Credit standards on loans to NFCs have, on balance, been left broadly unchanged in the euro area. The net percentage of banks reporting a tightening of credit standards stood at 0%. The main driver of the decline in the net tightening of credit standards in comparison with the previous quarter was a decrease in the impact of banks’ risk perceptions. In the last quarter of 2010, credit standards on loans to small and medium-sized enterprises (SMEs) were tightened further, albeit only slightly, while those on loans to larger firms remained stable. Moreover, slightly looser credit standards applied predominantly to short-term loans, while credit standards on long-term loans remained unchanged.
In the last quarter of 2010, the credit standards applied to households tended to tighten further. Credit standards on loans for house purchase appear to be tied closely to country-specific developments in housing markets. In the last quarter of the 2010, the net percentage of banks reporting a further tightening of standards for this category of loans bounced back to 11%, mainly driven by increased risk perceptions. This translated into an increase in, above all, margins on riskier loans. The net percentage of banks reporting a tightening of credit standards on loans to households for consumption purposes also rose slightly (standing at 2%) on account of a more cautious assessment of individual borrowers’ risk profiles.
Looking forward, euro area banks expect a very slight further tightening, in net terms, of credit standards for all categories of loans in the first quarter of 2011.
In the last quarter of 2010, euro area banks reported that, in net terms, demand for corporate loans and households’ demand for mortgage loans continued to increase, while demand for consumer credit contracted, albeit at a slower pace than in the previous survey round.
In net terms, demand for corporate loans increased in the case of both SMEs and larger firms, and across all types of maturities (albeit more dynamically for long-term loans). In the last quarter of 2010, net corporate demand for loans increased to 10%, compared with 7% in the previous survey. Interestingly, for the first time in more than two years, financing needs for fixed investment purposes stopped dragging down demand for corporate loans. In addition, euro area banks also noted some pick-up in merger and acquisition (M&A) activities. At the same time, and in line with the impact of recent debt restructuring forces in the corporate sector, the increase in demand for loans was partly mitigated by the availability of internal funds.
Turning to households, net demand for loans for house purchase was reported to have increased noticeably. In the last quarter of 2010, 23% of all the banks – expressed in net terms – reported an increase in demand, compared with 10% in the previous survey round. This increase in demand was largely supported by a positive contribution of housing market prospects and a significantly less negative contribution of consumers’ confidence.
In the same period, net demand for consumer credit remained in negative territory, but drew closer to positive values (standing at -2%, compared with -6% in the third quarter of 2010).
Looking forward, in the first quarter of 2011, euro area banks expect positive developments to continue in net demand across all types of loans.
Developments in credit standards and net demand for loans in the euro area
Enterprises
No further tightening of credit standards on loans to non-financial corporations
In the last quarter of 2010, the net percentage of banks reporting a tightening of credit standards on loans and credit lines for enterprises dropped to 0%. This result contrasts with an increase in net tightening in the previous quarter (4%) and constitutes a slight positive surprise as regards survey participants’ expectations three months ago (5%).
These developments reflect a further slight net tightening for loans to SMEs (2%, after 7% in the previous survey round), as well as a standstill for loans to large firms (0%, after 5% in the previous survey round). According to banks’ replies, the improvement in credit standards applied predominantly to short-term loans represented a net loosening of -3%, compared with -1% in the previous survey round. For long-term loans, banks reported broadly unchanged credit standards (0%, after 6% in the previous survey round).
With regard to the factors contributing to the move towards broadly unchanged credit standards in the last quarter of 2010, banks’ risk perceptions contributed less to a net tightening of banks’ credit standards than in the previous quarter, with the industry and firm-specific outlook, in particular (down to 5% from 10% in the previous survey round). At the same time, competitive pressures in loan markets had an ongoing easing impact. By contrast, banks’ balance sheet constraints, namely banks’ cost of capital (5%, as in the previous survey round), their ability to access financing (3%, as in the previous survey round) and their liquidity position (2%, up from 1% in the previous survey round), continued to contribute to a net tightening of credit standards at broadly unchanged levels.
Where price and non-price terms and conditions are concerned, the slight overall decline observed in the net tightening of credit standards in the last quarter of 2010 contrasted with a slight increase in both margins on riskier loans (20%, from 18% in the previous survey round) and loan covenants. (6%, from 4% in the previous survey round). Viewed across firm sizes, margins on average loans to large firms remained broadly unchanged in the fourth quarter of 2010 (1%, after -2% in the previous survey round), whereas those on loans to SMEs continued to widen by a net percentage of 3%. In the case of riskier loans, the substantial widening of margins was spread more or less evenly across the firm sizes.
On balance looking forward, euro area banks expect a slight net tightening of credit standards on loans to enterprises in the first quarter of 2011 (at 2%), without any specific differences across firm sizes. This tightening is expected to affect primarily longer-term loans, while no broad changes are envisaged for short-term loans.
