• The Euroland Bank Lending Survey shows that banks are continuing to tighten credit standards significantly, in respect of both enterprises and households, in the first quarter of this year, but not as much as in fourth quarter of last year.
  • The reason behind the tightening with regard to enterprises is primarily concern about general economic activity and industry/firm-specific outlook. The importance of banks’ cost of funds and balance sheet constraints diminished – but are still at high levels.
  • Banks expect further credit tightening in the second quarter, but at a substantially slower pace. We believe that we could see stabilisation, or even an easing of credit standards, before the end of the year.
  • Banks also indicated that recapitalisation support and state guarantees have already had a positive affect on their access to funding and are expected to further ease access to funding in the second quarter of 2009.
  • Net demand for loans from both enterprises and households continued to decline, but demand for loans for house purchases declined much less than in previous quarters. This is a first sign that the very low interest rate level is now helping to stabilise housing demand.

Details:

The net percentage of banks that tightened credit standards for loans to enterprises declined from 63% in Q4 08 to 43% in Q1. Just 28% of banks (net) expect to tighten further in Q2. In this respect it is noteworthy that the expectations have been quite precise in recent quarters.

The factors contributing to credit tightening to enterprises were primarily “industry or firm specific outlook” and “expectations regarding general economic activity”. Whereas in Q4 general economic activity was most important, now it is the industry-specific outlook. This may reflect that banks are now getting a more detailed picture of the crisis and this should increase the likelihood that sound enterprises can get access to finance. The tightening factor “access to finance” is at its best level in more than a year. This is a very important signal that financial market conditions are improving. We are now moving from an emphasis on the financial crisis to the economic crisis that has followed in its aftermath.

Credit standards were primarily tightened by margin increases – in particular on riskier loans. The tightening continues to be stronger for loans to large enterprises than for loans to small and medium-sized enterprises.

Banks also indicated that government announcements of recapitalisation support and state guarantees for debt securities issued by banks had a positive impact on banks’ access to funding in Q1 and is expected to further ease access to funding in Q2. Nevertheless, banks access to funding remained limited in Q1 as a result of the financial crisis. Only in the case of very short-term funding did a majority of reporting banks indicate that access was not hampered in the first quarter of 2009.