Economic Letter: Bank Credit Conditions & Monetary Policy

  • Bank Lending Survey results show that credit conditions remained relatively stable in the first quarter of 2020, but changes are coming.
  • Banks expect credit demand from businesses to be mixed but expect a record fall in demand for credit from households in the second quarter.
  • Banks expect the recent monetary policy decisions by the ECB to have positive effects on their balance sheets.

The Central Bank of Ireland has published an Economic Letter titled ‘Bank Credit Conditions & Monetary Policy’, written by David Byrne, Sarah Holton and Conor Parle. The research examines the results of the Bank Lending Survey (BLS) of a representative sample of Ireland’s banks, which is carried out by the Central Bank of Ireland on a quarterly basis. The survey has been conducted by the wider Eurosystem since 2003, where each National Central Bank (NCB) contacts a representative sample of banks within its country for information on both credit supply and demand. Governor Makhlouf discussed the survey results and wider credit developments in his latest blog yesterday.

The most recent BLS was carried out between March 19 and April 3 and banks were asked about changes in credit market conditions in the first quarter of the year and their expectations for the second quarter. As the pandemic only intensified towards the end of the first quarter, banks’ expectations for the second quarter will more fully reflect the effects of the virus on the credit market.

The research finds that COVID-19 had a limited impact on credit conditions during the first quarter of the year. Banks tightened their credit conditions somewhat due to a perceived increase in the riskiness of lending but banks have so far reported no changes in their credit standards due to a deterioration in their balance sheets or in their cost of funds.

The survey shows that banks expect credit demand from businesses to be mixed, they expect demand for short-term business loans to increase, reflecting higher working capital and inventory needs, with demand for longer-term business credit to decrease, reflecting lower investment.  On the household side, banks expect a record fall in demand for credit from households in the second quarter. These findings are corroborated by credit applications data that show sharp declines in individuals’ credit demand since mid-March and increases in demand for overdraft facilities from firms.

Banks expect the recent monetary policy decisions by the Governing Council of the ECB to have positive effects on their balance sheets. These measures could support banks’ liquidity, capital and financing conditions and therefore could help mitigate severe credit constraints on households and firms that can arise due to stress on banks’ balance sheets, like those experienced in the last financial crisis in Ireland.