• The German banks responding to the Bank Lending Survey (BLS) tightened their credit standards somewhat for loans to enterprises and loans to households for house purchase in the third quarter of 2021. Credit standards for consumer credit and other lending were eased marginally.
• Loan demand increased in all the surveyed loan categories, but fell significantly short of banks’ expectations in the previous quarter for loans to enterprises and consumer credit and other lending.
• Taken in isolation, the interest rate-reducing impact of the Eurosystem’s expanded asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) had a detrimental effect on bank profitability. In and of itself, the negative interest rate on the deposit facility also continued to contribute negatively to banks’ net interest income.
• The targeted longer-term refinancing operations III (TLTRO-III) in June and September 2021 had a positive impact on the profitability of the banks surveyed. The attractive conditions of the operations were a key factor in banks’ participation in TLTRO-III. The funds taken up were used primarily for granting loans and as a substitute for maturing debt securities and interbank loans.

The BLS covers three loan categories: loans to enterprises, loans to households for house purchase, and consumer credit and other lending to households. On balance, the surveyed banks marginally tightened their credit standards (i.e. their internal guidelines or loan approval criteria) for loans to enterprises and loans to households for house purchase. The net percentage of banks that tightened their standards was +3% for loans to enterprises (compared with -3% in the previous quarter) and +4% for housing loans (compared with -7% in the previous quarter). The banks justified this tightening partly on the grounds that credit risk was, in their estimation, heightened and risk tolerance lower. There was a marginal easing of credit standards for consumer credit and other lending to households (net percentage of -3%, after -17% in the previous quarter). For the fourth quarter, banks are, on balance, planning to marginally loosen their credit standards in all three loan categories. Banks left their overall terms and conditions (i.e. their actual terms and conditions agreed in the loan contracts) essentially unchanged in all surveyed loan categories. Only margins for loans to households for house purchase were widened to any appreciable extent irrespective of creditworthiness.

The demand for loans to enterprises continued to increase but fell well short of expectations. Demand was boosted by funding needs for refinancing, restructuring and renegotiation and financing needs for fixed investment, inventories and working capital. By contrast, enterprises’ greater use of internal financing and loans from other banks had a dampening effect on demand. The fact that the increase in loan demand fell short of expectations could indicate that enterprises have enough liquidity, for example from promotional funds. In addition, supply bottlenecks are likely to hamper output growth and investment. The loan rejection rate for loans to enterprises remained relatively high. Demand for loans for house purchase and for consumer credit and other lending increased again in the third quarter. Over the next three months, banks expect a further increase in demand for loans across all three surveyed loan categories.

The October survey round contained ad hoc questions on participating banks’ financing conditions and the impact of the Eurosystem’s purchase programmes (APP and PEPP). Other ad hoc questions addressed the effects of the negative interest rate on the Eurosystem's deposit facility and the two-tier system for remunerating excess liquidity holdings. The survey additionally contained questions on the Eurosystem’s TLTRO-III operations.

Against the backdrop of conditions in financial markets, German banks reported that their funding situation had improved somewhat compared with the previous quarter. Over the past six months, the Eurosystem’s purchase programmes (APP and PEPP) have helped improve the liquidity position of commercial banks and their market funding conditions, but they have still impacted negatively on bank profitability through net interest income. Survey respondents indicated that the purchase programmes had not contributed to credit growth over the last six months. Furthermore, the negative interest rate on the deposit facility once again put a strain on banks’ net interest income. Taken in isolation, it depressed lending and deposit rates and pushed up fees in deposit business. Deposits from firms were affected to a greater degree than deposits from households. The rise in fees was greater than in all previous survey rounds. The two-tier system for remunerating excess liquidity holdings tempered the negative effect on profitability.

Twelve banks from the German sample took part in the TLTRO-III operations in June, and eight in September, mainly on account of the attractive conditions. According to the banks surveyed, the operations had a positive impact on their profitability. Banks reported using the uptake in funds primarily for lending and as a substitute for maturing debt securities and interbank loans. They stated that they would also be participating in future operations mainly because of the TLTRO-III operations’ attractive conditions. The TLTRO-III operations eased lending policies and contributed to a rise in lending, particularly to enterprises.

The Bank Lending Survey, which is conducted four times a year, took place between 20 September and 5 October 2021. In Germany, 34 banks took part in the survey. The response rate was 100%.