Euro-zone businesses and households can expect access to bank loans to be tougher in the months to come as banks batten down the hatches in the wake of the credit market turmoil.
A European Central Bank survey showed banks have already tightened credit standards in the past three months and plan to be more choosy in their lending in the next quarter, especially for loans to big business.
"The net tightening most likely reflects the worsening of global credit market conditions," the ECB said in its survey of senior lending officers at 87 euro-zone banks, which was published a month earlier than usual.
"Looking ahead to the fourth quarter of 2007 banks expect a further net tightening of credit standards applied on loans to enterprises."
The survey is the first concrete euro-zone data on how lending standards have changed since the crisis in the U.S. market for subprime mortgages sparked a global credit squeeze in early August, with commercial banks worldwide hoarding cash and not lending it on.
Many of the riskiest U.S. loans had been repackaged and sold on to institutional investors, making it hard for euro-zone banks to know who to trust, especially after two German banks, IKB and SachsenLB, needed an industry bail-out.
The tightening in standards for business loans was the biggest since early 2003, when the prospect of slower economic growth prompted banks to take a more cautious approach.
Standards were tougher, particularly for loans to big business and for long-term borrowing, and larger firms are set to bear the brunt again of a further tightening of standards over the next quarter, the survey showed.
Key Turmoil Gauge
ECB President Jean-Claude Trichet gave a preview of the report in his monthly news conference on Thursday, and other ECB policymakers had said the data would be key in gauging how big an effect the credit market dislocation would have on ordinary firms and households.
The banks said they expected market turmoil to have a bigger impact on lending standards in the coming quarter than in the past one, partly reflecting their own difficulties in raising funds given tight money markets and bank's unwillingness to lend even to other financial institutions.
Nearly 50% of banks said market events would contribute to a tightening of credit standards for loans to big business over the next three months, compared with only around 40% over the past three months.
The ECB, along with the U.S. Federal Reserve and latterly the Bank of England, has intervened heavily in interbank lending rates to ensure overnight lending rates remain in line with its policy rate. But it has had little effect in cutting the huge risk premia now on three-month interbank lending.
The survey, which had a cut-off date of September 27, showed banks were stung by difficulties accessing wholesale funding, whether from other banks, short-term debt securities and longer-term bonds in the third quarter.
Banks also reported difficulties selling home and corporate loans on to investors and expected this to continue in the coming quarter.
The deterioration in bank balance sheets and weaker housing market prospects also led to tighter standards on home loans, with banks increasing margins on riskier loans in particular.
Households may find getting mortgages more difficult in the next quarter as lending officers said they expected to tighten credit standards further, despite net demand remaining significantly negative.