As geopolitical uncertainty grows and concerns about an economic slowdown mount, European banks are tightening loan reviews for corporations and households. They are moving to manage risk in case repayment capacity worsens. The European Central Bank (ECB) expects the trend in the second quarter of this year to continue into the third quarter.
According to Reuters and the ECB on the 21st (local time), eurozone banks applied stricter corporate loan screening standards in the second quarter of this year than in the previous quarter. With concerns about the economic outlook growing and the possibility of higher credit risk for corporations increasing, and with geopolitical risks such as military clashes in the Middle East piling on, banks tightened their lending standards further.
The lending threshold rose especially high in manufacturing sectors with heavy energy use, such as autos and steel and chemicals. The ECB said concerns about a worsening economic outlook and banks' risk aversion were the main reasons for the tougher screening.
Even with tighter loan reviews, funding demand from corporations rose slightly. Corporations increased bank financing to secure working capital, invest in facilities, and readjust existing borrowing fund, but banks maintained their risk management stance and did not ease lending standards. As a result, the rejection rate for loan applications rose across the board for both corporations and households. Based on ECB survey responses, the rejection rate for corporate loans and mortgage loan applications was 6% each.
Household lending conditions are also tough. Banks tightened standards for mortgage loan and consumer loans, and demand for mortgage loan fell in the second quarter.
The ECB projected that in the third quarter, screening standards will be tightened further across not only corporate loans but also mortgage loan and consumer loans. Geopolitical risks and uncertainty in energy markets are likely to influence eurozone banks' lending review stance for the time being.