With regard to demand for loans, banks reported that net demand for loans to enterprises was negative in the first quarter of 2008, a decline by comparison with the slightly positive net demand observed in the previous quarter. Net demand for loans to households for house purchase also fell further in the first quarter of 2008 and was negative, while net demand for consumer credit and other lending to households was broadly unchanged over the same period.
This survey round also contains a set of ad hoc questions as a follow-up to the ad hoc questions included in the previous two survey rounds, looking at the effect that the financial turmoil is having on credit standards and lending. As in previous survey rounds, lending to enterprises was more affected by the turmoil than lending to households. Banks reported that their access to wholesale funding had deteriorated over the past three months, especially as regards securitisation activity. In addition, the percentage of banks reporting that events in financial markets are having a considerable impact on the cost related to their capital position and some impact on lending has increased over the past three months.
Developments in credit standards and net demand for loans in the euro area
Enterprises
Credit standards. Reflecting the financial turmoil that has affected euro area banks over the past few months, net tightening of credit standards for loans or credit lines to enterprises increased further in the first quarter of 2008 (49%, compared with 41% in the previous quarter). With regard to the factors contributing to banks’ tightening of credit standards, banks’ perception of risk regarding general economic activity, the industry or firm-specific outlook and all the various factors covered by the cost of banks’ funds and balance sheet constraints (i.e. banks’ ability to access market financing, banks’ costs related to their capital position and banks’ liquidity positions) contributed to the increase in the net tightening.
Regarding the terms and conditions of credit, banks tightened credit standards further in net terms, especially by means of net increases in margins on both average loans (62%, up from 38% in the previous round) and riskier loans (72%, up from 58% in the previous round). Non-price terms and conditions also made an increased contribution to the stronger net tightening observed in credit standards in the first quarter of 2008, particularly the size of loans or credit lines, but also collateral requirements and other terms and conditions.
The net tightening of credit standards continued to be stronger for large enterprises (53% in the first quarter of 2008, up from 44% in the fourth quarter of 2007) than for small and medium-sized enterprises (35% in the first quarter of 2008, up from 27% in the fourth quarter of 2007). For the first time, a breakdown by firm size is possible also for the factors influencing changes in credit standards and the terms and conditions used to effect such changes. For both large enterprises and SMEs, the deterioration in expectations regarding general economic activity and the industry or firm-specific outlook were the most important factors in the net tightening. At the same time, the cost of banks’ funds and balance sheet constraints, especially banks’ liquidity positions, were more important for large firms than for SMEs. With regard to terms and conditions, increases in banks’ margins contributed most to the net tightening of credit standards on loans to both large firms and SMEs, although this contribution was somewhat more pronounced in the case of large firms. Non-price terms and conditions also contributed more strongly to the net tightening for large than for SMEs, especially as regards the size of loans and credit lines, but also with regard to collateral, loan covenants and loan maturity.
As regards loan maturities, the further increase observed in net tightening was more pronounced for long-term loans (57%, up from 39% in the previous survey round) than for short-term loans (33%, up from 28% in the previous survey round). This may reflect the increase observed in the cost of banks’ bond financing, as well as banks’ assessment that their access to funding via medium and long-term debt securities continued to be hampered in the first quarter of 2008.
Net tightening of credit standards on loans to enterprises was stronger for large banks than for small banks. With regard to the factors affecting credit standards, large banks identified, in particular, their ability to access market financing and their liquidity position as having a stronger negative impact on their credit standards.
Loan demand. In the first quarter of 2008 net demand for loans on the part of enterprises was negative (-17%), a decline by comparison with the slightly positive net demand of the previous quarter (2%).4 The main factors in this negative net demand were M&As and corporate restructuring and a strong decline in net demand for financing for fixed investment and inventories and working capital. In addition, internal financing made a considerable contribution to the decline in net demand for loans on the part of enterprises, thus pointing to continued sound profitability for enterprises. Debt securities issuance continued to contribute positively to net demand for loans on the part of enterprises, as market conditions and, in particular, the increased cost of market-based debt financing may have led to some replacement of market-based financing with bank financing. Loans from other banks and non-banks, as well as the issuance of equity, also contributed positively – albeit to a very limited extent – to net demand for loans.
