The net percentage of banks reporting a tightening of credit standards for loans to households for house purchase and for consumer credit also decreased further to 22% (from 28%) and to 21% (from 26%), respectively, in the second quarter of 2009, down from their historical peaks in the fourth quarter of 2008. The decline in the net tightening of credit standards on loans to households was driven by a lower perception of risks by banks regarding general economic activity and, in the case of housing loans, housing market prospects. By contrast with loans to enterprises, banks’ cost of funds and balance sheet constraints contributed to a slight further tightening of credit standards for loans to households in the second quarter of 2009. Looking forward, banks expect the net tightening of credit standards applied to loans to households to weaken somewhat further in the third quarter of 2009.
Net demand for loans by enterprises continued to decline in the second quarter of 2009, but the decline was somewhat smaller than in the first quarter. The decline in net demand was driven by a strong decrease in the financing needs for fixed investment and by a further considerable fall in demand stemming from mergers and acquisitions (M&As) and corporate restructuring. At the same time, debt restructuring as well as loans from other banks or non-banks tended to support the net demand for corporate loans in the second quarter. For loans to households, the net demand for housing loans turned positive in the second quarter of 2009, whereas net demand for consumer credit and other lending to households continued to decline, albeit to a lesser extent than in the first quarter.
As in recent survey rounds, the July 2009 survey incorporated a set of ad hoc questions, mainly addressing the effect of the financial turmoil on credit standards and lending.
Banks indicated that their access to wholesale funding in money markets and debt securities markets was less impaired in the second quarter of 2009 than in the first quarter. At the same time, there was little improvement as regards the access to securitisation. According to responding banks, governments’announcements and introduction of recapitalisation support and state guarantees for debt securities issued by banks have contributed to improving banks’ access to wholesale funding.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards. In the second quarter of 2009, the net percentage of banks reporting a tightening of credit standards for loans to enterprises broadly halved, to 21%, compared with 43% in the first quarter of 2009 and down from the high level seen in the third and fourth quarters of 2008 (64%). This is confirmed when analysing developments based on the diffusion index, which weights the intensity of the response. These developments confirm a turning-point in the tightening cycle observed in the April 2009 survey round, although the cumulated net tightening during the past quarters still represents a significant degree of net tightening of credit standards. All factors contributed to the decline in the net tightening of credit standards, but particularly supply-side factors, such as banks’ access to market financing (7%, after 19% in the first quarter) and banks’ liquidity position (-2%, after 14% in the first quarter). The costs related to the bank’s capital position also contributed to the lower net tightening of credit standards in the second quarter (13%, after 20%), albeit to a lesser extent than the other supply-side factors. The most important driving forces for the net tightening of credit standards on loans to enterprises continued to be expectations regarding general economic activity (46%, after 55%) and the industry or firm-specific outlook (47%, after 59%), for which however the net tightening also declined considerably in the second quarter of 2009.
The net tightening of price and non-price terms and conditions on loans to enterprises declined in the second quarter of 2009. In particular, the net tightening of the margins on average loans was reduced significantly, to 35%, from 58% in the first quarter of 2009, reaching its lowest level since the third quarter of 2007. The decline in the net tightening of the margins on riskier loans was smaller, but still pronounced (56%, after 71% in the first quarter). In addition, while the decline in net tightening for non-price terms and conditions was overall smaller compared with price terms and conditions, the degree of net tightening was lower for the non-price terms and conditions.
The decline in the net tightening of credit standards on loans to enterprises was reflected in both loans to large enterprises and loans to small and medium-sized enterprises (SMEs). As in most of the previous survey rounds, the net tightening of credit standards was somewhat stronger in the second quarter of 2009 for loans to large enterprises (25%, after 48% in the first quarter of 2009) than for loans to SMEs (21%, after 42% in the previous quarter). Both the cost and balance sheet constraints factor and the risk perception factor (i.e. mainly expectations regarding general economic activity and the industry or firm-specific outlook) contributed considerably to the more moderate net tightening of loans to large enterprises and SMEs. At the same time, expectations regarding general economic activity and the industry or firm-specific outlook continued to be the most important factors for the degree of net tightening of credit standards on loans to both large firms and SMEs. Costs related to the bank’s capital position still played a somewhat more important role in the net tightening for large firms than for SMEs. At the same time, large firms have profited somewhat more than SMEs from banks’ improved liquidity position (in the sense that banks’ liquidity position contributed to an easing of credit standards for large firms). Moreover, competition from other banks or non-banks contributed to a small extent to the net tightening of credit standards for both SMEs and large firms, as in previous quarters.
