Euro area banks tighten lending standards further

Euro area banks tightened lending standards again in the second quarter of 2026, while business borrowing picked up slightly and household demand for loans weakened, according to the European Central Bank’s (ECB) latest bank lending survey. The ECB said credit standards, which reflect banks’ internal lending guidelines and loan approval criteria, became moderately stricter for loans and credit lines to businesses, with a net 7 per cent of banks reporting tighter standards. Banks also tightened lending conditions for households, with a net 9 per cent reporting stricter standards for housing loans and 12 per cent for consumer credit and other household lending. For corporate lending, the tightening was less severe than banks had anticipated in the previous survey, when they expected a net tightening of 19 per cent. The ECB said higher perceived risks to the economic outlook and lower risk tolerance remained the main reasons for tighter lending standards, with banks continuing to monitor risks linked to geopolitical tensions and energy developments. Lower risk tolerance and heightened risk perceptions were also the main factors behind tighter standards for housing loans and consumer credit. Banks expect lending standards to tighten further across all loan categories during the third quarter of 2026. The survey also found that banks tightened the overall terms and conditions attached to loans across all customer segments, driven mainly by higher interest rates. At the same time, euro area banks reported a net increase in the proportion of rejected loan applications across all borrower groups. The rise in rejected applications was strongest for consumer credit, exceeding the increases recorded for business and housing loans. Demand for business loans increased slightly during the second quarter, with a net 3 per cent of banks reporting stronger demand. That marked another modest increase in borrowing demand, consistent with trends seen since the middle of 2024, and contrasted with banks’ earlier expectation of a pronounced decline of 10 per cent. The ECB said business loan demand was supported by increased financing for inventories and working capital, greater demand for fixed investment from large companies, and borrowing linked to debt refinancing and restructuring. Banks also reported higher demand for liquidity, although they described the overall outlook as mixed and dependent on future geopolitical developments. Demand for housing loans fell sharply, with a net 15 per cent of banks reporting lower demand, although the decline was slightly smaller than the 20 per cent fall anticipated in the previous survey. The ECB attributed the weaker demand mainly to deteriorating consumer confidence and changes in interest rates, while worsening housing market prospects also weighed on borrowing. Demand for consumer credit and other household lending also softened, with a net decline of 2 per cent. Although weaker than expected, the fall was less pronounced than banks had forecast in the previous survey, when they anticipated a decline of 9 per cent. Lower consumer confidence was identified as the main factor behind weaker consumer credit demand, followed by subdued spending on durable goods and changes in interest rates. Looking ahead, banks expect demand for housing loans to continue declining in the third quarter, with a net fall of 12 per cent, while demand for consumer credit is expected to remain broadly unchanged. The survey also showed slightly weaker access to retail funding, debt securities and money markets during the second quarter of 2026, while access to securitisation funding remained broadly stable. Both short-term and long-term funding contributed to weaker retail funding conditions. Banks expect funding conditions to deteriorate further over the next three months for debt securities, retail deposits and money markets, while securitisation markets are expected to remain stable. The ECB also found that non-performing loan ratios and other credit quality indicators contributed to tighter lending standards for business loans and consumer credit during the second quarter, although housing loan standards were largely unaffected. Higher risk perceptions and lower risk tolerance were again identified as the main reasons for the tightening. Banks expect credit quality indicators to continue tightening lending standards for businesses and consumer credit during the third quarter. Across the economy, lending standards tightened in most sectors during the first half of 2026, with the exception of services excluding financial services and real estate. The strongest tightening was reported in parts of manufacturing most exposed to energy and geopolitical risks, particularly the car industry and energy-intensive manufacturing. Banks expect lending standards to tighten further across most sectors during the second half of the year, although they foresee broadly unchanged standards for non-financial services and residential real estate. Loan demand remained broadly stable or declined across most sectors, with services excluding financial services and real estate the only area reporting higher demand during the first half of 2026. For the second half of the year, banks expect only small or moderate changes in borrowing demand across the main sectors. Climate considerations continued to influence lending decisions, according to the survey. Banks reported that climate-related factors had a net easing effect on lending standards and supported demand for loans from green companies and firms making progress with their environmental transition over the past 12 months. By contrast, high-emitting companies without credible climate transition plans faced tighter lending standards and a slight decline in loan demand. Physical climate risk remained the most important climate-related factor leading to tighter corporate lending standards, while transition risks specific to individual firms also became increasingly significant over the past year. Climate-related investment requirements and corporate restructuring were the main drivers of demand for green business loans. Financing needs linked to compliance with climate regulation and preferential lending rates for green projects also supported borrowing, although uncertainty over future climate regulation dampened demand. For housing, banks reported easier lending standards and stronger loan demand for buildings with good or targeted high energy performance. Properties with persistently poor energy performance continued to face tighter lending standards and weaker borrowing demand. Physical risks affecting real estate remained the main climate-related reason for tighter housing lending standards, while improvements in buildings’ energy performance had the opposite effect. Investment in improving the energy efficiency of buildings remained the strongest driver of climate-related housing loan demand, supported by sustainable lending rates and fiscal incentives, although uncertainty over future climate regulation again acted as a negative factor. The July 2026 bank lending survey was conducted between June 15 and June 30, 2026, with responses from 159 euro area banks, representing a response rate of 100 per cent. The survey examined lending developments during the second quarter of 2026 and banks’ expectations for the third quarter.