why banks are tightening credit conditions

The European Central Bank (ECB), which manages monetary policy in the euro zone, recognizes this. In the first quarter, commercial banks tightened their lending criteria to a level not seen since 2011. This is the case for housing loans granted to households and, to a lesser extent, consumer loans. Conditions have strengthened and demand for credit has fallen in parallel. This means that there are fewer loans granted in general. According to the ECB, growth in retail loans between January and March rose to 2.9% from more than 3% at the same time last year. Growth in loans granted to businesses fell from almost 6% to 5.2%.

The first explanation is the rise in interest rates. To lend money to their customers – households and businesses – commercial banks borrow from the European Central Bank. However, the ECB, like its equivalent in the United States (the Federal Reserve, the FED), has been raising its interest rates for several months to fight against galloping inflation. But this increase in interest rates has a direct collateral effect: it increases the cost of loans, which automatically become more expensive. At the same time, banks are more cautious and look twice before lending the money in the difficult economic environment filled with uncertainties. It is out of the question to lend to a household that is too greedy or to another whose financial situation has been or could be weakened in the current context. Ditto for companies whose investment projects are not optimal. The files are more than ever scrutinized.

Back to normal in 2025

When will the return to normal? This is the whole debate on whether or not to continue the rise in interest rates. As long as inflation has not returned to around plus or minus 2%, which is the normal target set by central bankers, rates will continue to serve as an adjustment variable. However, we are today almost everywhere in the world around 5% to 6% inflation, or even more. If the action of central banks is effective, some analysts predict a return to normal for 2025, hardly before. Suffice to say that the return of the season of easy loans is not for now.