The lower net tightening for loans to enterprises in the second quarter of 2009 was reflected in the terms and conditions for both loans to large enterprises and to SMEs. With respect to price terms and conditions, the decline in the net tightening of margins on average and riskier loans was more pronounced for loans to SMEs (to 30% and 53% respectively) than for loans to large enterprises (to 40% and 60% respectively). By contrast, the decline in the net tightening of non-price terms and conditions appears overall somewhat more pronounced for large enterprises than for SMEs. Overall, the degree of net tightening of terms and conditions was mostly higher for large firms than for SMEs.
As regards loan maturities, the net tightening continued to be more pronounced for long-term loans (33%, after 50% in the previous survey round) than for short-term loans (19%, after 38% in the previous survey round).
Expectations regarding credit standards applied to loans and credit lines for enterprises for the third quarter of 2009 point to a further lessening of the net tightening (12%) compared with the actual net tightening in the second quarter of 2009.
Loan demand. In the second quarter of 2009, net demand for loans by enterprises continued to decline, reaching -29%, which was somewhat less negative than the -33% reached in the first quarter of 2009. The fall in net demand was driven by a strong decrease in the financing needs for fixed investment (-52%, after -62% in the first quarter) and in demand stemming from M&As and corporate restructuring (-32%, after -39% in the previous quarter). At the same time, debt restructuring tended to support the net demand for corporate loans in the second quarter. With respect to the use of alternative finance, while loans from other banks or non-banks supported the net demand for corporate loans, internal finance contributed moderately negatively to enterprises’ net demand for loans. The issuance of debt securities and equity also contributed negatively to the net demand for loans to a somewhat larger extent than in the first quarter. This may reflect improved market conditions for issuing debt securities and equity in the second quarter of 2009.
In terms of borrower size, the somewhat less negative net loan demand in the second quarter of 2009 becomes apparent from the development of the diffusion indices, which weight the intensity of the response, whereas this is not obvious from the net percentages. Based on the diffusion index, the somewhat less negative net loan demand was driven by both large firms and SMEs. Regarding the maturity spectrum, net demand for long-term corporate loans was considerably less negative in the second quarter (-28%, after -44% in the first quarter). By contrast, net demand for short-term corporate loans continued to decline in the second quarter (-24%, after -20% in the previous quarter), thus reducing the gap in net loan demand across maturities.
As regards expectations, net demand for loans by enterprises is expected to turn positive (1%) in the third quarter of 2009, which would be the case for the first time since the fourth quarter of 2007, based on the realised net demand for loans.
Households
Loans to households for house purchase
Credit standards. In the second quarter of 2009, the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase decreased further to 22%, after 28% in the first quarter of 2009 and down from its historical peak of 41% in the fourth quarter of 2008. Expectations regarding general economic activity (29%, after 40% in the first quarter) and housing market prospects (22%, after 33% in the previous quarter) remained the main factors contributing to the net tightening of credit standards. By contrast with loans to enterprises, banks’ cost of funds and balance sheet constraints contributed to a slight further tightening of credit standards for housing loans in the second quarter of 2009 (9%, after 7% in the previous quarter).
As regards the terms and conditions for loans for house purchase, the net tightening of margins was reduced considerably in the second quarter, in particular on average loans (10%, after 38%), but also on riskier loans (35%, after 52% in the first quarter). By contrast, for non-price terms and conditions, the net tightening was hardly reduced in the second quarter. In particular, the net tightening of loan-to-value ratios remained constant at a still relatively high level by historical standards of 25%. In addition, the net tightening of collateral requirements remained broadly unchanged at 18% (after 19% in the previous quarter).
With regard to expectations, for the third quarter of 2009, credit standards for loans for house purchase are expected to tighten somewhat less (12%) compared with the actual net tightening in the second quarter of 2009.
Loan demand. The net demand for housing loans turned positive in the second quarter of 2009 (4%, after -30% in the first quarter) for the first time since the second quarter of 2006 when the moderation of the annual rate of growth of housing loans started. The increase in the net demand for housing loans was driven in particular by a considerably less negative assessment of housing market prospects and of consumer confidence compared with the first quarter.
Regarding expectations, net demand for housing loans is expected to decline (-7%), after the realised slightly positive net loan demand in the second quarter of 2009.
Consumer credit and other lending to households
Credit standards. In the second quarter of 2009, the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending to households declined further to 21%, from 26% in the first quarter and down from its historical peak of 42% observed in the fourth quarter of 2008. The main factor behind the net tightening was banks’ perception of risk, mainly related to expectations regarding general economic activity and the reditworthiness of consumers.
