Eurozone Banks Tighten Credit Standards as Geopolitical Risks Grow

Eurozone banks tightened lending standards in the second quarter, according to the European Central Bank’s Bank Lending Survey. Responses show a net tightening for corporate loans of 7%, for housing loans 9% and for consumer credit 12%.

Banks pointed to higher perceived credit risk and weaker risk tolerance as the main drivers. Concerns cited in the survey include the economic outlook, geopolitical tensions and energy-related risks. Lenders also tightened terms and conditions, chiefly through higher interest rates. The share of rejected applications rose across all borrower groups, with the steepest increase in consumer credit.

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On the demand side, corporate loan demand increased slightly on a net basis, up 3%. Firms sought financing for inventories, working capital, debt refinancing and investment, with larger companies accounting for much of the rise. The increase came in stronger than banks had anticipated earlier.

Housing loan demand fell sharply, down a net 15%, reflecting weaker consumer confidence, higher borrowing costs and a softer housing market outlook. Demand for consumer credit slipped slightly, at a net decline of 2%.

Looking ahead, banks in the survey expect lending standards to tighten further across all loan categories in the third quarter. Changes in credit conditions and central bank policy are important components of fundamental analysis, as they can signal shifts in economic activity and market expectations.