Euro credit terms ease for second quarter despite oil shock

Euro-denominated credit terms and conditions eased slightly for a second consecutive quarter between March and May 2026, according to a European Central Bank survey published on 24 July. The survey of 26 large banks found that overall credit conditions remained broadly resilient despite a period of severe market turbulence triggered by an escalating Middle East conflict.

The conflict sparked an oil supply shock that sent commodity prices sharply higher in March before markets staged a strong recovery in April and May. During this period, market-implied expectations for policy rates rose considerably. For European companies and investors, the resilience in overall credit terms means the banking system continued to supply funding rather than pulling back as risk sentiment soured.

However, the headline easing was driven entirely by pricing. Non-price credit terms, such as the maximum amount of funding available or maturity limits, remained basically unchanged across all counterparty types, secured financing transactions and non-centrally cleared over-the-counter derivatives. Looking ahead to August, banks expect overall credit terms to remain stable, with only a very small net percentage anticipating slightly tighter pricing for banks and dealers.

Beneath the stable surface, the ECB data points to distinct shifts in how dealers are managing risk. Financing rates and spreads rose across all collateral types in the securities financing market. A net 31% of respondents reported significant rate increases for asset-backed securities, while a net 29% noted higher costs for both high-yield corporate bonds and domestic government bonds.

Dealers actively adjusted their balance sheets in response to shifting demand. As equity values recovered, demand for funding secured against equities surged, with a net 33% of respondents reporting increased demand. Dealers responded by expanding funding availability against equities while simultaneously reducing the maximum amounts and maturities offered for several types of bond collateral.

The survey also revealed underlying friction in over-the-counter derivatives markets. Initial margin requirements increased slightly for most derivatives, notably reversing a previous decrease for interest rate derivatives. Furthermore, valuation disputes rose across all collateral types and for several derivatives, particularly equity derivatives, while liquidity deteriorated slightly for foreign exchange, equity and commodity derivatives.