HE The European Central Bank (ECB) tightened monetary policy to combat high inflation. continues to lean strongly towards bank lending. Between July and September, Spanish banks bounced back. Tighten for the sixth consecutive quarter (From March 2022) both award criteria Which leads you to decide whether to give a loan or not as necessary conditions for them (such as interest rate, amount, maturity and required guarantees). Demand has also fallen, as it has since last January. In the fourth quarter, organizations expect a “new decrease” in both supply and demand, albeit “a little more moderate” than in the summer period.
This is also reflected in the quarterly bank credit survey published this Tuesday by the Bank of Spain. Its results are a reflection of the ECB’s strategy: the euro zone monetary authority has increased reference interest rates at an unprecedented pace and on a scale of 4.5 percentage points since July 2022. Prime interest rate increased from 0 percent to 4.5 percentThe deposit facility (the interest paid on the money you hold in banks, the most relevant in the current context) increased from -0.5% (which returned less than what you kept for them) to 4%. It also ended massive debt purchases and encouraged financial institutions to give back in advance the extraordinary liquidity injections it had provided them during the pandemic.
The Central Bank’s goal is to cool the economy thus reducing the high value inflationBy the dual method of making access to credit more difficult and at the same time reducing the demand for credit by companies and families. It is succeeding: The average rate on mortgages, which account for 74% of family loans, rose by 2.3 percentage points to 3.436% in August since December 2021, when the monetary authority began tightening monetary policy. The rest of loans to households increased by just over one percentage point (to 6.94%).. This means that individuals’ loan balance decreased by around 2 percent to 677 billion 354 million euros. A similar situation occurred in loans given to companies.
Worse for homes
Bank of Spain document reveals households are at their worst during the summer months. Thus, institutions tightened the criteria for granting loans to families “a little more significantly” compared to April and June. Intensity of regulation for companies was “similar”. The increase in mandatory interest rates was also “similar or slightly more intense” for households and “slightly more moderate” for companies compared to the previous quarter. In fact, the ECB stated: Tightening the criteria for granting mortgage Pronounced “especially” in Spain Among the four major euro economies. That is, more than in Germany, France and Italy.
In general, banks are increasingly rejecting loan applications due to the increasing risk of default they perceive, the decrease in their tolerance for taking on these risks, and, to some extent, the deterioration of their liquidity. At the same time, loan demand decreased “generally” and “more intensively” in the summer months than in April and June, mainly due to the increase in mandatory interest rates. In the case of companies planned low investments affectedHouseholds are affected by “lower consumer confidence, greater use of savings and a worse outlook for the housing market.”
The survey also shows that banks have realized the obvious: the increase in European Central Bank interest rates has allowed them to increase their profitability because they earn more interest income from the loans they make. Their decision to slow down deposit payments as much as possible while charging more for loans allowed them to rapidly increase profitability from their customers, which “compensated” for the decline in loan balances. They expect this to last another six months Positive impact of increasing interest rates on profitabilityBut they also warn that the need to make provisions for larger defaults will increase, as will the possibility of capital loss and depreciation of certain assets due to larger defaults.