Bank lending set to tighten further

Bank lending tightened up as financial markets descended into chaos this year and is set to tighten further in the near future, a European Central Bank survey shows today, despite massive efforts by authorities to unfreeze credit markets.

Results of the ECB's latest Euro Area Bank Lending Survey 'indicate a significant increase in the net tightening of credit standards for loans to enterprises in the third quarter of 2008,' the bank said.

Conditions had also become more restrictive for households, but to a lesser extent, it added.

Commercial bank expectations for the rest of the year indicated further net tightening, which means that more of those who responded to the survey planned to set restrictive conditions than those who did not.

The level of those who forecast tighter conditions in coming months was broadly the same as those who said they had already taken such measures, roughly 66%, or two thirds of the 112 banks polled. Five Irish banks took part in the survey.

European banks cited several factors for the tougher conditions, in particular their expectations regarding future economic activity in the case of business loans.

For households, expectations regarding general economic activity and poor housing market prospects continued to be the main factors contributing to the tightening of credit standards, the ECB said.

It noted that for the first time since the launch of the bank lending survey, banks did not report that competition from other banks contributed to an easing of credit standards for loans to households for house purchase.

Household demand for credit was weaker meanwhile, with 'deteriorating consumer confidence' cited as the main factor.

Tighter lending conditions took several forms, from higher margins to restrictions on the size of loans or credit lines and the length of time over which banks were willing to lend. Larger companies faced more restrictions than smaller ones, the ECB said.

Banks also reported that financial market turmoil was hampering their access to money markets more than in the second quarter of the year. Banks now reported that it was their access to short-term money that was being hampered most, the survey revealed.

ECB president Jean-Claude Trichet yesterday said that 'we see no credit crunch developing, especially in loans to households'.