The second quarter results show banks continuing to tighten their credit standards for loans or credit lines to both enterprises and households. However, for enterprises, the pace of net tightening (14 percent after 27 percent) was at least less marked than the record high seen in the previous two quarters. Credit standards for lending for house purchase (8 percent after 19 percent) followed a similar pattern but for consumer credit (18 percent after 10 percent) tightening was more severe. Higher risk perceptions related to the economic outlook and borrower-specific situation, lower risk tolerance and banks' higher cost of funds all contributed to the latest readings.

For the third quarter, the region's banks expect a further, albeit more moderate, net tightening of credit standards on loans to firms, and unchanged credit standards on loans to households for house purchase. For consumer credit, a minor net tightening is anticipated.

The survey also found another sizeable contraction in loan demand. For enterprises (minus 42 percent after minus 38 percent) the fall was the steepest on record and much sharper than expected by the banks. However, for house purchase (minus 47 percent after minus 72 percent) another hefty drop was smaller than in the first quarter while further weakness in consumer credit demand (minus 12 percent after minus 19 percent) was similarly less acute than last time.

In sum, the latest results show that tighter financial conditions in general and higher interest rates in particular are bearing down on the more interest rate sensitive sectors of the economy. This is just what the ECB wants as it tries to bring inflation back under control.

The European Central Bank's quarterly lending survey of around one hundred and forty banks aims to enhance the Eurosystem's knowledge of financing conditions in the Eurozone and so help the central bank to assess monetary and economic developments as an input into monetary policy decisions. The headline number refers to the net percentage of banks that have tightened their credit standards on lending to enterprises. It is designed to complement existing statistics on retail bank interest rates and credit with information on supply and demand conditions in the euro area credit markets and the lending policies of euro area banks. The survey addresses issues such as credit standards for approving loans as well as credit terms and conditions applied to enterprises and households. It also asks for an assessment of the conditions affecting credit demand.

Particularly in the wake of the Great Recession and the Covid-19 crisis, changes in financial market conditions can have a major say in central bank policy, and hence, the level of asset prices. The main focus is the net percentage of reporting banks indicating tightening credit standards or positive loan demand with regards to enterprises, house purchase and consumer credit. An unwanted tightening of standards or undesired fall in lending could prompt a softer monetary stance from the ECB, potentially entailing lower official short-term interest rates and possible efforts to reduce the cost of longer-term loans.