The ECB’s latest lending survey found eurozone banks slowed the pace of credit tightening in the second quarter but continued to maintain stricter lending standards as geopolitical risks and weaker risk appetite persisted.
Eurozone banks remained cautious over lending in the second quarter, keeping standards tight as geopolitical risks and economic uncertainty continued to weigh on credit conditions despite improving demand from businesses. This was despite the pace of tightening having moderated compared to the second quarter of 2026, according to the latest European Central Bank (ECB) Bank Lending Survey.
“The outcome of US-Iran negotiations continues to be a source of uncertainty, with banks revising their assessments as talks evolve. Banks remain highly attentive to risks and are continuing to closely monitor credit risks, especially in the most exposed sectors, with some reporting additional tightening of credit standards because of geopolitical tensions and energy developments in the second quarter,” the report said.
The European Commission said the EU economy remains resilient but faces a more challenging outlook as trade tensions, higher US tariffs and persistent geopolitical uncertainty weigh on growth. While domestic demand has been supported by a strong labour market and easing inflation, policymakers warned that weaker global trade, subdued business investment and external risks are likely to keep the recovery modest.
The European Central Bank recently announced that it left its benchmark interest rate unchanged at 2.25%, citing concerns over how volatile energy prices could affect inflation. The Commission also cautioned that the outlook remains highly uncertain, with further trade disruptions or geopolitical shocks posing downside risks to growth.
In the survey, banks reported a slight increase in demand for corporate loans, driven by financing needs for inventories, working capital, fixed investment by larger firms and debt refinancing. However, elevated geopolitical risks, lower risk tolerance and concerns over borrowers’ creditworthiness continue to weigh on lending decisions, with banks maintaining stricter approval standards and expecting further tightening in the coming quarter.
For loans to enterprises, banks reported a moderate tightening in credit standards although the pace eased from the previous quarter. A net 7% of banks tightened lending standards, down from 10% in the first quarter and well below the 19% tightening they had expected. Higher perceived risks, lower risk tolerance and continued concerns over geopolitical and energy developments remained the main drivers. Banks also reported a further increase in corporate loan rejection rates, while lending terms and conditions continued to tighten, particularly through wider margins on riskier loans.
Despite tighter lending conditions, demand for business loans edged higher. A net 3% of banks reported an increase in loan demand, reversing the 2% decline recorded in the previous quarter and outperforming expectations for a 10% fall. The modest rise was driven mainly by stronger demand for inventories and working capital, increased fixed investment by large firms, and refinancing and restructuring activities. Looking ahead, banks expect credit standards for corporate lending to tighten further in the third quarter of 2026, the survey noted.
For households, banks reported a continued tightening in lending conditions during the second quarter of 2026. Credit standards for housing loans tightened by a net 9% of banks, broadly in line with expectations of 8%, while overall lending terms and conditions tightened by a net 4%, the first tightening since the third quarter of 2023. Rejection rates for mortgage applications also increased further. Demand for housing loans, however, fell sharply, with a net 15% of banks reporting weaker demand, compared with expectations of a 20% decline, as deteriorating consumer confidence, higher interest rates and weaker housing market prospects weighed on borrowing.
Meanwhile, credit standards for consumer credit and other household lending tightened by a net 12%, easing slightly from 15% in the previous quarter, while demand declined by a net 2%, a smaller fall than the 9% decrease banks had expected. Banks expect credit standards to tighten further in the third quarter, by 2% for housing loans and 11% for consumer credit.
While credit demand is showing tentative signs of stabilising, the recovery remains fragile as banks continue to prioritise risk management over loan growth. With geopolitical tensions, energy market uncertainty and concerns over borrowers’ creditworthiness still shaping lending decisions, the survey suggests that financing conditions are likely to remain restrictive in the near term. Unless economic and geopolitical risks ease more decisively, tighter credit standards could continue to constrain investment and household spending, potentially slowing the pace of the eurozone’s broader economic recovery.