As regards the terms and conditions on consumer credit and other lending to households, banks continued to increase the margins on both average loans (22%, after 40% in the first quarter) and riskier loans (29%, after 41% in the previous quarter), but to a considerably lower extent than in the first quarter. In addition, non-price terms and conditions, such as collateral requirements and the loan maturity, became somewhat less stringent compared with the first quarter.
Regarding expectations, for the third quarter of 2009, the net tightening of credit standards for consumer credit and other lending to households is expected to decline further to 15% compared with the actual net tightening in the second quarter of 2009.
Loan demand. In the second quarter of 2009, net demand for consumer credit and other lending to households remained negative, although somewhat less so compared with the previous quarter (-26%, from -34% in the previous quarter). The two main factors dampening demand continued to be consumer confidence and lower spending on durable consumer goods.
Regarding expectations, for the third quarter of 2009, net demand for consumer credit and other lending is expected to improve further, but to remain negative (at -10%) compared with the level reported for the second quarter of 2009.
Ad hoc questions
In line with previous survey rounds, the July 2009 survey round contains a set of ad hoc 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 loans to households in the euro area in the second quarter of 2009 and the extent to which they are expected to affect them in the third quarter of 2009. The questions refer to the access to wholesale funding and the impact on bank lending In addition, a new ad hoc question has been added to the July 2009 survey round, which addresses the extent to which the introduction of the Basel II-based capital adequacy framework has affected bank lending policies.
Impact of the financial turmoil on the access to wholesale funding
In the second quarter of 2009, banks reported that their access to wholesale funding was less impaired compared with the first quarter in most markets and categories. For the access to funding in the money market, less than 50% of the responding banks indicated that market access, in particular to the very short-term money market, was hampered as a result of the financial turmoil. While the percentage of banks reporting a hampered access to short-term and medium to long-term debt securities markets (52% and 64% respectively) was more elevated, this percentage was considerably lower than in the first quarter. Concerning securitisation, there was some improvement in market access with respect to housing loans, whereas this was hardly the case for corporate loans. Despite some improvement, access to true-sale securitisation continued to be hampered according to 70-80% of the responding banks. With respect to the ability to transfer credit risks off balance sheet (i.e. synthetic securitisation), the percentage of banks reporting hampered market access even increased in the second quarter (to 85%).
Over the next three months, banks expect a further improvement in the access to money and debt securities markets, but a hampered access to securitisation markets broadly unchanged from the second quarter of 2009
According to responding banks, governments’ announcements and introduction of recapitalisation support and state guarantees for debt securities issued by banks have contributed to improving banks’ access to wholesale funding. 60% of the responding banks (up from around 50% in the first quarter) reported some or a considerable impact from the government support schemes on their access to funding in the second quarter of 2009. For the next three months, responding banks expect a broadly stable support by such government schemes for their access to wholesale funding.
Impact of the financial turmoil on bank lending
In line with the improved access to money markets and debt securities markets, banks reported that the impact on bank lending, as regards margins and in particular as regards quantities, resulting from hampered market access declined in the second quarter of 2009. The impact continued to be stronger for the margins than for the amount of loans granted to borrowers. As regards the impact from the hampered access to securitisation on bank lending, banks reported a lower impact on the amount of loans granted and on margins demanded compared with the previous quarter. The percentages of banks reporting an impact on bank lending from the hampered access to securitisation were 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 the hampered access to money markets, debt securities markets and securitisation compared with the impact over the past three months.
As regards the impact of the events in financial markets on banks’ costs related to their capital position and on their lending policy, in the second quarter of 2009, 45% of the reporting banks indicated some or a considerable impact on capital and lending, which was broadly unchanged compared with the first quarter of 2009. At the same time, the percentage of banks replying that there was basically no impact of the events in financial markets on their capital increased to 37%, from 29% in the first quarter of 2009. Looking forward, 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.
Impact of the Basel II-based capital adequacy framework on bank lending
Banks’ capital position may have a considerable impact on bank lending behaviour and ultimately on economic activity. Against this background, this ad hoc question addresses the extent to which the introduction of the more risk-sensitive Basel II-based capital adequacy framework (Capital Requirements Directive; CRD) has affected, via its potential impact on banks’ capital position, banks’ lending policies since the first quarter of 2008. The CRD was implemented from January 2007 onwards and EU banks started reporting CRD-based capital ratios as of January 2008.
According to the majority of responding banks, the transition to CRD has had basically no impact on credit standards for loans to enterprises and households since the first quarter of 2008. Nonetheless, the impact has been somewhat higher for loans to enterprises than for loans to households. With regard to loans to enterprises, large enterprises were somewhat more affected than SMEs.
