Europe's battered financial sector is showing further signs of mending and banks are increasingly competing for custom by lowering credit standards, a key European Central Bank survey showed on Tuesday.

The ECB said its quarterly bank lending survey showed  banks are easing credit standards for loans to enterprises, an encouraging sign, since the chronic weakness of credit activity in the euro area has previously been blamed for the absence of any noticeable recovery in the 19 countries that share the single currency.

"In the October 2015 bank lending survey (BLS), euro area banks reported a net easing of credit standards on loans to enterprises in the third quarter of 2015, which was stronger than banks' expectations in the previous survey round," the ECB report said, attributing the development to "competitive pressures".

At the same time, banks reported a net tightening of credit standards on loans to households for house purchases, saying that tighter national regulation offsets the easing effect of competition.

Demand for loans is also increasing, the ECB found.

"Net demand for loans to enterprises increased, due mainly to the general level of interest rates, as well as to increased needs for fixed investments. Net demand for housing loans continued to increase due to the low level of interest rates and housing market prospects," the ECB said.

The eurozone central bank has previously complained that its ultra-easy monetary policy had not been feeding through into the real economy, because banks are not passing the money on in loans, particularly to the small and mid-sized enterprises (SMEs) which are the region's economic backbone.

In an attempt to address this, the bank cut its interest rates to new all-time lows and also embarked on a series of programmes to pump liquidity into the economy.

For example, it is making cheap funding available to banks via its TLTRO or targeted long-term refinancing operation programme on the condition that the banks will lend the cash on to businesses.

Most recently, the ECB embarked on a controversial programme of sovereign bond purchases, known as quantitative easing or QE.

The ECB said the additional liquidity made available to banks via its asset purchase programme was being used to grant loans.

Looking ahead to the fourth quarter, "banks expect a further net easing in credit standards on loans to enterprises," the ECB said.

"For households, credit standards on housing loans are expected to be broadly unchanged and a slight net easing is expected for consumer credit."

On the demand side, "banks expect a further considerable increase in demand from enterprises in the fourth quarter of 2015," the ECB said.
Source: AFP