Euro area banks tighten lending standards amid rising risk aversion

Euro area banks tightened credit standards for businesses and households in the second quarter of 2026, driven by heightened risk perceptions and lower risk tolerance. A net 7% of banks reported stricter criteria for corporate loans, while standards for housing and consumer credit tightened by a net 9% and 12% respectively. Banks expect this squeeze to continue across all loan categories in the third quarter. Actual loan terms also tightened across the board, driven primarily by higher interest rates.

The tightening creates a challenging paradox for European companies. While banks are becoming more selective, corporate loan demand actually rose slightly, with a net 3% of banks reporting an increase. This demand was primarily driven by businesses seeking working capital, inventory financing, and debt restructuring. However, the overall lending picture remains heavily dependent on unpredictable future geopolitical developments.

Not all industries are facing the same headwinds. The services sector was the notable exception to the tightening trend, even seeing an increase in loan demand. In contrast, banks clamped down hardest on the car industry and energy-intensive manufacturing, sectors directly exposed to ongoing energy and geopolitical shocks. Banks also reported a net increase in rejected loan applications across all borrower groups.

Households are bearing the brunt of the credit crunch. Demand for housing loans fell markedly, dropping by a net 15% as deteriorating consumer confidence, higher interest rates, and worsening housing market prospects weighed on buyers. Consumer credit demand also softened. The decline in household borrowing is expected to persist into the third quarter, with housing loan demand forecast to fall by another 12%.

The restrictive environment is being compounded by pressures on the banks themselves. Access to retail funding, debt securities, and money markets deteriorated slightly in the second quarter. Both short-term and long-term funding contributed to the deterioration in overall retail access, which is expected to worsen further. Additionally, rising non-performing loan ratios are actively forcing banks to tighten standards for corporate and consumer lending.

Climate considerations are increasingly dictating capital allocation. Banks reported an easing of credit standards and rising loan demand for green firms and energy-efficient buildings. Conversely, high-emitting companies without credible transition plans face tighter standards and falling demand. Physical climate risk remains the dominant factor pushing banks to restrict credit.