Decline in demand for mortgage and business loans; What are the consequences?

Demand for mortgage loans and corporate loans fell sharply in the first quarter of this year, according to new figures from the European Bank Lending Survey. This points to a pullback in lending and confirms the picture of a shift towards debt deflation and economic contraction. Rising interest rates have burst bubbles in real estate and government bonds, among other things, putting pressure on the financial system. Banks have suffered huge losses on their bond portfolios and could run into problems in the event of further outflows of deposits.

Lending to firms and households is drying up (Source: ECB)

Lending

Healthy banks are essential for the allocation of capital in the economy, but unfavourable market conditions have led to a tightening of bank lending. They only provide loans to the most creditworthy parties and shorten the average maturity of the loan portfolio. This has a negative impact on the real economy.

The decline in confidence in the economy has led to a lower willingness of lenders to lend and of consumers and businesses to apply for credit. Demand for loans has fallen sharply, mainly due to higher interest rates and a gloomy outlook for the housing market and consumer confidence. This has an impact on consumer spending and business investment, further affecting the economy.

Mortgage loans

In the eurozone, demand for mortgage loans has fallen sharply, especially in Germany. Banks have further tightened their lending standards for mortgages and are charging higher interest margins to maintain their profit margins. House prices are still falling and affordability has deteriorated. Companies are also showing less interest in loans, partly due to higher interest rates and less willingness to make large investments.

Demand for mortgage loans has fallen sharply (Source: Bank Lending Survey Q1 2023)

Loan terms and conditions

BBorrowing conditions have tightened again and are lending less to businesses, including for shorter terms. They charge higher interest margins and impose additional conditions or higher requirements on the collateral for loans. All of this points to a deflationary impulse and could lead to a recession or even a depression.

Banks more reluctant to lend to mortgages (Source: Bank Lending Survey Q1 2023)

Deflationary crisis

Overall, the figures show a decline in lending and point to a deterioration in the economic outlook. The situation for households and businesses in the euro area is worrying, with a sharp decline in demand for loans and a tightening of credit conditions by banks. This could lead to further economic contraction and a possible crisis that could be bigger than the 2008 financial crisis.

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.