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The European Central Bank has been raising interest rates with the aim of cooling demand for loans and mortgages across the euro area. The strategy targets both companies and households, acting as a step toward easing inflation. Banks have tightened lending terms and financing conditions, and demand from borrowers has fallen toward what is typically seen during major financial stress years such as 2008 and 2011. This is based on the ECB’s own bank lending survey for the euro area, corresponding to the first quarter of 2023. The report was released after renewed speculation about forthcoming monetary policy moves by the ECB and after a period where regional banks in the United States experienced stress and Credit Suisse faced difficulties in Europe.

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Among the 158 eurozone banks surveyed between March 22 and April 6, a noticeable drop in loan demand emerged. About 38% of banks reported weaker demand from customers, a marked rise over the 12% recorded in late 2022. Mortgage demand also declined across most sectors, with 72% reporting reduced demand, compared with 74% at the end of 2022. Net financing demand from organizations fell by 19% in the first quarter as credit was tightened and consumption slowed.

Demand for business loans fell sharply in the four largest euro area economies—Germany, France, Italy and Spain. The decrease in net demand for housing loans was most pronounced in Germany, Spain, and France.

Data from the Bank of Spain show a 13% fall in new mortgage originations in the first two months of the year, while new loans to companies dropped 6%. In contrast, loans for consumption rose by 3.5% over the same period.

The European Central Bank found that banks tightened their loans at the highest rate since the euro area sovereign debt crisis in 2011.

“Substantial” hardening, especially in Spain

In the first quarter, banks tightened lending conditions for companies at a pace higher than anticipated, reaching levels not seen since the 2011 debt crisis. Spain saw a strong tightening; for every two banks that did not tighten, three did. Germany, France, and Italy also experienced notable increases in tightening.

Credit approvals for corporate financing declined significantly as loan applications fell in the first quarter, described as the largest drop since the global financial crisis. Banks expect further, though moderate, tightening in corporate lending and a continued fall in demand in the second quarter.

Mortgages and consumption

Mortgage lending followed a similar pattern, with the tightening somewhat less severe than for corporate loans. The ECB bulletin notes that the net decline in mortgage demand remained strong through late 2022 and was near the highest since the survey began in 2003. The drive behind the drop in mortgage demand included high interest rates, weaker housing market expectations, and subdued consumer confidence. In the first quarter, almost all banks in Spain reported a decline in mortgage demand, while consumer loan demand fell mainly in Germany, Spain, and to a lesser extent Italy, with France showing little change.

Stricter criteria

Beyond higher rates and tougher loan terms, euro zone banks are tightening broader lending standards. In the first quarter, the share of banks that tightened lending standards for companies surpassed those that did not by 27%, reaching half of banks in 2019 terms. In France the tightening rate was strong, while Spain saw a decline in the share that tightened after peaking above 30% at the end of 2022.

Historically, the pace of credit standard tightening remains at levels last seen during the 2011 sovereign debt crisis. The overall tightening reflects higher risk perceptions and liquidity pressures in the period. The ECB notes that the winding down of the TLTRO programs is expected to lead to broader tightening in the second and third quarters of the year. Banks are also expanding margins on the riskiest loans to both companies and households.

Rejected applications

In the first quarter of 2023, banks reported a widespread rise in rejection rates across all loan categories, with business loan refusals marking the highest net percentage since the question began in 2015. In Spain, the share of banks increasing loan refusals rose about 15% relative to those not tightening, a rate close to the euro area average for the quarter.

As a result, banks state that rate hikes are improving their business environment and profitability. They also indicate that key ECB rate decisions have influenced interest margins in the preceding six months, according to responses collected in this survey round.