According to a survey by the European Central Bank, banks are pulling out of lending to European businesses and households as they prepare for a surge in non-performing loans due to the economic impact of the pandemic.
The ECB's quarterly survey of banks found that "credit standards for corporate lending were tightened in the third quarter of 2020, indicating credit risk considerations due to the coronavirus pandemic".
Banks told the ECB that they expected corporate credit standards to tighten further, reflecting concerns about the recovery as some sectors remain vulnerable, as well as uncertainties about extending fiscal support measures.
As a result, eurozone businesses and consumers could find their access to bank credit drying up once they are hit by tightened government restrictions in response to the recent coronavirus resurgence.
Spanish banks reported the most drastic tightening of their lending standards and the largest drop in credit demand among the four largest euro-zone economies in the third quarter, followed by French and Italian banks. Spain is hardest hit by the spread of the virus.
Frederik Ducrozet, strategist at Pictet Wealth Management, said that while it was difficult to gauge credit demand based on immediate action, developments in Spain were worrying.
The results paint a worrying picture for the ECB, which will practically meet on Thursday to discuss monetary policy. The governing council is expected to keep policy on hold while signaling that further easing is likely in December.
The ECB has estimated that bad loans could rise by EUR 1.4 billion in a severe scenario – almost three times their current level.
"The macroeconomic outlook is uncertain and we cannot rule out a weak recovery with a significant spike in non-performing loans," Andrea Enria, the ECB's chief regulator, wrote Tuesday in the Financial Times. He urged the EU to consider setting up an "asset management company" – or a bad bank – to take advantage of much of the expected increase in the NPL.
European governments have guaranteed hundreds of billions of euros in loans to companies in trouble, while central banks have flooded the banking system with extremely cheap loans at negative interest rates to keep companies from suffering from credit.
However, the demand for loans from companies in the euro zone fell in the third quarter, "which is due to a decrease in the need for liquidity in an emergency compared to the previous quarter," said the ECB. The demand for mortgages and consumer loans increased further in the quarter. The rejection rate for loan applications has increased in all loan categories.
Separate ECB data showed that overall money supply rose 10.4 percent in September, the highest annual growth rate since the 2008 financial crisis. Lending to businesses rose 7.1 percent, while lending to households rose 3.1 percent Percent increased.
Household deposits continued to surge – a sign of consumer nervousness – and rose 10.5 percent, the fastest pace in more than 12 years.
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