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Euro area banks tighten lending as they fear more Covid bad loans

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The European Central Bank holds a policy meeting on Thursday. Photo: Boris Roessler/AFP

The European Central Bank holds a policy meeting on Thursday. Photo: Boris Roessler/AFP

The European Central Bank holds a policy meeting on Thursday. Photo: Boris Roessler/AFP

Euro zone banks expect to tighten access to credit further in the first quarter of this year, the European Central Bank's quarterly lending survey showed yesterday. just as pandemic-related lockdown measures force many firms to rely on emergency cash.

With much of Europe's economy under some form of restrictions for the past year, bank credit has been vital in keeping companies afloat, and the ECB has focused much of its stimulus effort on keeping ultra-cheap credit flowing to the real economy.

But lenders have been making access to credit harder and more expensive, fearing that cash-strapped consumers and firms may be unable to pay back, and expect to continue doing so.

"Euro area banks expect a continued net tightening of credit standards on loans to firms in the first quarter of 2021, reflecting the continued uncertainties around the further development of the pandemic and its effects on borrowers’ credit risk," the ECB said.

Banks also expect to tighten access to housing and consumer credit, the ECB added. Its report was based on a survey of 143 banks done between December 4 and 29, just as restrictive measures were being tightened across much of the currency bloc.

Fearing that banks will tighten their purse strings too far, the ECB offered lenders even more credit at minus 1pc last month, provided they pass the cash on to firms, many of which have been mothballed, waiting for pandemic restrictions to be lifted.

But banks are under pressure, including from the ECB's supervisors, to keep their balance sheets clean and build buffers for an expected surge in non-payment of loans.

Banks in the ECB's survey said supervisory measures had strengthened their capital position and helped funding, but also caused them to tighten credit standards.

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The quarterly lending survey is a key input into ECB deliberations and comes just two days before a policy meeting that will reaffirm the bank's ultra-easy policy but is unlikely to approve any further stimulus measures.


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