Eurozone banks tighten credit and increase loan rejections in second quarter
Euro area lenders tightened borrowing conditions and rejected more loan applications in the second quarter as geopolitical tensions and economic uncertainty offset an unexpected rise in corporate demand for working capital.
Euro area banks moderately tightened credit standards for corporate, housing, and consumer lending in the second quarter of 2026, according to the latest bank lending survey. Lenders also reported a net increase in rejected loan applications across all borrower categories. The share of rejected consumer credit applications rose by 9 percent, while rejections for corporate and housing loans increased by 6 percent.
Credit standards for firms tightened by a net 7 percent, a moderation from the first quarter driven by lower risk tolerance and perceived threats to the economic outlook. Despite this squeeze, corporate loan demand posted a small net increase of 3 percent, defying bank expectations of a decline. Companies primarily sought financing for inventories, working capital, fixed investment, and debt refinancing.
Borrowing conditions for households also grew stricter, with net tightening of 9 percent for mortgages and 12 percent for consumer credit. Overall credit terms tightened across the board, driven mainly by higher lending rates and wider margins on riskier loans. This supply-side contraction coincided with falling demand, as deteriorating consumer confidence and higher interest rates dragged mortgage applications down by 15 percent.
The credit squeeze is being applied unevenly across the economy and specific sectors. Banks significantly restricted lending to car manufacturing and energy-intensive industries due to geopolitical and energy-related exposures, while Germany, Spain, and France saw tighter standards for corporate and housing loans. Conversely, lenders eased credit standards for firms advancing their green transitions, though climate risks continued to tighten conditions for high-emitting companies.
Looking ahead, the banking sector faces its own liquidity headwinds that could prolong the credit crunch. Access to debt securities, money markets, and retail funding deteriorated slightly in the second quarter, marking the largest decline in retail funding access since the last quarter of 2024. Banks expect these funding channels to tighten further over the next three months as they navigate ongoing uncertainties surrounding US-Iran negotiations.
