Banks tightened corporate credit conditions in the third quarter. Due to the deterioration of the “economic outlook” and “the creditworthiness of consumers affected by the pandemic”, the conditions for granting loans to businesses tightened in the third quarter in the euro area, according to a study by the Central Bank European Union (ECB).
Banks tightened corporate credit conditions in the third quarter
Concretely, the credit conditions defined by banks to lend to companies have tightened especially in France and Spain, to a lesser extent in Germany, while they have remained stable in Italy, details the study published on Tuesday October 26 by the ECB. In France in particular, credit standards have “returned to around their pre-pandemic levels” for Covid-19.
For home loans, credit standards have tightened in Germany, Spain, France and Italy. Ditto for consumer loans, except for France where they have remained unchanged. According to the ECB, the criteria continued to tighten “considerably” in the third quarter due to the deterioration of the “economic outlook” and “the creditworthiness of consumers affected by the pandemic”.
The real conditions applied for loans to businesses and households also deteriorated in the previous quarter, the study adds. Banks display a lower tolerance for risk when delinquencies increase, according to this quarterly survey carried out from September 21 to October 6 among 143 institutions.
The study then appears that Thursday, the Frankfurt institute should, at a minimum, prepare the spirits for a further extension of its debt buybacks on the market. This effort could be announced in December to guarantee favorable long-term financing conditions and thus support the economy. The upsurge in Covid-19 is leading to further drastic restrictions in several euro area countries and is damaging the prospects for economic recovery.
Declining demand for credit
After reaching an all-time high in the second quarter, net demand for credit by companies in the euro area contracted, as the need for liquidity declined during the summer. On the household side, credit demand picked up after the spring containment measures were lifted, with a catching-up effect during the summer.
For the fourth quarter of 2020, banks expect credit standards to continue to tighten for businesses and households, reflecting concerns both over the economic recovery and the extension of fiscal support measures. In a separate statement, the ECB said growth in loans to the private sector – businesses and households – stood at 4.6% in September, as in August.