In terms of borrower size, while net loan demand was negative for both large firms and SMEs (-23% and -13% respectively), it was weaker for large firms, in line with the results for previous quarters. Net demand was negative across the maturity spectrum, although to a larger extent for long-term loans than for short-term loans (-22% and -12% respectively), having been slightly positive in the previous quarter.
Expectations. Looking ahead to the second quarter of 2008, expectations point to the net tightening of credit standards being somewhat weaker (44%) than was actually observed in the first quarter of 2008. Net demand for loans on the part of enterprises is expected to be less negative (-12%) than was actually observed in the first quarter, both for loans to SMEs and for loans to large firms. With regard to loan maturities, banks also expect net demand for short-term and long-term loans to be slightly less negative in the second quarter of 2008.
Households
Loans to households for house purchase
Credit standards. In the first quarter of 2008 banks reported a further increase in the net tightening of credit standards for loans to households for house purchase (33%, up from 21% in the fourth quarter of 2007). Less favourable expectations regarding general economic activity and housing market prospects were the main factors contributing to this increase. Competition from other banks continued to contribute to the easing of standards.
Regarding the terms and conditions of credit, the net tightening for loans for house purchase was implemented mainly via a widening of margins on both average loans and riskier loans. However, non-price terms and conditions, especially a further tightening of loan-to-value ratios, also contributed to this net tightening.
When the net tightening of credit standards on loans to households for house purchase is compared across different sizes of bank, large banks can be seen to have tightened their credit standards by more than smaller banks.
Loan demand. Net demand for loans to households for house purchase fell further in the first quarter of 2008 (to -57%, from -36% in the previous quarter). This essentially reflected deteriorating consumer confidence and worsening housing market prospects.
Expectations. For the second quarter of 2008 respondent banks expect continued net tightening of credit standards for loans to households for house purchase (29%), albeit slightly weaker than the net tightening actually observed in the first quarter of 2008. Net loan demand is expected to be slightly less negative in the second quarter of this year (-53%).
Consumer credit and other lending to households
Credit standards. In the first quarter of 2008 banks reported a further increase in the net tightening of credit standards applied to the approval of consumer credit and other lending to households (19%, up from 10% in the previous quarter). The main factor in this further net tightening was banks’ perception of risk related to less favourable expectations regarding general economic activity, the creditworthiness of consumers and the risk on the collateral demanded. This net tightening was implemented mainly via the widening of margins on both riskier loans and, to a lesser extent, average loans. In addition, non-price terms and conditions, such as collateral requirements, loan maturities and non-interest rate charges, were tightened by comparison with the previous quarter.
Loan demand. Net demand for consumer credit and other lending to households was broadly unchanged in the first quarter of 2008 and remained negative (-13%, having stood at -11% in the previous quarter). In particular, deteriorating consumer confidence was seen as a factor dampening demand for consumer loans.
Expectations. For the second quarter of 2008 the net tightening of credit standards for consumer credit and other lending to households is expected to be somewhat stronger (25%) than was actually observed in the first quarter (see Chart 10, panel a). Net demand is expected to remain negative (-12%), broadly unchanged from the first quarter.
Ad hoc questions on the impact of the financial turmoil
As a follow-up to the ad hoc questions included in the last two survey rounds, the April 2008 survey also contains a set of questions aimed at gauging the extent to which the financial market tensions have affected banks’ credit standards for loans and credit lines to euro area enterprises and households in the first quarter of 2008, as well as the anticipated impact of such tensions over the next three months. The questions focus first on the impact on credit standards, and then on access to wholesale funding and the impact on bank lending.
