She is an important tool for monetary policy in Europe: the regular survey of banks about their lending business. Especially in times like these, with a turnaround in interest rates that the euro area has never experienced before, the money guardians follow all reactions of the banks to the interest rate hikes of the European Central Bank with eagle eyes.
The Bundesbank dedicated a separate press conference to this “Bank Lending Survey”, or BLS for short, on Wednesday. The message was clear: Germany’s banks are tightening the reins. Lending conditions have been significantly tightened for both corporate loans and private home loans.
Since the middle of last year, the price dynamics for residential real estate in Germany have “settled down significantly”, said Bundesbank chief economist Jens Ulbrich: “And in this respect we expect that the price dynamics in the real estate market will not continue in the way we expect have seen in recent years.”
More fear of loan defaults
In addition to the higher costs for their own refinancing, the banks primarily cite higher risks as the reason for stricter lending criteria: They are afraid of defaults because rising interest rates combined with crushing inflation, high energy prices and general uncertainty are affecting the situation of borrowers.
“The banks tightened their lending standards across the board in 2022 – and they expect further tightening for the first quarter of this year,” said Nicole Binder, who is responsible for these surveys at the Bundesbank. The tightening of the criteria for granting residential real estate loans is particularly striking. The banks have become stricter about who they lend to, how high they mortgage and what securities and risk premiums they require.
At the same time, the demand for construction loans has also collapsed. In the first quarter of 2022 there was still a plus, in the second the value stagnated. In the third quarter, it slumped more than it had since the surveys were launched in 2003. In the fourth quarter of 2022, the decline will continue. Banks are now expecting a further but weaker decline in the first quarter of 2023.
According to the Bundesbank, the restrictive course taken by banks in the granting of residential real estate loans is stronger in Germany than in the euro area as a whole – although the boom was also stronger beforehand. The bank employees surveyed named the capital buffers, which were introduced about a year ago, as one element that contributed to the tightening of their lending standards. Since February last year, banks have had to hold 0.75 percent of their risk-weighted assets as a “countercyclical capital buffer”; in addition, a buffer of 2 percent was introduced specifically for residential real estate loans.
The buffers are intended to help against excessive lending and prevent bubbles. But they also make it harder for borrowers to get credit.
Inflation rate is likely to drop noticeably from April
The BLS surveys were introduced 20 years ago. Every quarter, the Bundesbank sends 22 questions on credit supply and demand to 33 representative banks. There are similar surveys in the other euro countries.
The results are always available relatively early and are considered a leading indicator for the development of lending. The Governing Council uses them as a tool to decide on rate hikes.
According to the Bundesbank, it is not immediately clear from the survey results whether interest rates need to be raised much further. Bundesbank President Joachim Nagel has already spoken out in favor of this.
However, the results probably indicate that the interest rate hikes are having an effect: the “transmission” of monetary policy is working without the banks overreacting. In any case, Bundesbank chief economist Ulbrich expects the inflation rate in Germany to drop noticeably from April onwards.
From March onwards, a so-called statistical base effect will help: the previous year’s values, with which the current prices are compared when measuring inflation, were higher from March 2022 due to the Ukraine war; accordingly, the price increases should be smaller over the year.
The Bundesbank is concerned about the persistently high core inflation – that is inflation without strongly fluctuating prices such as those for energy and food.
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