Banks reported that net demand for loans both to enterprises and to households for consumer credit and other lending had declined considerably, while net demand for loans to households for house purchase had remained at elevated negative levels in the fourth quarter of 2008. Negative net demand for loans to enterprises was driven by a further decline in the financing needs for fixed investment and by a further contraction of demand stemming from merger and acquisition (M&A) activity and corporate restructuring. In the case of loans to households, the drop in demand mainly reflected worsening housing market prospects, deteriorating consumer confidence and considerably lower financing needs for durable consumer goods.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards: In the fourth quarter of 2008, the net percentage of banks reporting a tightening of credit standards for loans to enterprises was 1 percentage point lower than in the third quarter (64%, after 65% in the third quarter of 2008); as in the previous quarter, this reflected mainly banks reporting to have tightened their credit standards "somewhat", while only a minority stated to have tightened them "considerably". The most important driving factors behind the net tightening continued to be expectations about future economic activity and the industry or firm-specific outlook, which gained further importance to reach levels of 77% and 73% respectively. At the same time, the impact of banks’cost of funds and balance sheet constraints remained comparatively high, in particular banks’ ability to access market financing, which increased further to 36%. Moreover, the impact of the costs related to banks’ capital position increased further in comparison with the third quarter of 2008, while banks’liquidity position broadly remained at elevated levels.
As regards the terms and conditions for granting loans to enterprises, banks reported that they had broadly continued to widen their margins on both average and riskier loans in the fourth quarter, to 61% (against 68%) and 77% (against 76%) respectively in net terms. In addition, the tightening in non-price terms and conditions remained high. Almost half of the banks tightened their credit standards by acting on the size of loans or credit lines and on collateral requirements, as in the previous quarter. When cumulating the net tightening since the second half of 2007, the reporting banks stated that, of all non-interest charges, collateral requirements were increased most.
In contrast to the previous survey rounds, the net tightening of credit standards reported for large enterprises (63%, after 68% in the third quarter) was equal to that given for small and medium-sized enterprises (SMEs) (63%, after 56% in the third quarter. While there was a certain degree of stabilisation in the case of large enterprises, net tightening for SMEs increased further in the fourth quarter of 2008. With regard to the factors underlying the changes in credit standards, for both large enterprises and SMEs, expectations regarding general economic activity and the industry or firm specific outlook continued to be the most important contributors. At the same time, banks’cost of funds and balance sheet constraints played a somewhat more important role in the net tightening for large firms than for SMEs, and they seem even to have gained in importance, especially for lending to SMEs. Moreover, competition from other banks contributed for the first time, albeit to a limited extent (8%), to the net tightening of credit standards for both SMEs and large firms. With respect to the terms and conditions for credit, net tightening of credit standards continued to be reflected most in net increases in banks’ margins on both average and riskier loans to both large firms and SMEs. Regarding non-price terms and conditions, the net tightening for both large firms and SMEs remained broadly at the same high levels as in the previous quarter.
As regards loan maturities, the net tightening continued to be more pronounced for long-term loans (68%, after 66% in the previous survey round) than for short-term loans (53%, after 49% in the previous survey.
Loan demand: Net demand for loans by enterprises declined considerably and remained negative in the fourth quarter of 2008, standing at -40%, after -26% in the third quarter. The negative net demand was driven by a decline in the financing needs for fixed investment (to -60%, from -36% in the third quarter) and by a further drop in the demand stemming from M&A activity and corporate restructuring (-44%, after -32% in the third quarter). In addition, as in the previous quarter, internal financing (i.e. profitability) contributed somewhat to lowering the net demand for loans by enterprises. By contrast, the issuance of debt securities continued to contribute positively at slightly more elevated levels to the net demand for loans by enterprises, reflecting market conditions and the increased cost of marketbased debt financing.
In terms of borrower size, while net loan demand, in contrast to preceding quarters, was negative for both large firms and SMEs, the decline was somewhat more pronounced for SMEs in the fourth quarter of 2008. Regarding the maturity spectrum, net demand decreased particularly markedly in the case of long-term loans.
Expectations: Expectations for the first quarter of 2009 point to the net tightening of credit standards remaining lower (47%) than the actual net tightening in the fourth quarter of 2008. The decline in net demand for loans by enterprises is expected to ease (-26%) in comparison with actual net demand in the fourth quarter of 2008.
Households
Loans to households for house purchase
Credit standards: In the fourth quarter of 2008, the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase continued to increase somewhat (to 41%, after 36% in the third quarter. Expectations regarding general economic activity and housing market prospects continued to be the main factors driving the net tightening of credit standards. However, the cost of funds and balance sheet constraints likewise continued to put some strain on responding banks. In addition, as was already the case in the previous quarter, competition from other banks did not contribute to an easing of credit standards for loans to households for house purchase, but
the impact was broadly neutral.
