July results of the Bank Lending Survey (BLS) in Germany
- The banks repeatedly eased their credit standards and terms and conditions in all three surveyed loan categories. They again adapted credit terms and conditions mainly by narrowing margins irrespective of borrowers’ creditworthiness, albeit to a smaller extent than in the preceding quarter.
- Demand for loans to enterprises and loans to households for house purchase picked up considerably, with demand for consumer credit and other lending in fact rising sharply.
- In the first half of 2018, the NPL ratio had no impact on credit standards.
The survey covers three loan categories: loans to enterprises, loans to households for house purchase, and consumer credit and other loans to households. The surveyed banks eased their credit standards (ie banks’ internal guidelines or loan approval criteria) for loans to enterprises marginally on balance in the second quarter of 2018, in line with expectations from the previous survey round. Moreover, for the fourth time in succession they slightly loosened, on balance, the standards for loans to households for house purchase, though not by as much as had been generally expected in the previous quarter. On the whole, credit institutions marginally eased their standards for consumer credit and other loans to households; in the previous survey, no change had been planned for the second quarter.
In addition to credit standards, banks also eased their terms and conditions (ie the actual terms and conditions agreed in the loan contracts) in all three surveyed loan categories. This took place primarily in the area of margins, which were narrowed irrespective of creditworthiness, with margins for average risk loans being narrowed more sharply. Banks once again cited high competitive pressure as the main reason for narrowing margins.
Demand for loans to enterprises and loans for house purchase picked up considerably. Demand for consumer credit and other lending showed a sharp rise on the quarter in fact, far exceeding expectations, especially in the case of corporate and consumer finance. The assessment of the surveyed banks was that demand was driven chiefly by the low general level of interest rates, the housing market outlook and the expected trend in housing prices as well as households’ great propensity to acquire durable consumer goods.
The July BLS round contained ad hoc questions on the banks’ funding conditions, the impact of the new regulatory and supervisory activities (including the capital adequacy requirements defined in CRR/CRD IV and the requirements resulting from the ECB’s comprehensive assessment), as well as, for the first time, on the significance of various determinants of the size of banks’ loan margins and on the impact of non-performing loans on institutions lending policy.
The German banks reported that, given the situation in the financial markets, their funding situation showed very little change compared with the preceding quarter. In response to the new regulatory and supervisory activities, the surveyed banks continued to strengthen their capital position in the first half of 2018. Key factors affecting the size of margins for new loans in all surveyed loan categories over this period were intense competition, banks’ risk assessment, the cost of capital, meeting institutions’ profit targets and operating costs, with competition, target profitability and the cost of capital achieving the largest gains in prominence over the 2014 to 2017 period. In the first half of 2018, the NPL ratio (percentage ratio of the stock of gross non-performing loans on the bank balance sheet to the gross book value of loans) had no impact on the surveyed banks’ credit standards, nor were the surveyed banks expecting any significant effects over the coming six months. On the other hand, the banks stated that, in the reporting period from 2014 to 2017, the NPL ratio, seen in isolation, had led to a slight tightening of credit standards for loans to enterprises and loans to households for house purchase, but only a marginal tightening of credit standards for consumer credit and other lending. In addition, the NPL ratio, in isolation, led to a marginal tightening of credit terms for loans to enterprises.