Banks reported that net demand for loans to enterprises and households continued to be negative in the second quarter of 2008. Besides mergers and acquisitions (M&As) and corporate restructuring and fixed investment, another factor that contributed to lower net demand for loans to enterprises was internal financing. The negative net demand for loans to households for house purchase reflected mainly worsening housing market prospects and deteriorating consumer confidence.
This survey round incorporated a set of ad hoc questions as a follow-up to the ad hoc questions included in previous survey rounds. They addressed the effect of the financial turmoil on credit standards and lending. As in previous survey rounds, it was reported that lending to enterprises was more affected by the turmoil than lending to households. In addition, the impact of the turmoil on credit standards was especially strong for loans for financing M&As and corporate restructuring, whereas the effect was more limited – albeit increasing – for loans for financing fixed investment or inventories and working capital. With respect to wholesale funding, banks reported that their access to money markets and debt securities markets was somewhat less hampered by the effects of the financial market turmoil in the second quarter of 2008 compared with the first quarter. By contrast, access to securitisation was hampered to a similar extent as observed in the first quarter.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards In the second quarter of 2008, the net percentage of banks reporting a tightening of credit standards for loans to enterprises was somewhat lower than in the first quarter (43%, down from 49% in the first quarter). The most important factors continued to be banks’ risk perception regarding general economic activity and the industry or firm-specific outlook. The impact of all factors summarised in the cost of funds and balance sheet constraints experienced by banks (i.e. banks’ ability to access market financing; the costs related to their capital positions; and their liquidity positions) was somewhat less than in the first quarter, by contrast with the impact of their concerns about the economic outlook.
Regarding the terms and conditions of credit, margins on average loans (53%, down from 62% in the previous round) and on riskier loans (64%, down from 72% in the previous round) continued to contribute most strongly to the net tightening of credit standards in the second quarter, albeit to a somewhat lesser extent than in the first quarter. Non-price terms and conditions remained broadly unchanged for the most part, compared with the first quarter, with the notable exception of collateral requirements which increased considerably compared with the previous quarter.
The net tightening of credit standards continued to be stronger for large enterprises (44%, against 53% in the first quarter of 2008) than for small and medium-sized enterprises (SMEs; 34%, against 35% in the first quarter). While the level of net tightening was, however, broadly unchanged for SMEs, it was less severe for large enterprises than in the previous quarter. As regards the factors affecting credit standards for both large enterprises and SMEs, banks reported that deteriorating expectations regarding general economic activity and the industry or firm-specific outlook were the most important factors in the tightening. Banks also reported that the cost of funds and balance sheet constraints, especially their liquidity positions, played a more important role in the net tightening of standards for large firms (albeit a lesser role than in the previous quarter), than for SMEs. This may be related to the greater importance of market-based funding for bank loans to large firms. With respect to terms and conditions, an increase in bank margins contributed most to the net tightening of credit standards for both loans to large firms and loans to SMEs. With respect to nonprice terms and conditions, large firms generally experienced stronger net tightening than SMEs, except in the case of collateral requirements.
As regards loan maturities, the net tightening continued to be more pronounced for long-term loans (52%, against 57% in the previous survey round) than for short-term loans (31%, against 33% in the previous survey round). This may have reflected the increase in the cost of bond financing for banks as well as their assessment that their access to funding via medium and long-term debt securities continued to be hampered in the second quarter of 2008.
Loan demand In the second quarter of 2008, net demand for loans to enterprises continued to be negative, at a level broadly unchanged from that observed in the previous quarter (-16%, against -17% in the first quarter). The main factors in the negative net demand were M&As and corporate restructuring and a decline in financing needs for fixed investment. In addition, internal financing was another factor that contributed to lowering net demand for loans to enterprises, pointing to a robust profit situation of enterprises. By contrast, developments in debt securities issuance contributed positively to net demand for loans to enterprises, reflecting market conditions and the increased cost of market-based debt financing. In terms of borrower size, while net loan demand was negative for both large firms and SMEs (-12% and -8%, respectively), it was weaker for large firms, which is in line with the results for previous quarters. In addition, net demand was negative across the loan maturity spectrum.
Expectations Looking ahead to the third quarter of 2008, expectations point to slightly stronger net tightening of credit standards (45%) compared with the actual net tightening observed in the second quarter, for both large enterprises and SMEs. Net demand for loans to enterprises is expected to be slightly less negative overall (-14%) compared with actual demand observed in the second quarter. In particular, it is expected to be slightly less negative for SMEs and slightly more negative for large firms.
Households
Loans to households for house purchase
Credit standards In the second quarter of 2008, the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase was somewhat lower (30%, against 33% in the first quarter). Deteriorating expectations regarding general economic activity and housing market prospects were the main factors in the net tightening. While the cost of funds and balance sheet
constraints also contributed to the net tightening, competition from other banks continued to contribute to easing.
As regards the terms and conditions for loans for house purchase, margins on average loans (23%, against 25% in the first quarter) and riskier loans (30%, against 37% in the first quarter) continued to be tightened, but to a lesser extent than in the first quarter. With respect to nonprice terms and conditions, loan-to-value (LTV) ratios were tightened to a similar extent as the margins on riskier loans. The net tightening of LTV ratios remained at a similar high level seen as in the first quarter. Collateral requirements and the loan maturities were tightened further in the second quarter.
