by Banks see QE and negative deposit rates as contributing to lending volumes—but also hurting their net interest income. Released on 18 October, the ECB’s third-quarter Bank Lending Survey– the first one to fully capture the effects of the 23 June Brexit referendum – remained broadly consistent with improving credit conditions. The BLS is of special significance in the current environment where commercial banks remain under a lot of pressure from all sides, whether from regulation, non-performing loans, low/negative rates or Brexit.Credit standards as well as terms and conditions of new loans continued to ease across most sectors and countries in Q3. Demand for credit continued to rise across all categories of loans as well, driven once again by the general level of interest rates and M&A activity. Fixed investment was seen as an important driver in France and Italy.Unfortunately, while credit demand has been picking up in the BLS since early 2014, the rise in actual lending volumes has been more tepid and the credit impulse has started to weaken again. According to the latest BLS, net demand for bank loans continued to rise “across all loan categories” in Q3, although at a slower pace than in recent quarters.
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Frederik Ducrozet considers the following as important: Bank Lending Survey, Credit Conditions, credit impulse, Macroview, negative interest rates
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Banks see QE and negative deposit rates as contributing to lending volumes—but also hurting their net interest income.
Released on 18 October, the ECB’s third-quarter Bank Lending Survey– the first one to fully capture the effects of the 23 June Brexit referendum – remained broadly consistent with improving credit conditions. The BLS is of special significance in the current environment where commercial banks remain under a lot of pressure from all sides, whether from regulation, non-performing loans, low/negative rates or Brexit.
Credit standards as well as terms and conditions of new loans continued to ease across most sectors and countries in Q3. Demand for credit continued to rise across all categories of loans as well, driven once again by the general level of interest rates and M&A activity. Fixed investment was seen as an important driver in France and Italy.
Unfortunately, while credit demand has been picking up in the BLS since early 2014, the rise in actual lending volumes has been more tepid and the credit impulse has started to weaken again. According to the latest BLS, net demand for bank loans continued to rise “across all loan categories” in Q3, although at a slower pace than in recent quarters. The net percentage of banks reporting a rise in demand for loans to enterprises dropped to 11% in Q3, from 17% in the previous two quarters, and well below the expectations from the previous BLS (20%). The number of banks reporting an increase in demand for loans for house purchases decreased to 23% in Q3, from 30% in Q2.
In terms of the ECB outlook, the main message from the latest bank lending survey is that both QE and negative deposit rates are seen as net positive factors, contributing to the rise in lending volumes. However, a large majority of euro area banks reported a net decline of their loan margins and an overall negative impact on their net interest income.
Overall, the latest BLS only strengthened our view that the ECB is very unlikely to cut the deposit rate further into negative territory, but instead will focus on QE extension and technical changes, in line with our forecasts. We continue to expect a 6-month QE extension at the current EUR80 bn pace along with technical changes to be announced in December.