Lending approvals: Banks more cautious on corporate lending

According to the January ECB Bank Lending Survey (BLS), the banks surveyed tightened their lending standards for loans to corporates in the fourth quarter of 2016. This marks the first net tightening of lending standards since the same quarter in 2013. The net balance of the banks surveyed came to 3% (prior quarter: 0%), whereby the figure describes the difference between the percentage of banks reporting they had tightened lending standards and the percentage of banks reporting they had eased lending standards. In this context, a positive figure indicates that a higher proportion of banks tightened their standards during the period in question. According to the BLS, the main reason for the tightening of credit standards on loans to the corporate sector was banks’ increasing risk aversion.

Lending standards for loans to private households for house purchases remained largely unchanged. The net balance of the banks surveyed stood at 1% in this category compared with -4% three months’ earlier.

The banks polled expect lending standards to ease across all lending categories in the first quarter of 2017. The next BLS will presumably be published in April.

The BLS reveals that demand for loans has strengthened further of late. It suggests that the current low interest rate environment, brisker M&A activity, and the general need for refinancing were the main drivers of demand for corporate loans in fourth quarter 2016. According to the central bank, demand for housing loans was boosted, amongst other things, by strong consumer confidence and the favourable level of interest rates.

As regards the targeted longer-term refinancing operations (TLTROs), the ECB reports that 37% of the 139 banks participating in the January BLS survey took part in the third TLTRO II. The banks indicated in the survey that the TLTRO II programme has contributed to an easing of credit terms.

The results of the latest BLS are likely to make welcome reading for Mario Draghi. They will be taken as evidence that the action taken by the ECB to date is gradually having an effect. Nevertheless, the ECB President is likely to emphasize at the interest rate meeting on Thursday that he believes the central bank needs to continue with its expansionary monetary policy. Despite the recent rise in Euroland inflation the ECB does not believe it will reach its inflation target of below but close to 2% for some considerable time to come. Against this backdrop we do not expect the central bank to move away from its current monetary policy thrust in the foreseeable future.

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