Data from the European Central Bank (ECB) have revealed that lending to nonfinancial firms increased 7.1% year on year in June, down a notch from the 7.3% seen in May, which was the biggest increase since 2009.
The surge in lending reflects the hundreds of billions of euros in loans to struggling businesses, guaranteed by European governments.
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At the same time, central banks have flooded the banking system with ultra-cheap loans at negative rates to help boost the supply of credit.
The annual growth rate of the M3 measure of money supply accelerated to 8.9% from 8.2%, beating expectations for 8.6% in a Reuters poll.
Businesses in desperate need of liquidity
On the demand side, the flood of loan applications underscores businesses’ desperate need for liquidity to fund inventory and working capital.
Demand for corporate loans was stronger for small and medium-sized businesses than for large company. There were also significantly more short-term loans requested than long-term credit. Demand for loans to fund investments fell sharply.
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By GlobalDataBank lending could shrink in the coming months
However, banks now plan to tighten the money spigot in anticipation that governments will taper off their loan guarantee schemes, according to a recent ECB survey.
Banks predicted a considerable tightening of business lending standards by the Q3 2020.
The ECB found that, in the coming months, lending could dry up for companies that are relying on bank funding to cope with the economic fallout from the coronavirus crisis.
Already, some lenders have begun restricting access to credit in order to preserve capital. They are positioning themselves for an ECB decision on whether to allow bank with stronger balance sheets to restart dividend payments.
Government guarantees remain crucial
Banks told the ECB they had “only slightly” tightened their lending requirements to businesses in the three months to June.
As a result, however, the rejection rate for corporate customers seeking loans dropped sharply by 12%—a confirmation that state guarantees remain indispensable in a global crisis with no end in sight.
