Bank credit tightening eased in Q3, flags turning point-ECB

FRANKFURT, Oct 28 - Banks in the euro zone continued to tighten credit standards in the third quarter due to weak economic outlook, but less than they did in the previous quarter, the European Central Bank said on Wednesday.

The ECB said the survey signalled the credit standard tightening cycle was nearing an end. Slightly more banks saw themselves loosening credit standards to businesses in the fourth quarter than said they would tighten them, and the degree of net tightening fell in the third quarter from the second.

"This development thus further confirms the indications of a turning-point in the tightening trend observed at the time of the April 2009 survey," the ECB said in its latest quarterly Bank Lending Survey.

"At the same time, it needs to be kept in mind that the cumulated net tightening during the financial turmoil has not yet started to reverse itself and remains very substantial."

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The ECB said the state of the economy drove the tightening in July-September, and added banks had easier access to wholesale financing.

"The most important driving forces for the net tightening in the euro area continued to be expectations regarding general economic activity and the industry or firm-specific outlook," the ECB said.

"Importantly, some of the supply-side factors, namely banks' access to market financing and banks' liquidity position, contributed to an easing of credit standards for loans to enterprises."

The survey also said banks kept tightening credit standards for households in the third quarter, and expect that to continue in the current quarter, but to a lesser degree.

Below is a table showing the net percentage of banks reporting and expecting changes to credit standards and loan demand in the ECB survey.

Q3 Q2

- Loans to businesses Reporting tighter credit standards this quarter 8 21

Reporting higher loan demand this quarter -20 -29 Expecting tighter credit standards next quarter -1 12

Expecting higher loan demand next quarter 1 1

- Mortgage loans to households Reporting tighter credit standards this quarter 14 22

Reporting higher loan demand this quarter 10 4 Expecting tighter credit standards next quarter 5 12

Expecting higher loan demand next quarter 9 -7

The survey of 118 banks was conducted from Sept. 14 to Oct. 2. For a copy of the survey, please see the ECB Web site:

http://www.ecb.int/stats/money/lend/html/index.en.html