ECB: Eurozone banks to cut lending over war

Eurozone banks plan to limit access to corporate credit in the second quarter as the war in Ukraine strains prospects and reduces their risk tolerance, according to a European Central Bank study.

As war rages and inflation soars, policymakers are increasingly concerned that banks will reduce lending, and become reluctant to finance investment during a period of uncertainty.

They also fear that higher household expenditures on daily necessities will affect their disposable income.

Credit standards, or banks’ internal loan approval criteria, have already tightened in the first quarter due to increased risk estimates, mainly due to high inflation and ongoing 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 effects of the war in Ukraine, and continue to worry about high import prices.

“Banks expect significantly stronger tightening of credit standards for corporate lending, possibly reflecting the uncertain economic impact of the war in Ukraine and the expectation of a less accommodative monetary policy,” the ECB said in its quarterly lending survey.

In addition, banks expect a slight tightening of credit standards for mortgages and consumer credit and other lending to households, he added.

However, demand for credit continues to rise in the first quarter and the ECB expects a net increase in demand for corporate loans in the second quarter, although interest on mortgages is likely to decline.

The central bank is expected to meet on April 14 and while no major policy action is expected, the ECB could provide further details on how it plans to withdraw its support program, fearing that inflation is now a bigger problem than weak growth.