FRANKFURT (Reuters) - Euro zone banks expect to tighten access to credit further in the fourth quarter and see a drop in loan demand as economic growth slows and interest rates rise, the European Central Bank said on Tuesday.
As a winter recession now appears almost certain, confidence has been dropping rapidly, raising the risk that banks become pickier in granting loans, potentially reinforcing the downturn.
But banks have had a downbeat outlook for several quarters even as corporate lending growth has risen to its best level since 2009, suggesting at least a partial disconnect between forecasts and actual performance.
"In the fourth quarter of 2022 euro area banks expect a significantly stronger net tightening of credit standards on loans to firms," the ECB said based on a survey of a 153 banks. "In addition, euro area banks expect credit standards to continue to tighten for both housing loans and consumer credit."
Banks said that rising ECB interest rates have contributed to the tightening of credit standards and higher borrowing costs have also started to dampen loan demand.
The ECB has increased rates by 125 basis points so far this year and another 125 basis points is priced in before the end of the year before further increases in 2023.
In the current quarter, firms' loan demand is expected to drop while mortgage demand is expected to see a further "strong net decrease," the ECB added.
"In the context of economic slowdown and intensifying recession fears, the risks related to the economic outlook, as well as industry or firm-specific situations and banks’ declining risk tolerance all had a considerable tightening impact on credit standards for loans to firms," the ECB said.