Chart 1. Changes in credit standards applied to the approval of loans or credit lines to enterprises

Eurozone Bank Lending Survey: The latest survey report published by the European Central Bank (ECB) today, shows that Irish banks report a fall in demand for business and household loans in Q2. Other Eurozone banks reported an increase in the net tightening of credit standards compared with the first quarter, for business and households.

The ECB said renewed constraints in banks’ access to funding and liquidity management are reported as key factors underlying the tighter credit policy. Meanwhile, the demand for loans perceived by banks continues to recover.

More precisely, the downward trend in the net tightening of credit standards on loans to enterprises which came to a halt in the first quarter of 2010 was reversed in the second quarter, increasing from 3% to 11%. Banks had expected a further net tightening of 2% at the time of the previous survey round. Looking forward, Eurozone banks anticipate credit standards on loans to enterprises to tighten somewhat in the third quarter of 2010 (by 5%). The factors contributing to the reinforced net tightening of loans to enterprises relate to the deterioration of banks’ own balance sheet situation, particularly as regards their liquidity position and access to wholesale funding. At the same time, slight improvements in credit risk, and to some extent, in general economic conditions were perceived by reporting banks.

In the second quarter of 2010, the degree of net tightening of credit standards on loans to households for house purchase was unchanged at 10%, exceeding the 2% expected at the time of the previous survey round. Similarly, the degree of net tightening remained broadly unchanged for consumer credit, at 12%, compared with an expected 2% in the previous survey round. Looking forward, banks expect a decrease in the net tightening of credit standards for loans for house purchase and consumer credit in the third quarter of 2010, to 3% and 6% respectively.

The report says while credit supply conditions deteriorated, the July 2010 results pointed to a gradual improvement in the net demand for loans in the second quarter of 2010, being only slightly negative for loans to enterprises (-2%, compared with -13% in the first quarter of 2010) and turning positive for loans to households (at 24% for housing loans, compared with -2% in the first quarter of 2010, and at 1% for consumer credit, compared with -13% in the previous quarter). By contrast, in the previous survey round banks had expected a positive net demand for loans to enterprises. For housing loans expectations were broadly in line.

The ECB said the most important reason for higher net demand for loans by enterprises was a less negative contribution from factors such as fixed investment and mergers and acquisitions. Moreover, the negative contribution from substitute sources of financing became somewhat less pronounced in the second quarter. At the same time, the positive contribution of debt restructuring remained unchanged compared with the previous survey round and the contribution of inventories and working capital increased somewhat further. For housing loans, demand turned positive after its slightly negative levels in the previous quarter. This increase in net loan demand was due mainly to improved housing market prospects, higher spending on durable consumer goods and a less negative contribution from consumer confidence.

Ireland

Banks were also asked to report how the demand for loans changed during the second quarter of 2010. A response less than three suggests a decrease in loan demand, a response equal to three points to unchanged loan demand, and a response greater than three indicates increased loan demand. Banks reported that the demand for loans from enterprises decreased during the second quarter of 2010. Lower levels of fixed investment and reduced volumes of Mergers and Acquisitions (M&A) activity were the main factors noted by banks to be underlying this decline in loan demand.

Credit standards1 on loans to households for house purchase tightened during the second quarter of 2010 and were unchanged regarding consumer credit and other lending to households. Increases in loan margins were reported across both loan categories, and in the case of loans to households for house purchase, reduced loan maturity was also reported.

Banks also reported that the demand for household loans for house purchase as well as consumer credit and other lending decreased during the second quarter of 2010 and this decrease was attributed to less favourable housing market prospects, declining levels of consumer confidence and reduced spending on consumer durables.