IRISH BANKS tightened their criteria for lending to mortgage customers and businesses in the third quarter of 2009, while demand for loans also fell, according to the results of the latest European Central Bank (ECB) survey.
This was the ninth quarter in a row in which credit standards on loans to businesses had tightened, the Euro Area Bank Lending Survey found.
The stricter lending standards at Irish banks mirrored a tightening in credit criteria across Europe.
Irish banks expect credit standards to remain unchanged during the fourth quarter of 2009. This was in contrast to the euro zone as a whole, where banks expect to ease credit standards for companies in the fourth quarter.
Although Irish borrowers were obliged to meet stricter credit standards on mortgages, there was no change in credit standards for other consumer credit.
The banks said borrowers were obliged to satisfy higher credit standards for mortgages due to “less favourable expectations regarding general economic activity”.
Europe is undergoing its worst recession since the second World War, which has made financial institutions unwilling or unable to lend.
In Ireland, weak consumer confidence led to a cut in spending on durable consumer goods in the period, reducing demand for consumer credit.
The continued slump in the housing market has deterred potential borrowers from seeking mortgages.
Tighter standards on lending to businesses were due to the banks’ cost of funds and balance sheet constraints, less favourable expectations for general economic activity and “industry or firm-specific uncertainty”, according to the banks.
Access to wholesale funding markets remained “challenging” for Irish banks in the third quarter, despite Government commitments to recapitalisation and the banking guarantee, according to a note from the Central Bank.
The situation is “expected to remain equally challenging” in the final months of the year.
Restrictions on access to wholesale funding markets affected the quantity of funds banks would lend and the margin at which loans were advanced.
Banks blamed “ongoing uncertainty in financial markets” for reluctance to lend and said this would “remain broadly unchanged” for the rest of the year.
Senior lending officers at the five Irish banks participating in the survey said demand for loans from enterprises had fallen as a result of lower levels of investment by businesses and fewer mergers and acquisitions.
The banks said demand for loans from businesses would decrease further in the final quarter of the year.
Data on private-sector credit for the month of September will be published by the Central Bank on Friday.
Loans to households and companies across Europe showed their first annual decline on record in September, the ECB said on Tuesday.
Expectations that credit flows may ease across the euro zone in the fourth quarter “confirms the indications of a turning point in the tightening trend”, the ECB said.
Economists think the euro zone economy may have begun to grow again in the third quarter, but the official statistics have not yet been published.
Growth is likely to remain muted unless credit flows improve. – (Additional reporting: Bloomberg)
