Fear of a higher risk of default on the part of banks and much uncertainty about the impact of interest rate hikes on households and companies. An explosive cocktail that has sharply disrupted both grant giving and loan demand in the first quarter of the year and threatens to intensify from now on.
Banks don’t want anything that smells of risk and have long been more scrupulous about the types of customers they allow to borrow from. They demand longer terms, they demand better profiles and, in some cases, they make offers more expensive to ensure that only those who can pay will enter their credit portfolio.
The European Central Bank (ECB) acknowledged in its latest bank credit survey, “The tightening of credit to corporates and housing purchases was stronger than banks expected in the last quarter and points to a continued weakening of credit dynamics.” “
The document published this Tuesday leaves no room for doubt about the credit slowdown in the region, also coinciding with the outbreak of the banking confidence crisis in the US. Experts had already predicted that the aftershocks experienced with the collapse of Silicon Valley Bank in March—and which was reflected in the collapse of Credit Suisse in Europe—would make banks and customers more cautious in their lending decisions. Due to this, there will be a recession in credit.
But this situation has been added to a cycle of rising interest rates, weakening prospects for the real estate market, and declining consumer confidence. Mortgage hardening. But, above all, business credit. The central bank notes, “Credit norms, i.e. internal guidelines of institutions or their approval norms for corporates have tightened substantially.” Notably, the percentage of institutions that recognized this stringency of conditions was 27%. “From a historical perspective, this momentum remains at the highest level since the euro zone sovereign debt crisis in 2011,” the expert explains.
This is accompanied by a sharp drop in demand, even as credit costs rise in the current environment of rising interest rates, “stronger than expected by banks and the strongest since the 2008 global financial crisis”.
The same is true of mortgages, whose demand remains minimal, continuing the trend of the final quarter of 2022, when the largest contraction in the entire historical series occurred amid a rise in 12-month Euribor.
The indicator to which most mortgages in Spain refer has just completed a positive year, rising from 0.013% in April 2022 to 3.757% in the same month of this year. An unprecedented pace of rebound that has not only made variable-rate loans more expensive, but is also making those conditions much harder on new mortgages.
And the worst is yet to come. The survey shows that banks expect an additional “sharp drop” in demand for this second quarter, with even tighter terms in the concession, which could translate into more expensive mortgages, but above all, to access them. in very difficult situations.
This means to say that the increase in their prices has not yet reached the peak. The Bank of Spain recently explained that national institutions barely transferred 30% of the increase in Euribor to the cost of their mortgages.
This survey is also important for the meeting being held by the ECB this week. Under pressure from a new spike in inflation to 7% in April, the agency has been warning for some time that it closely monitors credit developments to guide its monetary policy decisions. The institution’s chief economist, Irishman Philip Lane, had already indicated that the document published this Monday was important in the sense that it would allow us to know the first effects of the financial turmoil in March on credit activity in the euro area. And, as verified, the prospects are not at all optimistic.
Rate hike effect
In its new survey of bank loans, the ECB has also included a new question for institutions to verify the impact of interest rate increases on the sector. And banks acknowledge that the impact has been positive for their margins over the past six months.
However, they acknowledge that this position was partially offset by a “negative volume impact on interest margin”. Response commensurate with the substantial weakening of credit dynamics in recent months.