Governments once again restricting economic activity, banks are growing worried about rising credit risk, potential damage to economic growth as emergency credit lines are keeping a range of companies afloat, particularly in services. Banks had already curtailed access to corporate credit in the third quarter and expected to tighten further in the last three months of the year, reflecting concerns about the stalling recovery and governments’ ability to maintain fiscal support measures amid a lingering downturn. Banks referred to the deterioration of the general economic outlook, increased credit risk of borrowers and a lower risk tolerance as relevant factors for the tightening of their credit standards for loans to firms and households.
Credit supply is still holding up, suggesting that companies are accepting tougher terms in exchange for the cash. Lending to non-financial companies expanded by 7.1% in September, unchanged since June and not far below a more than 10-year high of 7.3% hit in May. Although tighter credit access is likely to worry ECB policymakers, the deterioration is not yet considered serious enough to prompt more stimulus when the ECB meets on Thursday, especially since the bank has plenty of untapped firepower at its disposal. With the ECB lending cash at minus 1%, the cost of funding was not hindering lending. Instead, growing risk perceptions were making banks more cautious. Still, most ECB watchers foresee the bank expanding its stimulus measures in December, when new economic projections are expected to show a slower rebound and could even hint at a risk of a double-dip recession.