FEWER EURO area banks are now making it harder for companies, households and consumers to borrow money. That is the mildly good news from the European Central Bank’s (ECB) latest quarterly bank lending survey. The bad news is that Ireland has not shared in what is a small relative improvement in credit market conditions in the rest of the euro area. During the third quarter of 2009, as domestic banks tightened their lending criteria for companies and set stricter terms and conditions for borrowers, demand for loans by companies decreased further.
For the five Irish banks that participated in the ECB survey, this latest tightening of credit standards to business – the ninth successive tightening since 2007 – is one measure of the scale of the current economic downturn. This year economic activity is set to contract sharply.
The banks attribute the decrease in loan demand by companies to a reduction in their financing needs: lower levels of fixed investment and less merger and takeover activity. The banks, in explaining their reluctance to lend, attribute their caution and conservatism to a number of factors: their own cost of funds, their weak balance sheets, greater risk aversion, and an unfavourable economic outlook.
During the last quarter, households seeking loans for house purchase were also faced with tighter credit terms and conditions. Here too, banks showed a reluctance to lend because of “less favourable expectations regarding general economic activity”. For the final quarter, their tight lending policy for home purchase is unlikely to change.
The Government’s support in recapitalising the banks and in providing the State guarantee for their liabilities has ensured their survival. The financial underwriting by government and the taxpayer has enabled the banks to access wholesale funding for their lending activities. Nevertheless, their access to that wholesale market, the banks say, remains restricted. Because that affects how much they can borrow – at what price, and on what terms – it also influences how much they can lend.
The value of the ECB’s survey of bank lending is that it provides valuable qualitative – if one sided – information on changes in credit market conditions in the euro area. However, a similar parallel survey conducted among borrowers – companies, households and consumers – to establish their views on the lending practices of banks, would present an equally useful and more balanced overall picture of credit market conditions.