Eurozone bank lending predicted to fall for first time since 2014

Eurozone banks are expected to cut lending next year for the first time since 2014 as countries across the region fall into recession.

Banks will reduce their lending in the face of rising interest rates and volatile economic conditions, making it harder for cash-strapped companies to borrow, according to a report by consultancy EY.

Across the eurozone, lending by banks will fall by 1.8 per cent next year, EY predicts, after rising 4.6 per cent this year.

The report also stated rising energy prices, interest rates and inflation — combined with falling real household incomes — would lead to a drop in demand for loans from consumers.

“The region’s economies are facing recession, and a contraction in borrowing driven by reduced demand and supply is forecast as consumers, businesses and banks become more cautious,” said Omar Ali, partner at EY.

“The short-term economic impact will be felt universally, but small businesses are likely to struggle most if access to finance is constrained.”

However, the consultancy predicted that lending in the eurozone would pick up after next year, rising 2.7 per cent in 2024 and 3.7 per cent in 2025, assuming the war in Ukraine does not escalate further, inflation falls, energy prices stabilise and confidence returns.

Lending to companies is expected to drop 2.7 per cent next year, its weakest level in a decade, as companies grapple with higher borrowing costs, sluggish economic activity, supply chain challenges and the rising cost of capital goods.

Consumer borrowing is predicted to fall 1.4 per cent in 2023 as the impact of inflation on incomes means consumers are less likely to buy expensive products.

EY predicted banks would be hit with a 2.6 per cent rise in loan losses this year — rising to 5 per cent in 2025 — as companies and households struggle to repay debt.

But the rates will be lower than in previous economic downturns because banks tightened their lending criteria after the financial crisis. In 2013, loan losses in the eurozone peaked at 8.4 per cent.

Germany and Italy are the two economies expected to see the biggest drop in lending next year — at 1.7 and 1.8 per cent, respectively — as they suffer the economic consequences of higher energy prices.

At the FT’s recent Banking Summit, UBS chair Colm Kelleher said Brexit and the stalling of the EU’s banking union project meant lending would be likely to slow significantly in a recession.

“I think Europe is going to be relatively sterile ground for the future,” he said.