As regards the terms and conditions for loans for house purchase, banks reported a further increase in net tightening via margins on average loans (to 45%, up from 35% in the third quarter). They also reported an increase in net tightening via margins on riskier loans, to 51%, from 43% in the third quarter. Moreover, non-price terms and conditions, such as collateral requirements and loan-to value (LTV) ratios, were also tightened further.
Loan demand: The net demand for housing loans remained at a highly negative level in the fourth quarter of 2008 (at -63%, up from -64% in the third quarter). This reflected mainly worsening housing market prospects and deteriorating consumer confidence.
Expectations: For the first quarter of 2009, credit standards for loans for house purchase are expected to tighten to a lesser extent (25%) than the actual net tightening recorded in the fourth quarter. Net loan demand is expected to remain broadly at the highly negative level (-61%) of the fourth quarter.
Consumer credit and other lending to households
Credit standards: In the fourth quarter of 2008, the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending continued its increase (reaching 42%, up from 30% in the previous quarter). The tightening of credit standards for consumer credit and other lending thus reached a level similar to that of those for loans to households for house purchase. The main factor behind the further increase in net tightening was again banks’ perception of risk, mainly those related to expectations about general economic activity and the creditworthiness of consumers.
As regards the terms and conditions for consumer credit, banks reported an increase in net tightening via margins on average loans and a basically unchanged level of tightening for riskier loans, amounting to 37% in both cases. These levels remained somewhat lower than those for housing loans.
Loan demand: Net demand for consumer credit and other lending to households declined in comparison with the third quarter of 2008 (to -47%). This level continued to be less negative than that of net demand for loans for house purchase, although the gap decreased markedly. Reporting banks gave deteriorating consumer confidence and lower financing needs for durable consumer goods as the main factors that dampened demand.
Expectations: For the first quarter of 2009, credit standards for consumer credit and other lending to households are expected to tighten considerably less than the actual net tightening in the fourth quarter of 2008, reaching a level of 28%. Net demand is expected to remain negative, but at somewhat less elevated levels (-39%) than in the fourth quarter of 2008.
Ad hoc questions on the impact of the financial turmoil
As a follow-up to the ad hoc questions included in the last rounds of the survey, the January 2009 survey also contains a set of questions that is aimed at gauging both the extent to which the financial market tensions have already affected banks’ credit standards for loans and credit lines to enterprises and households in the euro area in the fourth quarter of 2008 and the extent to which they will affect them in the next three months. The questions refer to banks’ access to wholesale funding and the impact on bank lending.
Access to wholesale funding
In the fourth quarter of 2008, banks reported that their access to money markets had broadly remained hampered at elevated levels as a result of the turmoil in the financial markets and that their access to debt securities markets had been hampered further in comparison with the third quarter. With 89% of the responding banks stating that their market access for medium to long-term debt issues had been impaired, the proportion was similar to that reported for securitisation and risk transfer.
Access to securitisation, both true-sale and synthetic, continued to be hampered to a degree similar to that in the third quarter. 86% and 92% of the responding banks answered that their access to securitisation was hampered for corporate loans and loans for house purchases respectively.
Over the next three months, access to short-term funding is expected to improve; this holds for money markets and, to some extent, the market for short-term debt securities issues. At the same time, access to funding at medium to long-term maturities is projected to be hampered further in comparison with the situation in the fourth quarter of 2008. Access to securitisation is expected to remain hampered to a more or less similar extent as in the previous quarter.
Governments’ announcements of recapitalisation support and state guarantees for debt securities issued by banks seem to some extent already to have supported banks’ access to wholesale funding. This was indicated by banks in response to a new ad hoc question in the January round of the bank lending survey. Some improvement was found by 34% of the responding banks for the fourth quarter of 2008. For the first quarter of 2009, 58% expected an improvement in their access to wholesale funding as a result of these measures.
More or less in line with the developments reported in respect of their access to money markets and debt securities markets, banks reported that the impact of these funding options on bank lending, as regards both quantities and margins, remained broadly unchanged at elevated levels. The impact on the margins continued to be stronger than that on the amounts of loans granted to borrowers. As regards the impact of their hampered access to securitisation on their lending, banks reported a somewhat lower impact on the amount of loans granted and a similar impact on margins, both as compared with the previous quarter. The impact of hampered access to securitisation on bank lending was only somewhat more pronounced in the case of margins than in that of quantities. With respect to the next three months, banks reported that they expected the impact their hampered access to money markets and debt securities markets would have on their willingness to lend and on their margins to be similar to that recorded over the past three months and that the impact of securitisation would be lower.
As regards the impact of the change in banks’ costs related to their capital position on their lending policy, 48% of the reporting banks indicated a considerable impact or some impact on their capital and lending in the fourth quarter of 2008,, which was an increase by 5 percentage points in comparison with the third quarter. In addition, a somewhat lower percentage of banks replied that there had basically been no impact on their capital (27%, down from 33% in the previous quarter).
