Eurozone banks tighten corporate credit as working-capital demand rises

Eurozone banks tightened lending standards for businesses during the second quarter even as demand for working-capital and inventory finance increased, highlighting the growing pressure on companies to secure liquidity in a riskier economic environment.

A net 7% of banks participating in the European Central Bank’s July lending survey reported tighter approval standards for loans and credit lines to companies. The tightening was less severe than banks had anticipated in the previous survey, but institutions expect standards to become more restrictive again during the third quarter.

Banks attributed the change principally to a weaker economic outlook, geopolitical and energy risks and reduced tolerance for credit exposure. Loan terms also tightened across the market, driven mainly by higher interest rates, while a greater proportion of corporate applications was rejected.

At the same time, demand for corporate loans rose slightly, with a net 3% of banks reporting an increase. The ECB said companies were seeking additional finance for inventories and working capital, as well as fixed investment, refinancing and restructuring. Demand associated with immediate liquidity requirements also increased.

The combination is significant for businesses dependent on revolving credit or conventional bank facilities. Companies may need more liquidity to absorb higher input costs, maintain inventories or respond to supply disruption precisely as banks become more selective about the risks they are prepared to accept.

Credit tightening was most pronounced in the automotive sector and energy-intensive manufacturing, where lenders remain concerned about energy prices, geopolitical developments and the wider economic outlook. Banks expect standards to tighten across most major sectors during the second half of the year.

The survey also revealed a divergence in climate-related lending. Banks reported relatively easier credit conditions for green companies and businesses making credible progress towards transition objectives, while high-emitting companies without convincing transition plans faced a tightening effect.

Funding conditions for banks themselves deteriorated slightly across retail deposits, debt securities and money markets, although access to securitisation remained broadly unchanged.

The ECB surveyed 159 banks between 15 and 30 June, with all participating institutions responding. The results suggest alternative working-capital providers could see increased demand if businesses find bank credit harder to obtain, although specialist lenders will face many of the same concerns over customer performance and sector risk.