EcoTV Week

Euro area : Outstanding bank loans’ developments not yet dampened by the increase in rates


The rise in market interest rates since the beginning of 2022 has led to higher bank lending rates in the euro area. Both rates of loans for housing purchase and those of loans to non-financial corporations have been affected. For the time being, developments in bank loans outstanding do not reflect the tightening in bank lending conditions but the early consequences could materialize in 2023.


The huge increase in bond yields since the beginning of 2022 caused by the return of inflation and the prospect of more tightened monetary policies made banks' loan rates rise in the eurozone. That was particularly true for home loans. We saw a 84-basis point increase between the end of 2021 and July 2022, of which 18 basis points for the month of July only. The increase was quite significant in Germany. Plus 150 basis points for an average level of 2.82% in July 2022. A level unseen since fall 2013. In Italy, we also noted a marked increase in home loans rates. Plus 100 basis points. The average level was at 2.41%. The highest level since 2015. In these two countries, more dependent on Russian gas, banks are perceiving a more greater risk to which they tend to be less tolerant.

At the same time, the rates of loans to non-financial corporations increased in a more moderate manner, plus 41 basis points. The level in July 2022 was at 1.77%. More volatile, they registered a slight decrease in July, minus 6 basis points. It was due to the drop in bond yields between mid-June and the end of July 2022. This increase in loan rates had not yet had noticeable impacts on developments in bank loans to the private sector in the eurozone.

We noted a 6.6% increase in outstanding loans in August 2022. It was plus 3.5% at the end of 2021. This acceleration was mainly due to loans to non-financial corporations. Outstanding loans went from plus 3.3% at the end of 2021 to plus 8.8% in August 2022. Soaring energy prices have driven up non-financial corporations' need for funds. At the same time, the increase in household loans was more moderate. From 3.9% at the end of 2021 to 4.7% year-on-year

in August 2022. For companies and households, demand was sustained by the prospect of higher financing costs in the months to come. We noted a slight increase in monetary aggregate, plus 6.1% in August 2022 against plus 5.7% year-on-year in July 2022. It was due to an acceleration in loans to non-financial corporations. While M3 was stuck in a trend of deceleration since the beginning of 2021. The increase in market rates make bank loans more attractive. Bank financing, due to a rate increaseless significant and less rapid, is benefiting from a shift of demand from large companies at the expense of bond issues. This contributes to an increase in the share of bank financing in non-financial corporations' debt.

Another consequence lies in the likely impacts on housing market. According to an ECB's recent econometric work, a 1% increase in home loans rates may lead to a decline in housing prices. Minus 5% within two years. The decline in housing investment may reach 8% with the same increase in rates and within the same period. The increase in rates which began in 2022 should not have visible impacts on the economy and on pricing mechanisms before 2023. In the meantime, the eurozone could go into a technical recession, two consecutive months of GDP decrease. But inflation would stay well above the target of 2%. New measures from the ECB could not be excluded. Besides the raise in deposit facility rate which is at 0,75% today and that we see at 2% at the beginning of 2023.

Team : Banking economics