Credit conditions about unchanged in US; tightening in Europe

1 Feb 2012 by Jim Fickett.

In the last few days both the US Federal Reserve and the European Central Bank have released results of bank surveys on lending conditions. The difference in the results is striking and instructive.

In the US, conditions are more or less unchanged.

Overall, in the January survey, domestic banks reported that their lending standards had changed little and that they had experienced somewhat stronger loan demand, on net, over the past three months. Foreign respondents, which mainly lend to businesses, reported a net tightening of their lending standards while loan demand was about unchanged.

Here are results for business loans and residential mortgages (click for larger image):

In Europe, on the other hand, banks were very clearly tightening lending condition in the fourth quarter:

According to the January 2012 bank lending survey (BLS), the net tightening of credit standards by euro area banks surged in the fourth quarter of 2011 for credit standards on both loans to non-financial corporations (35% in net terms, up from 16% in the preceding quarter) and loans to households for house purchase (29%, up from 18% in the preceding quarter), and to a lesser extent on consumer credit (13%, up from 10% in the preceding quarter). Looking ahead, euro area banks expect a further net tightening of credit standards, albeit at a slower pace than in the fourth quarter of 2011.

Participating banks explained the surge in the net tightening of credit standards by the adverse combination of a weakening economic outlook and the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position. Increased market scrutiny of bank solvency risks in the fourth quarter of 2011 is likely to have exacerbated banks’ funding difficulties. As a result, euro area banks significantly tightened credit terms and conditions and raised interest rates on loans to non- financial corporations (NFCs) and households. The prevalence of tightening appeared to be widespread across larger euro area countries, with the notable exception of Germany.

And here are the European graphs corresponding to the above two from the US:

It is not only that European banks tightened lending to Europe; American banks also tightened lending to institutions with European exposure:

Large fractions of domestic and foreign respondents again reported having tightened standards on loans to European banks or their affiliates and subsidiaries. There was more widespread tightening of standards than in the previous survey on loans to nonfinancial firms that have operations in the United States and significant exposures to European economies.

Since modern economies react quite strongly to changes in credit conditions, this is another sign that the euro zone economy is in for difficult times.