A European Central bank survey released on Tuesday revealed that although banks in the euro zone dropped the bar on mortgage approvals last quarter for the first time in more than two years, loan demand continued to decline due to high borrowing costs and a stagnating economy.Â
Making New Debt
In an effort to control inflation, the European Central Bank (ECB) has raised interest rates to all-time highs, which has stopped the expansion of bank lending in the 20 eurozone member states.
The ECB’s quarterly Bank Lending Survey revealed that although banks were gradually becoming less cautious—at least when it came to issuing home loans—households and businesses showed little desire for taking on new debt.
In the three months leading up to March, banks relaxed their requirements for granting loans to individuals for the purchase of homes and somewhat relaxed their restrictions on business credit availability.
Nevertheless, they saw a “small decline” for home loans and a “substantial decline” in company credit demand, something they had not anticipated three months earlier.
Decrease In Mortgage Rates
“Higher interest rates, as well as lower fixed investment for firms and lower consumer confidence for households, exerted dampening pressure on loan demand,” the European Central Bank stated.
With just a “moderate net decrease in demand” for corporate loans and even an increase in demand for loans to families, banks, however, were expecting an improvement in the three months leading up to June.
New mortgage interest rates decreased as banks braced for ECB rate cuts. It was also observed that this stopped banks from making record profits.
“The dampening impact of the ECB’s interest rate decisions expected over the next six months also extends to overall bank profitability, with a moderately negative contribution from provisioning and impairments,” the European Central Bank stated.
