NFCs, the general perception of risks (linked to the overall economic situation, housing market developments or creditworthiness of borrowers) appears to have also played a role in explaining the tightening of credit standards on loans to households. Looking forward, euro area banks generally expect a further tightening of credit standards on loans to households in the second quarter of 2011.
Turning to demand, euro area banks reported a notable increase in the demand for loans to NFCs (to 19% in net terms in the first quarter of 2011, from 10% in the fourth quarter of 2010), mainly driven by a pick-up in financing needs for fixed investment and inventories/working capital. At the same time, banks registered a decline in the demand for loans from households. Looking ahead, the prospects for loan demand remain, however, broadly positive.
Developments in credit standards and net demand for loans in the euro area
Enterprises
A moderate tightening of credit standards on loans to enterprises Euro area banks resumed a slight overall tightening of their credit standards on loans to NFCs in the first quarter of 2011. The net percentage of banks reporting a tightening of credit standards stood at 4% in the first quarter of 2011, compared with 0% in the previous quarter and only marginally above expectations of respondents at that time.
Euro area banks suggested that the tightening of credit standards, on average, mainly affected large firms (with a reported net tightening of 6% in the first quarter of 2011, compared with 0% in the fourth quarter of 2010). The net tightening of credit standards on loans to small and medium-sized enterprises (SMEs)remained broadly unchanged at 3% in both quarters. In terms of maturity, credit standards on short-term loans continued to be loosened (-2% in the first quarter of 2011, compared with -3% in the previous survey round), while those on long-term loans were tightened.
The tightening of credit standards was mainly driven by banks’ credit supply-side considerations. The net percentage of banks reporting that access to market financing was among the factors explaining the tightening of credit standards rose to 9% in the first quarter of 2011 (from 3% in the fourth quarter of 2010). Moreover, banks’ liquidity position was reported to have contributed to the tightening of credit standards by 7% of euro area banks (in net terms), compared with 2% in the fourth quarter of 2010. According to banks, the perception of risks (in particular expectations regarding overall economic activity and the industry or firm-specific outlook) continued to contribute to the tightening of credit standards as in the previous round. Conversely, competition continued to dampen the tightening of credit standards (but slightly less than in the previous survey round).
Although the general feeling was that credit standards were being tightened, non-price terms and conditions (expressed as levels) reported by euro area banks were generally tightened less than in the previous survey round. Moreover, while margins on riskier loans appear to have been raised slightly (by 20% of banks in net terms, compared with 18% in the fourth quarter of 2010), margins on average loans were actually reduced.
Looking forward, on balance, euro area banks expect a slight tightening of credit standards on loans to NFCs in the second quarter of 2011 (at 3% in net terms). This possible further tightening is expected to affect both SMEs and large firms equally, and to primarily affect long-term loans.
Notable increase in the demand for loans to non-financial corporations
Euro area banks reported a notable increase in the demand for corporate loans (see Chart 3), even though it was somewhat more moderate than what they had expected in the previous survey round. The net percentage of banks reporting an increase in the demand for loans to NFCs stood at 19% in the first quarter of 2011, compared with 10% in the fourth quarter of 2010. Moreover, the increase in demand appeared to be mainly driven by a pick-up in financing needs for inventories and working capital and, for the first time in more than two years, by positive developments in fixed investment. This is in line with general indications of a positive underlying momentum in the economic recovery. At the same time, euro area banks indicated that the influence of alternative sources of financing, either internal or external, became broadly neutral. Looking forward, banks expect the demand for corporate loans to continue to rise in the second quarter of 2011, slightly more for SMEs than for large firms and for short-term loans than for long-term ones.
Households
Further tightening of loans to households for house purchase
In net terms, euro area banks also reported a further tightening of credit standards on loans to households for house purchase. The net percentage of banks reporting a tightening of credit standards on mortgage loans stood at 13% in the first quarter of 2011, up from 9% in the fourth quarter of 2010.
Similarly to the case of corporate loans, the increased cost of market funding and balance sheet constraints were put forward as factors explaining the tightening of credit standards, while, in contrast to the case of loans to NFCs, the general perception of risks appeared to have also played a significant role in explaining the increase in tightening (with increased contributions from housing market prospects and overall expectations regarding general economic activity).
Banks confirmed this by reporting increases of margins on both riskier loans and average loans. The net percentage of banks reporting a widening of margins on riskier loans rose from 10% in the fourth quarter of 2010 to 19% in the first quarter of 2011, while the percentage of banks indicating that they increased margins on average loans for house purchase turned positive, from -1% in the fourth quarter of 2010 to 11% in the first quarter of 2011.
Looking forward, 9% of euro area banks – in net terms – expect a tightening of credit standards on loans for house purchase in the second quarter of 2011, but slightly lower than what was reported for the first quarter.
Substantial contraction of housing loan demand
Euro area banks also reported a substantial contraction in the demand for mortgage loans (-10% in net terms in the first quarter of 2011, down from +23% in the fourth quarter of 2010). This was mainly on account of a deterioration of housing market prospects in the majority of euro area countries, as well as faltering consumer confidence. Looking forward, however, banks expect a mild increase in the demand for housing loans (5% in net terms) in the second quarter of the year. It is noteworthy that over recent quarters, both realised and expected figures related to the demand for housing loans have been particularly volatile from one quarter to the next, possibly pointing to a large degree of uncertainty for this category of loans.
Tightening of credit standards also applied to consumer loans
Broadly in line with expectations, the net tightening of standards for consumer credit also increased, to 7% in the first quarter of 2011, from 2% in the fourth quarter of 2010. The factors contributing to this tightening were credit supply-side considerations and risk perceptions (i.e. a mild 8 deterioration in the creditworthiness of borrowers and in expectations regarding general economic activity). As a result, price-related terms and conditions on consumer credit (notably margins on both average and riskier loans) were generally made more stringent in most euro area countries, while other non-price terms and conditions tended to remain broadly unchanged.
Looking forward, euro area banks expect, on average, a further tightening of credit standards on consumer credit and other lending to households (at 8%) in the second quarter of 2011.
Net demand for consumer credit still sluggish
Somewhat in contrast to banks’ expectations in the previous survey round, net demand for consumer credit in the first quarter of 2011 remained negative on average in the euro area (at -4%, compared with - 2% in the fourth quarter of 2010), notably dampened by faltering consumer confidence. Looking forward, in the second quarter of 2011, euro area banks continue to expect positive demand for consumer credit (6% in net terms).
