European Banks Lend Less, Fearing Bad Loans During Pandemic

Euro area banks have scaled back lending in order to shield against risk, a new European Central Bank (ECB) survey says.

The banks’ continued reticence on lending reflects the uncertainty still present in the economy due to COVID-19, including various government lockdowns and spikes in case counts. There have also been concerns about borrowers’ creditworthiness in light of lockdowns.

The demand for loans dropped in the fourth quarter of 2020, and banks reported a continued net increase in demand for inventories and working capital, though its positive contribution was less as opposed to the first half of 2020. That could show that companies had already built up precautionary buffers anticipating the economic downfall.

As loan demand declined, demand for fixed investments continued to weigh on the overall loan environment.

The credit standards for housing loans and consumer credit were slower to decline in demand. Consumer credit suffered from the deterioration of the economy alongside consumers’ lagging creditworthiness, while home loans actually saw an increase in demand in spite of the stricter standards, supported by the lower general interest rates and better housing market prospects.

The rejection rate for loans has increased moderately across all categories.

Net demand for loans to enterprise increased in Germany and Italy, while France and Spain saw declines. The stats for demand for home loans were almost the same, except that the rate in Italy was unchanged.

PYMNTS wrote recently that Elke König, chair of the new European Banking Union resolution authority, the Single Resolution Board (SRB), warned European banks of bad loans coming as the economic effects of the recent lockdowns take hold.

In response, König said there should be some kind of coordinated efforts for “embattled” banks to help them discern which loans are most likely to be valuable. But because of the different smaller solutions to help combat it for now.