— Declining Credit Caused Mainly By Slack Demand, LTROs Have Helped
–Adds More Data From Survey On Loan Demand, Funding Access

FRANKFURT (MNI) – The proportion of banks planning to toughen their
lending conditions declined in the first quarter and will drop even
further in the coming months, according to the European Central Bank’s
Bank Lending Survey, published Wednesday.

The results suggest the ECB’s E1 trillion infusion of three-year
liquidity has helped counter severe credit crunch risks and stimulate
lending.

However, loan demand has contracted substantially and is expected
to remain relatively subdued in the second quarter, suggesting that it
may take some time before the ECB’s flow of cash trickles into the
Eurozone’s faltering economy.

The survey of 131 institutions conducted, between March 23 and
April 5, showed that a net 2% of banks plan to continue tightening
lending conditions to businesses over the coming months, compared to 9%
that reported doing so in the first quarter. Both figures represent a
sharp drop from the 35% reported in the 4Q Bank Lending Survey, which
was mostly conducted before the ECB’s LTROs.

A net 7% of respondents said they would tighten credit standards
for home loans in 2Q, down from 17% in 1Q and 29% in 4Q. A net 6% said
they would do the same for consumer credit, compared to a 5% tightening
reported in 1Q and 13% in 4Q.

The drop in tightening standards in 1Q “was much more pronounced
than anticipated by survey participants at the time of the previous
survey round and mainly reflected milder pressures from cost of funds
and balance sheet constraints, in particular as regards banks’ access to
funding and their liquidity position,” the ECB said.

Euro area banks reported a sizeable drop in the net demand for
loans to non-financial corporations in the first quarter of 2012 (-30%,
from -5% in the fourth quarter of 2011).

“This brought net demand for such loans to a significantly lower
level than had been expected in the fourth quarter of 2011, with the
decline driven in particular by a further sharp drop in financing needs
for fixed investment,” the report said.

The net demand for loans to households declined substantially in
the first quarter. Demand for house purchases dropped by 43% compared to
a more modest fall of 27% in Q4. Demand for consumer credit was down 26%
compared to 16% in the previous quarter.

“For the second quarter of 2012, banks expect much less negative
net demand for loans to households and a rise in demand for corporate
loans,” the ECB said.

Wednesday’s bank lending data had been eagerly anticipated by
markets and policymakers looking to see how much of the ECB’s cheap
three-year loans to the banking sector have filtered through to the real
economy.

The ECB has extended to European banks over E1 trillion of
three-year loans at an interest rate of 1% in a move designed to avert a
severe liquidity crunch in the European banking sector, which has seen
its funding costs soar as the Eurozone’s debt crisis drags on.

Although he has argued that the controversial operations were an
“unquestionable success,” ECB President Mario Draghi has also noted that
the effects of the LTROs were “complicated” and that it would take some
time before they were fully felt.

At the ECB’s monthly press conference in March, Draghi revealed
that an internal ad hoc bank lending survey produced by the central bank
showed bank lending and credit had picked up modestly since the first
LTRO operation of December 21.

Speaking in European Parliament today, Draghi said the results of
the bank lending survey were “encouraging.”

In its April Monthly Bulletin, the ECB said that it saw weak demand
rather than an unwillingness on the part of banks to lend as the main
dampener on lending for the next few months. Leading indicators
suggested poor appetite from both corporations and households, in line
with subdued economic activity, the central bank said.

Nevertheless, the International Monetary Fund warned last week of a
possible massive deleveraging in the European banking sector in which
credit supply could shrink by 1.7% over the next 18 months.

The ECB said in its last monthly bulletin that banks did face some
lending constraints because of the funding environment and new capital
requirements, but it said the LTROs should help. Indeed, today’s bank
lending survey shows that funding access has improved significantly over
the last quarter.

“Regarding banks’ access to retail and wholesale funding in the
first quarter of 2012, improvements were reported across all funding
categories but particularly for debt securities and money markets,” the
survey found. “These developments attest to a substantial positive
impact of the two three-year LTROs on banks’ funding conditions,” it
said.

“Banks’ access to retail funding likewise improved somewhat, albeit
less so, on average, than that to wholesale funding. Looking ahead, euro
area banks expect further – albeit more moderate – improvements in the
conditions for access to wholesale funding in the second quarter of 2012
and only marginal improvements for their retail funding,” the ECB said.

–Frankfurt newsroom, +49-69-720-142; jtreeck@marketnews.com

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