Banks in the euro area tightened lending standards during the three months to March and signalled they expect further restriction in the current quarter, according to a quarterly survey published by the European Central Bank. The ECB’s Bank Lending Survey, covering the 21 countries that share the euro, attributed much of the change to energy-price pressures and rising funding costs linked to the conflict in Iran that began in late February.
The survey indicated that the deterioration of financing conditions was observable even before any potential interest rate move by the ECB. The tightening of banks' criteria for approving loans was deeper than anticipated. For corporate borrowers, the narrowing in credit availability was the sharpest since the third quarter of 2023, the survey found.
"Perceived risks to the economic outlook and a lower risk tolerance of banks were the main contributing factors, with banks indicating in a dedicated open-ended question that geopolitical and energy developments exerted tightening pressure," the ECB said.
In addition, the central bank reported that "Some banks reported additional tightening related to exposures to energy-intensive firms and to the Middle East." Looking ahead, institutions expect "a widespread and more marked net tightening of credit standard" for the three months to June.
On the demand side, the survey said loan demand edged down slightly in the three months to March, in contrast to what lenders had anticipated. The decline reflected firms cutting back on investments, although the ECB noted that some companies replenished inventories during the same period.
The ECB added that banks' commentary pointed to two opposing forces on demand. "Some banks highlighted that ongoing developments in energy prices were driving increased liquidity demand from firms, while others pointed to higher uncertainty and the postponement of investments as dampening factors for demand," the report said.
The survey therefore portrays a picture in which higher energy costs and increased funding pressure have already prompted banks to raise credit hurdles and expect to do more of the same in the coming quarter, while demand dynamics among firms remain mixed between inventory needs and investment postponement.