Eurozone banks are anticipated to chop lending subsequent yr for the primary time since 2014 as international locations throughout the area fall into recession.
Banks will scale back their lending within the face of rising rates of interest and risky financial situations, making it tougher for cash-strapped corporations to borrow, in keeping with a report by consultancy EY.
Throughout the eurozone, lending by banks will fall by 1.8 per cent subsequent yr, EY predicts, after rising 4.6 per cent this yr.
The report additionally said rising power costs, rates of interest and inflation — mixed with falling actual family incomes — would result in a drop in demand for loans from customers.
“The area’s economies are dealing with recession, and a contraction in borrowing pushed by diminished demand and provide is forecast as customers, companies and banks turn out to be extra cautious,” mentioned Omar Ali, companion at EY.
“The short-term financial influence shall be felt universally, however small companies are more likely to wrestle most if entry to finance is constrained.”
Nonetheless, the consultancy predicted that lending within the eurozone would choose up after subsequent yr, rising 2.7 per cent in 2024 and three.7 per cent in 2025, assuming the battle in Ukraine doesn’t escalate additional, inflation falls, power costs stabilise and confidence returns.
Lending to corporations is anticipated to drop 2.7 per cent subsequent yr, its weakest degree in a decade, as corporations grapple with increased borrowing prices, sluggish financial exercise, provide chain challenges and the rising price of capital items.
Shopper borrowing is predicted to fall 1.4 per cent in 2023 because the influence of inflation on incomes means customers are much less seemingly to purchase costly merchandise.
EY predicted banks could be hit with a 2.6 per cent rise in mortgage losses this yr — rising to five per cent in 2025 — as corporations and households wrestle to repay debt.
However the charges shall be decrease than in earlier financial downturns as a result of banks tightened their lending standards after the monetary disaster. In 2013, mortgage losses within the eurozone peaked at 8.4 per cent.
Germany and Italy are the 2 economies anticipated to see the largest drop in lending subsequent yr — at 1.7 and 1.8 per cent, respectively — as they endure the financial penalties of upper power costs.
On the FT’s latest Banking Summit, UBS chair Colm Kelleher mentioned Brexit and the stalling of the EU’s banking union challenge meant lending could be more likely to gradual considerably in a recession.
“I believe Europe goes to be comparatively sterile floor for the longer term,” he mentioned.