Credit Market Analysis by Lloyds TSB

How much will tighter bank lending standards affect growth?

Credit lending standards have tightened…
The latest bank lending surveys from the Bank of England and the ECB show clearly that credit lending standards to corporates and households have tightened since
last summer. In fact, they have tightened to a sufficient degree to raise fears of a sharp economic slowdown. 

How much will tighter bank lending standards affect growth?

Credit lending standards have tightened…
The latest bank lending surveys from the Bank of England and the ECB show clearly that credit lending standards to corporates and households have tightened since
last summer. In fact, they have tightened to a sufficient degree to raise fears of a sharp economic slowdown. We take a look back at the ECB bank lending survey since its inception in 2003 to see whether it is a reliable indicator of actual bank lending and ultimately economic growth. This should offer a guide to the likely accuracy of the BoE survey, which only started last year.

..but actual lending to corporates remains strong
One of the most striking features of actual lending to nonfinancial companies in the euro zone is that it has remained very strong. This is in stark contrast with the bank lending survey suggesting a sharp tightening of credit standards in the last two quarters, as chart a shows. Not surprisingly, lending criteria have been tightened due to the credit crisis and concerns about the economic outlook. The survey also
suggests that demand for loans has fallen, though only moderately, because there is still considerable appetite for companies to invest, see charts b and c. This is not unexpected, given that business confidence remains high relative to the historical average. With respect to bank lending to households, it is clear that growth in the demand for loans has been moderating even before the credit crisis started last summer, though tighter lending standards should act as a further constraint. This partly reflects a slowdown in the housing market in countries such as France, Spain and Ireland, as chart d shows, but also a normalisation of euro zone consumer confidence in the past year towards the longterm average, see chart e. Euro zone growth is set to slow, but will remain relatively resilient

 

How accurate has the bank lending survey been in predicting the outlook for economic growth? Interestingly, growth appears to be more correlated with corporate demand for loans, rather than lending standards, see charts f and g.
In fact, as chart h shows, fixed investment is poorly correlated with lending standards. As for households, private consumption seems only weakly correlated with consumer credit supply and credit demand, see charts i and j, suggesting other factors are driving consumption, such as falling unemployment. Overall, we expect the tightening of credit standards will contribute towards a slowdown in euro zone growth to about 1.7% this year, before it recovers to 2% in 2009. With CPI inflation expected to average 2.6% this year, there is little scope for the ECB to reduce interest rates, unless growth slows a lot more sharply.

 

Hann-Ju Ho, Senior Economist

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