Eurozone banks tighten corporate credit despite resilient demand

Euro area banks tightened their lending criteria for enterprises in the second quarter, with a net 7% of institutions reporting stricter standards. Lenders also pulled back significantly on household credit, implementing a net 9% tightening for house purchases and 12% for consumer credit. The primary drivers were higher perceived risks regarding the economic outlook and a deliberate reduction in risk tolerance as banks remain highly attentive to geopolitical and energy developments.

Despite these stricter gates, corporate loan demand unexpectedly increased. A net 3% of banks reported higher demand for business credit, sharply contrasting with the 10% decline bankers had predicted in the previous survey. This resilience was largely driven by large firms seeking capital for fixed investment, alongside broader corporate needs for inventory, working capital, and debt refinancing.

The picture was markedly different for households. Demand for housing loans fell by a net 15%, dragged down by deteriorating consumer confidence, unfavorable interest rate shifts, and worsening housing market prospects. Consumer credit demand also softened by a net 2%, as spending on durable goods remained subdued. Banks expect this housing downturn to deepen, forecasting a further 12% decline in mortgage demand for the third quarter.

Beneath the aggregate corporate figures, the credit cycle is fracturing along industrial lines. Banks tightened standards most aggressively in the first half of the year in sectors directly exposed to energy and geopolitical shocks, specifically the car industry and energy-intensive manufacturing. Credit conditions for the services sector, excluding finance and real estate, were the notable exception, avoiding the broad tightening trend.

This tightening cycle is far from over. Banks expect to apply even stricter criteria across all loan categories in the third quarter. This outlook is compounded by a slight deterioration in banks' own access to retail, debt, and money market funding over recent months. Furthermore, non-performing loan ratios and other credit quality indicators are beginning to exert a direct tightening influence on lending standards for firms and consumer credit.

Climate exposure is also actively reshaping bank balance sheets. Lenders reported an easing of credit standards for green firms and energy-efficient buildings, while simultaneously restricting credit for high-emitting companies without credible transition plans and properties with poor energy ratings. Physical climate risk has emerged as the dominant factor restricting credit availability across the corporate and real estate sectors.