Impact on credit standards
As in the last survey round, responding banks reported that credit standards for loans to enterprises were more affected by the turmoil than credit standards for loans to households. In particular, the situation in financial markets had a larger impact on loans to large enterprises than on loans to SMEs. In the first quarter of 2008 a net percentage of 54% of banks reported a tightening of credit standards for loans and credit lines to large enterprises owing to the situation in financial markets (up from 38% in the previous quarter), while a net percentage of 34% of banks reported such tightening for SMEs (up from 24% in the previous quarter). With regard to lending to households for house purchase, a net percentage of 29% of reporting banks indicated that the situation in financial markets had contributed to a tightening of credit standards (up from 18% in the previous quarter), whereas a net percentage of 19% of reporting banks (up from 6% in the previous quarter) said the same for consumer credit and other lending.
Focusing more specifically on loans and credit lines to enterprises, according to responding banks the impact of the turmoil on credit standards was, in the first quarter of 2008, especially strong for loans financing M&As and corporate restructuring, whereas the effect was more limited – albeit increasing – for loans financing fixed investment or inventories and working capital. In the first quarter of 2008 the net tightening of banks’ credit standards for loans financing M&As and corporate restructuring increased to 66% (up from 61% in the fourth quarter of 2007), whereas the net tightening of banks’ credit standards for loans financing fixed investment increased to 36%, up from 30% in the previous quarter.
Access to wholesale funding
Banks generally reported that the turmoil in financial markets had, over the past three months, made it more difficult to access wholesale funding by comparison with the fourth quarter of 2007. In particular, between 85% and 90% of responding banks reported that their securitisation activity continued to be hampered for the selling of loans for house purchase and for the selling of corporate loans. In addition, 80% of reporting banks considered that their ability to remove credit risk from their balance sheets had been hampered over the past three months. Banks also reported continued difficulties in accessing wholesale funding through the interbank unsecured money market in the first quarter of 2008. In addition, as in the last survey round, a larger share of banks had difficulties in raising funds through medium to long-term bonds than through short-term debt securities. Over the next three months, access to wholesale funding is expected to improve slightly, compared with the situation in the first quarter of 2008.
Impact on bank lending
Difficulties in accessing wholesale funding over the past three months have also had an impact on the amount that banks have been willing to lend and/or the margins at which funds have been lent over the past three months. In the first quarter of 2008 61% of banks reported that their access to wholesale funding via money markets and debt securities markets was having an impact on their willingness to lend (broadly unchanged from the 60% reporting such an impact in the previous quarter), while 76% of banks reported that the wholesale funding situation was having an impact on the margins at which funds were lent (broadly unchanged from the 77% reporting such an impact in the previous quarter). At the same time, the impact on margins continued generally to be stronger than that on the amount of loans granted to borrowers. As regards the impact of the more difficult environment for securitisation, a larger share of banks reported that loan margins were being affected (87% of banks, compared with 77% in the previous quarter), while the share of banks reporting an impact on lending amounts remained broadly unchanged (72% of banks, compared with 69% in the previous quarter). For other sources of funding, banks reported that the impact on margins was stronger than that on quantities. By contrast with their expectations of a slight improvement in their access to wholesale funding, responding banks reported that they expected the impact on margins and their willingness to lend to increase further during the second quarter of 2008.
As regards the impact of banks’ need to fund draw-downs on commitments to asset-backed commercial paper programmes issued by conduits or structured investment vehicles, banks for which this question was relevant (i.e. excluding those banks which replied “not applicable”) reported a broadly unchanged impact as regards the amount lent (33% of banks, compared with 31% in the previous quarter) and slightly less impact on the margins at which they lent to borrowers (39% of banks, compared with 43% in the previous quarter). As in the previous survey round, however, it needs to be borne in mind that 64% of responding banks replied “not applicable”. Over the next three months, a somewhat smaller impact is expected for both loan amounts and margins.
As regards the change in banks’ costs related to their capital position, in the first quarter of 2008 a larger share of responding banks reported that there had been a considerable impact on the cost related to their capital position and some impact on lending (11% of banks, compared with 4% in the previous quarter).
