German banks applied tighter credit standards for loans at the beginning of 2023, according to the Bank Lending Survey (BLS) conducted by the Bundesbank. Speaking at a virtual meeting with the press to mark the 20th anniversary of the BLS, Bundesbank economist Nicole Binder noted that, according to the banks, the persistently high credit risk in all segments was the main reason for this. Credit risk had increased owing, amongst other things, to the deterioration in the economic situation, but also to the high degree of uncertainty surrounding the Ukraine war and the high inflation.

Interest rate policy tightening producing results

The situation is not expected to change in the coming months, either. Credit standards are likely to be tightened even further, especially as the Governing Council is expected to continue raising interest rates.

“The tightening of the ECB’s interest rate policy is thus producing the desired results,” according to Bundesbank Chief Economist Jens Ulbrich. With the interest rate increases since July 2022, the European Central Bank has sharply reduced lending. “We see that the monetary policy transmission mechanism is working,” Mr Ulbrich said. However, he added, the impact of the interest rate hikes was within reasonable bounds. In addition, he continued, the increased credit risk was also being adequately taken into account in lending.

Sharp decline in loans for house purchase

Demand for loans, too, is likely to continue to decline, with private housing loan demand having fallen the most sharply. According to Mr Ulbrich, this was due to higher interest rates as well as reduced disposable income owing to inflation and high energy prices. Housing construction in Germany was also suffering as a result, he noted. Private housing construction would therefore remain the Achilles’ heel of economic developments this year. “We will see sharp declines in housing construction investment this year,” he said. However, he expects investment to rebound in 2024 in response to housing demand, though not to levels observed in 2020 and 2021. According to Mr Ulbrich, price dynamics in the real estate market have eased markedly since the middle of last year. “That is why our expectation again this year is that price dynamics in the real estate market will not continue in the manner that we have seen in recent years,” Mr Ulbrich concluded.

Background to the Bank Lending Survey

20 years ago, the Eurosystem introduced a quarterly Bank Lending Survey (BLS) for the euro area. The BLS covers three loan categories: loans to enterprises, loans to households for house purchase, and consumer credit and other lending to households. The Bundesbank collects the information supplied by the participating German institutions, collates it and publishes it as a national result. The aim is to deepen knowledge of the role of lending in the “monetary policy transmission mechanism” and thus to gain additional information for monetary policy analysis. The questionnaire is sent to a representative sample of 33 banks and comprises 22 questions on past and expected future lending by participating institutions to the non-financial private sector as well as on loan demand. Questions on particularly topical issues are added as well. The BLS’s major advantage over other credit data is the earlier availability of the survey data. They therefore also serve as a decision-making framework in the deliberations of the Governing Council of the ECB.