Euro zone businesses' demand for loans remained strong in the last three months of 2006 but demand for household mortgages continued to weaken, the European Central Bank (ECB) said yesterday. Marc Coleman, Economics Editor, reports.

Credit standards for business loans were largely unchanged from the third quarter of 2006, but banks eased their credit standards for mortgages and consumer credit, the ECB said in its quarterly survey of euro zone banks.

"Banks continued to report a strong positive net demand for loans to enterprises in the fourth quarter of 2006, up from the previous quarter," the ECB said.

Growth for loans strengthened more markedly for small and medium-sized enterprises and for short-term loans compared to larger enterprises and longer-term loans.

Looking forward, banks said they expected strong business demand for loans to continue in the first three months of 2007, and for credit standards to remain similar, though with some easing for loans to smaller firms.

Consumer borrowing gave a weaker picture. Despite the looser conditions, net demand for housing loans continued to decline from the peak reported at the end of 2005.

A slight relaxation in the standards applied for mortgage lending was attributed to more intense competition among banks for business, with more banks reporting lower margins lending, lengthening loan maturities and a reduction in non-interest charges.

This trend was partly offset by a reported decline in loan to value ratios as well as higher interest rates on riskier property loans, prompted by worries about overheating in the property market.

Banks expected a further decline in mortgage demand in early 2007, and a further easing of credit standards for both mortgages and consumer credit. But demand for consumer loans should improve in the first quarter of 2007, banks said.

Eighty-five euro zone banks took part in the survey. - (Additional reporting, Reuters)