Global Market: Euro zone banks tighten credit standards amid geopolitical risks, ECB survey shows

Euro zone banks tightened access to credit during the second quarter as geopolitical uncertainty weighed on lending decisions, with lenders expecting borrowing conditions to become even stricter in the current quarter, according to the European Central Bank’s (ECB) latest Bank Lending Survey, Reuters reported.

The survey found that while demand for business loans increased, banks adopted more cautious lending practices by tightening credit standards and rejecting a larger share of loan applications. The stricter lending conditions were particularly evident in sectors such as the automobile industry and energy-intensive manufacturing.

The findings broadly support the ECB’s assessment that the conflict involving Iran is likely to have only a modest impact on euro zone economic growth. Reuters reported that the central bank continues to view the 21-member currency bloc as relatively resilient because it is a major energy exporter, although elevated oil prices are expected to weigh on consumer spending and reduce manufacturing profitability.

The ECB said banks cited worsening risks to the economic outlook and lower risk tolerance as the main reasons for tightening lending standards, with financial institutions remaining highly alert to geopolitical and energy-related risks.

The survey, which covered 159 of the euro zone’s largest banks, showed that lenders expect credit standards to tighten further across all major loan categories during the third quarter.

The lending survey is closely watched by policymakers as an important gauge of financial conditions and credit availability across the euro area ahead of monetary policy decisions.
The ECB is widely expected to leave interest rates unchanged at its policy meeting later this week. However, Reuters reported that many market observers still expect the central bank to resume rate hikes in September after the surge in energy prices linked to the Iran conflict pushed inflation to around 3%, well above the ECB’s 2% target.

The survey also highlighted weakness in the housing market, with demand for home loans falling sharply during the second quarter. Banks expect housing loan demand to decline further in the current quarter, indicating continued softness in residential lending across the euro zone.