Euro zone banks are toughening conditions on lending to households and firms because of slowing economic growth, although easier financial market conditions are starting to free up the flow of funds, a European Central Bank survey showed.
Banks made it harder to borrow money in the second quarter of 2008 for the fourth quarter in a row, and expect to raise barriers further in the next few months, according to the ECB's quarterly report on bank lending.
But the survey of more than 100 banks showed the number of lenders reporting tighter credit standards for corporate and mortgage loans in the second quarter was lower than in the first quarter.
For corporate loans, 44 per cent said they had toughened their standards in Q2, compared with 51 per cent in Q1, although a mere 1 per cent reported easier conditions.
In another positive sign, banks also reported easier access to money markets and debt securities, which had been a major barrier to their lending in previous quarters.
"Overall, banks felt that the wholesale funding situation had improved somewhat compared to the situation in the previous quarter," the ECB said.
Still, 80-90 per cent of banks reported that their ability to securitise assets was still hampered, one year after worries about US subprime mortgages first infected global markets.
Banks surveyed in July said the market environment and balance sheet concerns now took a back seat to worries about the economy when it came to approving loans. "The most important factors in the net tightening continued to be a deterioration in expectations about the economic outlook," the ECB said.
The ECB left interest rates unchanged yesterday at a near seven-year high of 4.25 per cent. President Jean-Claude Trichet said growth in the second and third quarters would be much weaker than the first, prompting markets to drop bets on any further tightening in official rates this year.
Demand for loans ebbed further in the second quarter and was expected to remain weak in the third quarter, although corporate demand was expected to hold up better than that for home loans.
The tightening in credit standards for home loans has been less acute than for businesses, but demand has fallen off more sharply due to worsening housing markets in some countries.
Sixty-two per cent of banks reported falling demand for home loans in Q2, similar to Q1, and a similar proportion expected a further fall in demand in the third quarter.
Banks said that financial market turmoil continued to have more impact on lending to businesses than to households and they were particularly wary of financing mergers and acquisitions and corporate restructuring.
Reuters
