Home > Loan Demand in the Euro Area Surged Further

Loan Demand in the Euro Area Surged Further

July 14, 2020 By Mircea Vasiu

The Euro area bank lending survey for the second quarter of the year was released today, and the data revealed further demand for loans from European households and businesses. This is a survey of critical importance for the ECB – conducted four times a year, it offers a glimpse into commercial banks’ activity in the different countries part of the Euro area.

Effectively, it shows how things are in the territory. This way, the ECB monitors the effects of its decisions and how the transmission mechanism works.

Approval Criteria for Loans Tightened

The survey had a response rate of 100% from 144 banks in the Euro area. The main conclusion is that the demand for loans surged further, leading to mixed signals. On the one hand, in normal times, strong demand for loans reflects high levels of business optimism and an economy that keeps performing. On the other hand, under the COVID-19 recessions, it most likely means that more emergency funds are needed as demand for housing loans declined dramatically.

Another important point of the current survey is that the approval criteria for loans have tightened somewhat when compared with the previous survey. If at the start of the crisis, commercial banks lowered the conditions for loan applicants so to provide the necessary liquidity as quickly as possible, things tightened a bit in the second quarter.

For instance, businesses applying for a loan in the first quarter, especially in the second half , had greater chances of getting one  approved when compared with the second quarter.

Banks also expressed concerns about the creditworthiness of the borrowers. It is no wonder considering the high level of unemployment and the artificial way the businesses are kept alive.

In other words, any analysis of the creditworthiness of a borrower, household of business, is likely to differ significantly from the period ahead of the crisis. After all, the banks suffer from the impossibility of forecasting future market conditions, starting with the level of interest rates and ending with the duration of the pandemic.

Last but not least, the current survey reveals risk perceptions and risk aversion of the tightening impact of non-performing loan ratios. Moving forward, the longer the pandemic takes, the higher the non-performing loan ratios – that is the focus of the ECB’s main policy tools and the reasons why commercial banks tightened the approval criteria.

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