The decline in non-performing loans will not ease lending conditions in the euro area

The level of non-performing loans (NPLs) has a slight impact on lending requirements and standards, according to the survey of the European Central Bank (ECB), conducted between 13 December 2021 and 11 January 2022. Banks have been asked about the influence on corporate lending and household’s credits, for the period of whole 2021 and their expectations for the first three month of 2022.  A total of 152 banks from the euro area were surveyed in this round

According to the results, the lending standards stay almost at the same level for housing loans, while banks reported moderate easing on the lending conditions for consumer lends in the fourth quarter of 2021. Risk tolerance and competition in general didn’t affect household lending requirements. For the first quarter of this year the expectations are for tightening of mortgage requirements and easing for consumer lending. In general, the expectation is for continuing demand in any household lends.

Credit institutions reported a weak relationship between NPLs level and requirement to the corporate clients in the second half of 2021. The situation in consumer lending is similar, and housing lending conditions were slightly eased in the second half of the previous year. In recent years the NPLs levels have been declining almost continuously in almost all European countries and in particular – in euro area countries. 

But banks are reluctant to ease the conditions, despite the reduction in NPLs. They justify this with pressure, related to supervisory and regulatory requirements, as well as reduced risk tolerance, shows the conclusion of the study. The costs, related to capital requirements, balance sheet clearing operations, their access to market financing and liquidity, have a weak effect on the lending conditions, as they have done so far. 

For the first half of 2022 euro area banks expect the effect of low NPLs level to be not observable on the credit standards for all types of loans. At the same time is possible balance sheet clearing to lead toward slight easing on some requirements, according to the study.

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