Loan demand Net demand for housing loans remained strongly negative in the second quarter of 2008, broadly at the same level as in the previous quarter (-56%, after -57% in the previous quarter). This reflected mainly worsening housing market prospects and deteriorating consumer confidence.
Expectations For the third quarter of 2008 respondent banks expect net tightening of credit standards for loans for house purchase to remain broadly unchanged (29%) from the level of actual net tightening observed in the second quarter. Net loan demand is expected to be somewhat more negative (-60%).
Consumer credit and other lending to households
Credit standards In the second quarter of 2008 the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending to households increased somewhat (24%, against 19% in the previous quarter), remaining, however, at a lower level than for loans to households for house purchase. The main factor in this further increase in net tightening was banks’perception of risk, which was related to a deterioration in expectations regarding general economic activity, the creditworthiness of consumers and the risk on the collateral demanded.
As regards the terms and conditions, the net tightening was mainly implemented via a widening of loan margins. While margins on riskier loans remained broadly unchanged after a steep increase in previous quarters, margins on average loans were tightened somewhat further in the second quarter. In addition, some non-price terms and conditions, such as collateral requirements and loan maturities, were tightened somewhat further.
Loan demand Net demand for consumer credit and other lending to households was negative and declined further compared with the first quarter of 2008 (-21%, against -13% in the previous quarter) according to responding banks. Nevertheless, the level was considerably less negative than the level of net demand for loans for house purchase. The main factor dampening demand was a deterioration in consumer confidence according to reporting banks.
Expectations For the third quarter of 2008 net tightening of credit standards for consumer credit and other lending to households is expected to remain broadly unchanged (25%) compared with actual net tightening observed in the second quarter. Net demand is expected to remain negative and to decline further (-26%) compared with the second quarter.
Ad hoc questions on the impact of the financial turmoil
As a follow-up to the ad hoc questions included in the last few survey rounds, the July 2008 survey round contained a set of questions which aimed to gauge the extent to which the financial market tensions affected banks’ credit standards for loans and credit lines to enterprises and households in the euro area in the second quarter of 2008, and how they will be affected in the next three months.
Impact on credit standards
In the second quarter of 2008 banks reported that, as a result of the financial turmoil, credit standards on loans to large enterprises and to SMEs were tightened further. By contrast, in the main questionnaire, which refers to overall developments, banks reported lower net tightening for large firms and broadly unchanged credit standards for SMEs. In line with the results of the main questionnaire, responses to the ad hoc questions reported that large firms continued to be more affected by the financial market situation than SMEs. In addition, net tightening continued to be more pronounced for enterprises than for households. With respect to lending to households, the net tightening of credit standards as a result of the financial turmoil was broadly unchanged compared with the previous quarter in the case of both loans for house purchase and consumer credit. In the main questionnaire, banks reported, in general, lower net tightening for loans for house purchase and stronger net tightening for consumer credit
compared with the first quarter.
Focusing more specifically on loans and credit lines to enterprises, according to responding banks the impact of the turmoil on credit standards was especially strong for loans for financing M&As and corporate restructuring, whereas the effect was more limited – albeit increasing – for loans to finance fixed investment or inventories and working capital. Over the next three months, banks expect a broadly similar level of net tightening for loans for these purposes as seen in the second quarter.
Access to wholesale funding
Banks reported that in the second quarter of 2008 their access to money markets and debt securities markets was somewhat less hampered by the effects of the financial market turmoil compared with the first quarter. As in the previous survey round, a larger percentage of banks reported difficulties in raising funds through medium to long-term bonds than through short-term debt securities in the past three months. By contrast to developments regarding access to money markets and debt securities markets, access to securitisation – both true-sale and synthetic – continued to be hampered to a similar extent as in the first quarter. Around 80% to 90% of the responding banks reported that their access to securitisation was hampered.
Overall, responding banks felt that the wholesale funding situation had improved somewhat compared with the situation in the previous quarter. Over the next three months access to funding via money markets and debt securities markets is expected to remain hampered to a similar extent as in the second quarter of 2008. A lower percentage of banks expects access to securitisation to be considerably hampered compared with the level seen in the second quarter.
Impact on bank lending
In line with the reports of less hampered access to money markets and debt securities markets, banks reported that the access to these wholesale funding markets had a somewhat lower impact on bank lending, as regards both amounts and margins. At the same time, the impact on margins continued to be stronger than the impact on the amount of loans granted to borrowers. As regards the more difficult environment for securitisation, banks reported a further increase in the impact on the amount of loans granted and a broadly unchanged impact on margins. For securitisation, the impact on margins nevertheless remained larger than the impact on amounts, but the difference was smaller
compared with the other funding alternatives. With respect to the next three months, banks reported that they expect the impact on their willingness to lend and on margins to remain broadly unchanged for all funding alternatives.
As regards the impact on banks’ lending policies of their need to fund draw-downs on commitments to asset-backed commercial paper programmes issued by conduits or structured investment vehicles, banks which conduct this business (i.e. excluding those banks which replied “not applicable”) reported an increased impact in the second quarter of 2008. Similar to previous survey rounds, however, it needs to be borne in mind that 69% of responding banks indicated that they do not conduct this business.
As regards the impact on lending policies of changes in costs related to banks’ capital positions in the second quarter of 2008, a considerably lower percentage of responding banks reported that there had been some impact on capital but no impact on lending compared with the first quarter. In addition, 42% of reporting banks stated that there had been basically no impact on their capital (against 34% in the previous quarter).
