Banks will tighten the screw on businesses in Q2, warns the ECB

A general movement is emerging that sees eurozone banks consider significantly limiting access to credit for businesses in the second quarter of 2022, the European Central Bank (ECB) survey released Tuesday showed. Driving this movement is risk intolerance, which is growing as the war in Ukraine drags on and uncertainty about its impact on the economies of the 19 of the 27 member states that have adopted the euro as their currency.

What the banks fear is the persistence of interruptions in the supply chains and therefore the loss of efficiency of the productive apparatus, the outbreak of inflation with the increase in the prices of goods and energy … But they also anticipate the response of the ECB to this situation through a tightening of monetary policy (interest rates and debt repurchases).

“Banks expect a significantly stronger tightening of credit standards for corporate loans, which should reflect uncertainty about the impact of the war in Ukraine and the anticipation of less accommodative monetary policy,” explains its quarterly survey. on credit in the euro area, conducted in March with 151 establishments.

| Read: “The economic cost of the conflict in Ukraine will be high” (Nicolas Théry, Crédit Mutuel)

We recall that these internal criteria for granting credit to banks had already been tightened in the first quarter of 2022 for the same reasons. However, the ECB explains, the second quarter should be even more difficult in this regard, as banks have an increasingly pessimistic perception of the consequences of the conflict between Ukraine and Russia and are trying to strengthen the protection of their balance sheets.

The ECB fears a slowdown in the second quarter that would mainly penalize businesses

In fact, at the ECB we see this risk aversion pass between the 1st and 2nd quarters, and we fear a slowdown on the part of banks in the granting of loans, which would penalize business investments and limit the ability of households to offset the impact of the increase in prices on disposable income.

Despite this, credit demand continued to grow in the first quarter. And this will not decrease, since according to the ECB, banks expect an increase in demand for business loans for the second quarter of 2022.

On the domestic side, theThe demand for home loans and consumer credit and other household loans further increased in net terms in the first quarter of 2022. The net increase in home loan demand is mainly due to the general level of interest rates . For the second quarter of 2022, banks are expecting a sharp decline in demand for home loans, but demand for consumer credit is broadly unchanged. The ECB explains that this demand is linked more to the need to buy durable goods than to a confidence effect, as it has been falling sharply lately.

| Read: Ukraine’s GDP will collapse (-45%), but the World Bank sees an even more bleak scenario

Fear of shrinkage within six months

Banks indicated, the ECB study reveals, that the ECB’s asset purchase programs and the third round of targeted long-term refinancing operations (TLTRO III) continued to have a positive impact on their liquidity position and market financing conditions.

But banking institutions expect this impact to become weaker in the case of the TLTROs and negative for the ECB’s asset purchase programs over the next six months.

What to feed the debate on Thursday 14 April at the Board of Governors

The ECB investigation should fuel the debates within the institution before the monetary policy meeting on April 14, at the end of which it could specify its intentions in terms of normalizing its strategy, the fight against inflation is now the its priority.

Observers hope that the institution will clarify this point puzzle created by the war in Ukraine: the association between galloping inflation and increased recession risks in the euro zone, each of the two problems a priori has an opposite solution to the other.

In March, the institute chaired by Christine Lagarde announced that it would end net asset purchases in the third quarter, giving itself the option to raise rates. “After some time”.

The ECB is expected on Thursday “to maintain its commitment to a conditional, gradual and flexible normalization of its policy” And “reassess the situation during the June 9 meetingaccording to Frederik Ducrozet, Pictet Wealth Management strategist, interviewed by AFP.

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NOTE

The euro area bank lending survey, conducted four times a year, was developed by the Eurosystem

improve understanding of the lending behavior of banks in the euro area. The results reported in the April 2022 survey refer to changes observed in the first quarter of 2022 and to changes expected in the second quarter of 2022, unless otherwise stated.