German banks tightened their credit standards for loans to enterprises for the third consecutive period, while guidelines for loans to households for house purchase remained unchanged.
The banks did not change their overall terms and conditions for loans to enterprises on balance, but made the requirements tighter for private housing loans.
Households’ demand for loans for house purchase was far greater than the banks had anticipated. Demand for loans to enterprises with longer interest rate fixation periods also rose once again.
The Eurosystem’s expanded asset purchase programme (APP) continued to weigh on banks’ profitability. For the coming six months, the credit institutions are concerned that the resumption of asset purchases under the APP will dampen their profits.
The negative deposit facility rate (DFR) was reported to have had an adverse effect on banks’ net interest income, whilst at the same time increasing the volume of their lending, viewed in isolation. The banks expect these effects to weaken over the course of the next six months. The Bank Lending Survey (BLS) in Germany covers three loan categories: loans to enterprises, loans to households for house purchase, and consumer credit and other lending to households. The surveyed banks tightened their credit standards (i.e. their internal guidelines or loan approval criteria) for loans to enterprises in the third quarter for the third consecutive period (a net percentage of +3%, as in the previous two surveys). This adjustment was reportedly due, in large part, to the fact that they felt that the industry or firm-specific situation, as well as borrowers’ creditworthiness, had deteriorated. This was also reflected in an increase in the share of rejected loan applications. Credit standards for loans for house purchase as well as for consumer credit and other lending to households remained unchanged.
The surveyed banks did not tighten their overall terms and conditions (i.e. the actual terms and conditions agreed in the loan contracts) for loans to enterprises on balance. Margins on loans to enterprises widened; meanwhile, banks loosened the other terms and conditions asked for. Banks made terms and conditions for loans to households for house purchase tighter for borrowers on balance, chiefly on account of increased margins. Terms and conditions for consumer credit and other lending to households remained broadly unchanged, narrowed margins aside.
The banks stated that demand for credit showed a further increase in all the surveyed lines of business. Demand for loans to households for house purchase once again exceeded, by a substantial margin, banks’ expectations from the previous quarter. The key driver of this growth, according to the surveyed banks, was, as before, the low general interest rate level.
The October survey contained ad hoc questions on banks’ financing conditions and on the impact on credit business of the Eurosystem’s expanded asset purchase programme (APP) as well as the effect of the negative interest rate on the Eurosystem’s deposit facility.
Against the backdrop of conditions in financial markets, German banks reported virtually no change in their funding situation compared with the previous quarter.
Banks reported that, viewed in isolation, the Eurosystem’s expanded APP had improved their liquidity position slightly over the past six months. However, it did not improve their market financing terms during this period. Furthermore, it weighed on banks’ profitability more heavily than in the last survey, although net purchases had been discontinued at the start of the year. Just as in the previous survey, the APP had no meaningful impact on lending policies and the credit volume in the two preceding quarters. In view of the ECB’s decision in September to resume net purchases from November 2019, the credit institutions are apprehensive of strains on their profitability over the next six months. At the same time, they deem it likely that the APP will lead to an increase in credit volume in business with households. They do not expect their lending policies to be significantly affected, however.
The negative DFR was once more a key factor in banks’ net interest income shrinking over the past six months due to its dampening impact on lending rates, amongst other reasons. Simultaneously, according to the banks’ assessment, the negative DFR led to an increase in the volume of loans to enterprises and loans to households during this period, when viewed in isolation. Overall, the banks expect the negative effect of the DFR on net interest income to diminish over the next six months. Expected relief from the two-tiered system for remunerating excess liquidity holdings is cited by some banks as a reason for this. Notable positive effects on credit volume are only anticipated for loans to enterprises.
The Bank Lending Survey, which is conducted four times a year, took place between 13 September and 30 September 2019. In Germany, 34 banks took part in the survey. The response rate was 100%.