Thursday, February 2, 2012

2/2/2012: Euro area credit supply remained constrained in Q4 2011


ECB's Bank Lending Survey (BLS) for January 2012 is out, showing dramatic failure of the December 2011 LTRO to kick start supply of credit to the real economy.

According to the BLS, credit standards by euro area banks tightened in the fourth quarter of 2011 on:
  • loans to non-financial corporations (35% of euro area banks report tighter lending to NFCs in net terms, up from 16% in  the preceding quarter),
  • loans to households for house purchase (29% of the euro area banks reporting net tightening of lending to households, up from 18% in the preceding quarter), and 
  • loans for consumer credit (13%, up from 10% in the preceding quarter). 
Looking ahead, euro area banks "expect a further net tightening of credit standards, albeit at a slower pace than in the fourth quarter of 2011" in Q1 2012.  There is no easing of lending conditions on the horizon.

Overall rise in the net tightening  of credit standards was caused by:
  • "the adverse combination of a weakening economic outlook" and 
  • "the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position",
  • In addition, "increased market scrutiny of bank solvency risks inQ4 2011 is likely to have exacerbated banks’ funding difficulties."
Euro area banks also reported a net decline in the demand for loans to NFCs in Q4 2011, albeit at  a slower pace than in the previous quarter (-5% in net terms, compared with -8% in Q3 2011).

  • Banks indicated a sharp fall in the financing needs of firms for their fixed investment. 
The net demand for loans to households  declined further in Q4 2011, "broadly in line with previous expectations and with actual figures quoted in the previous survey round (-27% in the last quarter of 2011, compared with -24% in Q3 2011 for loans for house purchase, and -16% in the last quarter of 2011, compared with -15% in the third quarter for consumer credit).

For Q1 2012 banks expect a sizeable drop in the net demand for housing loans, while the decline in net demand for consumer credit is expected to remain in the same range.

Despite a massive LTRO in December 2011, "euro area banks reported a slight easing of access to wholesale funding in the last quarter of 2011, compared with replies from the previous survey,
although still a large number of euro area banks  (in net terms) continued to report significant
difficulties. ... Looking ahead, banks across the euro area overall expect some improvement  in access to wholesale market funding in the next quarter, potentially reflecting the anticipated effectiveness of non-standard measures taken by the ECB."

Banks also indicated that "sovereign market tensions led to a substantial deterioration of their funding conditions through balance sheet and liquidity management constraints, as well as through other, more indirect, channels. Banks also reported that vulnerabilities to risks stemming from the sovereign  crisis have significantly contributed to the tightening of credit standards, although some parts of the banking system were in a position to shield their lending policies from the impact of the crisis."

"...On the impact of new regulatory requirements on banks’ lending policies, banks’ replies point
to a further adjustment of risk-weighted assets and capital positions during the second half of 2011, to a larger extent than in the first half of the year and more than envisaged in July 2011. The same
applies for the impact of regulation on the net tightening of credit standards. In the coming months
banks indicate a further intensification of balance sheet adjustments and related constraints on the
bank lending channel."
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