Eurozone: economic uncertainty is affecting credit standards for businesses

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January’s Bank Lending Survey results show credit standards have tightened for businesses in the eurozone and that demand for loans has declined. Banks indicated that the tighter corporate credit standards were mainly due to greater collateral requirements rather than any significant increase in the cost of funds. While demand from businesses for credit between March and August 2020 was massive, it then started to fall through to November, the latest month for which survey data is available.

Unlike in previous crises, banks’ cost of funds is notably absent from the factors contributing to tighter credit standards. The main factors at play have been banks’ concerns over the general economic backdrop and each firm’s specific situation.

Our analysis

Extraordinary monetary policy easing has effectively resolved the cost of funds issue. Interest rates are very low and being passed down to borrowers.

The impact of the current crisis on company solvency, however, persists. Lower business volumes have dragged profits down and impaired creditworthiness, leading banks to become more cautious. The solution to this problem lies in adapting fiscal policies to support corporate balance sheets not only in terms of liquidity, but also solvency.

Noteworthy is the very strong correlation between banks’ assessments of the general economic backdrop and the specific characteristics of firms and sectors. Once the economic outlook has considerably improved with the help of vaccines, we can hope that factors relating to default risk will contribute less to banks’ credit standards.


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The opinion expressed above is dated 22th January 2021 and is liable to change.


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