Banks reported that net demand for loans to enterprises and households declined further and remained negative in the third quarter of 2008. The negative net demand for loans to enterprises was driven by a decline in the need for financing for fixed investment, as well as continued negative demand stemming from M&As and corporate restructuring. For loans to households for house purchase, the negative net demand mainly reflected worsening housing market prospects and deteriorating consumer confidence.
As in previous survey rounds, it was reported that lending to enterprises was more affected by the turmoil than lending to households. With regard to wholesale funding, banks reported that the financial market turmoil was hampering their access to money markets and debt securities markets to a considerably greater extent than had been the case in the second quarter, in particular with regard to short-term funding. The hampering of banks’ access to securitisation remained broadly unchanged from the second quarter of 2008.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards. In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for loans to enterprises increased significantly (by 22 percentage points, to 65%, up from 43% in the second quarter of 2008). The most important factors in this net tightening remained the expectations regarding future economic activity and the industry or firm-specific outlook. At the same time, the impact of banks’ ability to access market financing also contributed to the net tightening. Moreover, the impact of banks’ costs related to their capital positions increased somewhat compared with the second quarter of 2008, as did the impact of banks’ liquidity positions, with the contribution of these factors broadly returning to the levels observed in the first quarter of 2008.
As regards the price terms and conditions of loans to enterprises, banks reported that they further increased their margins on average loans and riskier loans in the third quarter, with the net percentages of banks reporting such increases rising to 68% and 76% respectively (up from 53% and 64% respectively in the previous quarter). In addition, non-price terms and conditions were also tightened further. Such tightening was effected in particular by means of the size of loans or credit lines (the net tightening of which increased by 16 percentage points to stand at 45% in the third quarter) and the maturity of the loans (the net tightening of which increased by 15 percentage points to stand at 40% in the third quarter).
Further increases were also observed in banks’ collateral requirements (the net tightening of which increased by 10 percentage points to stand at 46% in the third quarter). When looking at total net tightening since mid-2007, reporting banks indicate that, of all the non-price terms and conditions, collateral requirements have been tightened the most in net terms.
The net tightening of credit standards continued to be stronger for large enterprises (68%, up from 44% in the second quarter) than for small and medium-sized enterprises (SMEs), for which it stood at 56% in the third quarter, up from 34% in the second quarter. While some stabilisation had occurred in the second quarter, this net tightening increased considerably for both firm size categories in the third quarter of 2008. As regards the underlying factors, for both large enterprises and SMEs the expectations regarding general economic activity and the industry or firm-specific outlook were the most important factors in the tightening of credit standards. At the same time, banks’ funding costs and balance sheet constraints were more important for large firms than for SMEs, which is likely to be related to the greater importance of market-based bank funding for loans to large firms. Moreover, while in the second quarter banks had reported that competition from other banks contributed to the easing of credit standards for loans to SMEs, this factor was now regarded as contributing to the net tightening of credit standards for both SMEs and large firms. With regard to terms and conditions, while in the case of average loans the net increase in margins was more pronounced for large firms than for SMEs, it was broadly similar for large firms and SMEs in the case of riskier loans. With regard to non-price terms and conditions, both large firms and SMEs experienced further net tightening in all categories.
As regards loan maturities, the net tightening continued to be more pronounced for long-term loans (66%, up from 52% in the previous survey round) than for short-term loans (49%, up from 31% in the previous survey round).
Loan demand. Net demand for loans to enterprises declined considerably and remained negative in the third quarter of 2008 (standing at -26%, down from -16% in the second quarter). This was driven by a decline in net demand for financing for fixed investment (which fell to -36%, down from -20% in the second quarter) and by continued negative demand stemming from M&As and corporate restructuring (which stood at -32%, down from -27% in the second quarter). In addition, internal financing continued to dampen enterprises’ net demand for loans, although to a lesser extent than in the second quarter. By contrast, debt securities issuance continued to contribute positively to enterprises’ net demand for loans in the light of 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, it was somewhat weaker for large firms, in line with the results for the previous quarters. Net demand was negative across the maturity spectrum.
Expectations. Expectations for the fourth quarter of 2008 point to the net tightening of credit standards being (at 66%) broadly unchanged from the net tightening observed in the third quarter of 2008. Net demand for loans to enterprises is expected (at -8%) to be less negative than the net demand observed in the third quarter.
Households
Loans to households for house purchase
Credit standards. In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase increased somewhat (to 36%, up from 30% in the second quarter. Expectations regarding general economic activity and housing market prospects continued to be the main factors contributing to the net tightening of credit standards. In addition, for the first time since the launch of the bank lending survey, banks did not report that competition from other banks contributed to an easing of credit standards for loans to households for house purchase (with the net percentage of banks reporting that this factor contributed to tightening increasing to 0%, up from -7% in the second quarter).
As regards the price terms and conditions of loans to households for house purchase, the net percentage of banks reporting an increase in margins on average loans rose (to 35%, up from 23% in the second quarter). The net percentage of banks reporting an increase in margins on riskier loans also rose (to 43%, up from 30% in the second quarter). By contrast, the net tightening of non-price terms and conditions, such as collateral requirements and loan-to-value ratios, did not increase further and instead remained at levels similar to those observed in the second quarter.
Loan demand. Net demand for housing loans declined in the third quarter of 2008 and remained negative (standing at -64%, down from -56% in the second quarter). This mainly reflected worsening housing market prospects and deteriorating consumer confidence.
Expectations. For the fourth quarter of 2008, the net tightening of credit standards for loans for house purchase is expected (at 45%) to be stronger than that observed in the third quarter. Net loan demand is expected (at -70%) to be somewhat more negative than that observed in the third quarter.
Consumer credit and other lending to households
Credit standards. In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending continued to increase (reaching 30%, up from 24% in the previous quarter). At the same time, the net tightening of credit standards for consumer credit and other lending remained weaker than that observed for loans to households for house purchase. The main factor in this further increase in net tightening was banks’ perception of risk, which related mainly to expectations regarding general economic activity and the creditworthiness of consumers.
As regards the terms and conditions of consumer credit, banks reported net increases in the margins on both average and riskier loans (with the net tightening of such margins increasing to 32% and 38% respectively).
Loan demand. Net demand for consumer credit and other lending to households remained negative at -21%, unchanged from the second quarter of 2008. This remained less negative than net demand for loans to households for house purchase. According to reporting banks, the main factor dampening demand was deteriorating consumer confidence.
Expectations. For the fourth quarter of 2008, the net tightening of credit standards for consumer credit and other lending to households is expected (at 43%) to be stronger than that observed in the third quarter. Net demand is (at -34%) expected to remain negative and decline further.