Further increase in net demand for loans to enterprises confirms turnaround
In the last quarter of 2010, net demand for loans3 from enterprises increased further (standing at 10%, up from 7% in the third quarter of 2010 and -2% in the second quarter), thereby confirming the turnaround recorded in the previous quarter. Viewed across firm sizes, net demand for loans rose for both loans to SMEs (19%, from 10% in the previous survey round) and loans to large firms (11%, from 3% in the previous survey round). As regards maturities, net demand developed particularly dynamically for long-term loans (21%, up from 7% in the previous survey round), but also increased further for short-term loans (15%, from 12% in the previous survey round).
The improvement in net overall demand was mainly driven by the fact that the decrease in the financing needs for fixed investments came to a halt (0% after -13% in the previous survey round). In addition, a pick-up in the financing of M&A activities (8%, after -3% in the previous survey round) had a positive impact on overall demand for loans, while the contributions of financing needs for inventories and working capital (13%, after 17% in the previous survey round) declined. As regards alternative funding, internal funds dampened firms’ external financing needs further (-6%, after -3% in the previous survey round). At the same time, a rising positive contribution from the limited availability of loans from other banks and non-banks was recorded.4 In addition, the issuance of equity became less of an alternative source of financing for banks’ customers, while the slightly dampening impact of debt issuance declined only marginally.
On balance looking ahead, euro area banks expect net demand for loan to enterprises to increase further in the first quarter of 2011 (31%, up from 29% in the previous survey round). This rise is expected to be due to a larger extent to SMEs (33% in the last quarter of 2010) than to large firms (22% in the last quarter of 2010).
Furthermore, banks expect an ongoing alignment in dynamics across maturities, with the difference in the expected increase for short and long-term loans decreasing further.
Households
Tightening of credit standards on loans to households for house purchase bounces back
In the last quarter of 2010, the net percentage of banks reporting a tightening of credit standards bounced back to 11%, from 0% in the previous quarter. This is at odds with expectations in the previous survey expectations that euro area banks would, on average, maintain broadly unchanged credit standards in the last quarter of 2010.
The increase in the tightening of credit standards on housing loans appears to be explained mainly by increased risk perceptions linked to both the housing market and developments in general economic activity. Slightly higher costs of funding and balance sheet constraints also played a role in the reported rebound in tightening. Finally, competition among banks, which usually has a dampening effect on the tightening of credit standards, tended to have a lesser impact than in previous survey rounds.
The tightening of credit standards translated mainly into a tendency to increase margins on riskier loans. In fact, most other non-price terms and conditions (such as the collateral required, the maturity and the “loan-to-value” ratios) were either left broadly unchanged or were made slightly less stringent.
Looking forward, euro area banks assume this rebound in the tightening of credit standards to weaken somewhat, with 4% of all euro area banks expecting a further tightening in the first quarter of 2011.
Strong rebound in demand for loans for house purchase
Broadly in line with expectations, net demand for housing loans increased in the last quarter of 2010 as the net percentage of banks reporting an increase in demand for housing loans rose from 10% in the third quarter of 2010 to 23% in the last quarter of the year. Demand for housing loans remained very much in line with housing market developments at the country level.
On balance, the overall positive net demand for housing loans was largely supported by a more positive contribution of housing market prospects and a significantly less negative contribution of consumer confidence. In countries where demand for loans was reported to be sluggish, one of the main dampening factors was deemed to be households’ savings.
Looking forward, euro area banks expected demand for loans to remain broadly unchanged in the first quarter of 2011. Over recent quarters, both actual and expected figures on the demand for housing loans have been particularly volatile, possibly pointing to a large degree of uncertainty for this category of loans.
Slight increase in the tightening of credit standards on consumer credit and other lending to households
The net tightening of credit standards for consumer loans also rebounded, albeit only slightly, to 2% in the last quarter of 2010, compared with 0% in the previous quarter. As for housing loans, the tightening observed in the last quarter of the year was stronger than that anticipated by banks in the previous quarter, and factors related to the perception of risk seem to have played a role in determining the slight rebound in tightening. More precisely, banks indicated a slightly stronger contribution from both the creditworthiness of consumers (5%, compared with 4% in the previous survey round) and risks on collateral demanded (5%, compared with 3% in the previous survey round).
Interestingly, the contribution of expectations with respect to the general economic outlook decreased further, confirming that the individual profiles of potential borrowers were key determinants in explaining the reported further tightening of credit standards on consumer credit.
Looking forward, euro area banks expect, on average, a further tightening of credit standards on consumer credit and other lending to households (4%) in the first quarter of 2011.
Unlike what was expected, net demand for consumer credit did not turn positive in the last quarter of 2010, but it drew closer to positive values (-2%, compared with -6% in the third quarter of 2010). Net demand for consumer credit appears to have remained sluggish, dampened by consumer confidence and developments in households’ savings. Looking forward, however, euro area banks expect net demand for consumer credit to be positive (7%) in the first quarter of 2011.
