Euro zone banks to tighten corporate credit access on war fears: ECB By Reuters

Euro zone banks to tighten corporate credit access on war fears: ECB By Reuters

© Reuters. FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) -Euro zone banks plan to sharply tighten access to corporate credit in the second quarter as the war in Ukraine weighs on the outlook and cuts deep into their risk tolerance, a European Central Bank survey showed on Tuesday.

As the war drags on and inflation soars, policymakers have become increasingly concerned that banks will curtail lending, growing reluctant to finance investment during a period of uncertainty. They also fear that higher household spending on daily necessities will curtail their disposable income.

Credit standards, or banks’ internal loan approval criteria, already grew tighter during the first quarter over perceptions of increased risk, due in part to high inflation and continued supply chain disruptions, the ECB said.

But the second quarter is likely to be even more difficult as banks seek to protect their balance sheets from the fallout of Russia’s war in Ukraine and they remain concerned about high input prices.

“Banks expect a considerably stronger net tightening of credit standards for loans to firms, likely reflecting the uncertain economic impact of the war in Ukraine and the anticipation of less accommodative monetary policy,” the ECB said in a quarterly lending survey.

“In addition, banks expect a moderate net tightening of credit standards for housing loans and for consumer credit and other lending to households,” it added.

Still, demand for credit continued to rise across the board in the first quarter and the ECB expects a net increase in corporate loan demand in the second quarter even as interest in mortgages will likely drop.

The survey is normally a key input in the bank’s policy deliberations and policymakers are likely to be concerned that the flow of credit to the economy is dropping just as growth is coming to a standstill.

The bank will next meet on April 14 and while no major policy action is expected, the ECB could provide further detail on how it plans to roll back its extraordinary stimulus, fearing that inflation is now a bigger problem than weak growth.

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