Eurozone banks tighten lending as demand for business and housing loans declines

Eurozone banks tightened lending standards for businesses and consumer credit during the third quarter of 2026, while demand for business and housing loans weakened significantly, as higher interest rates, geopolitical uncertainty and declining consumer confidence continued to weigh on borrowing activity.

The findings, published in the European Central Bank’s (ECB) October 2026 Bank Lending Survey, point to increasingly cautious lending conditions across the euro area. The survey also highlights deteriorating access to bank funding, rising loan rejection rates and expectations of further tightening in several lending categories during the final quarter of the year.

The survey found that a net 9 per cent of eurozone banks tightened their credit standards for loans and credit lines to businesses during the third quarter. This was higher than the 5 per cent tightening anticipated in the previous survey, indicating that banks had become more cautious than initially expected.

The main reasons behind the stricter lending criteria were increased perceptions of risk and reduced willingness among banks to take on additional risk. Some institutions also identified growing pressure arising from geopolitical uncertainty and developments in energy markets.

Conditions were different in the household lending market. Credit standards for housing loans remained broadly unchanged, with a net balance of zero per cent of banks reporting a tightening. However, consumer credit and other household lending experienced further restrictions, with a net 14 per cent of banks reporting tighter approval criteria.

The tightening in consumer lending exceeded expectations, largely reflecting banks’ heightened assessment of borrower risks and their reduced tolerance for potential losses.

Looking ahead, banks anticipate further restrictions on business lending during the fourth quarter of 2026. They also expect a more pronounced tightening of credit standards for both housing loans and consumer credit.

Beyond approval criteria, the actual terms and conditions applied to loan agreements became stricter across all lending categories. Higher interest rates were the principal factor behind this development. Banks also reported an increase in the proportion of rejected loan applications across businesses and households, with the rise particularly pronounced in consumer credit.

AI investment emerges as a potential source of future borrowing demand

The ECB survey also examined how banks are adapting their lending policies to the growing use of artificial intelligence by businesses.

Most institutions reported that they had not yet introduced specific quantitative criteria into their credit standards for assessing loans connected with the adoption or development of AI technologies.

Nevertheless, some banks said that the adoption of AI and its associated risks were increasingly being incorporated into qualitative assessments of borrowers. Information technology companies were attracting particularly close scrutiny.

At the same time, banks expect the expansion of AI to create a gradual but sustained increase in demand for financing, particularly for digital infrastructure and data centres.

Institutions indicated that AI-related lending is currently more likely to be directed towards infrastructure providers than software developers or businesses adopting AI technologies.

This concentration is expected to become more pronounced over the coming months as investment in digital infrastructure expands.

Business borrowing weakens despite working capital requirements

On the demand side, eurozone banks reported a net 6 per cent decline in demand for business loans and credit lines during the third quarter.

The development represented a reversal of expectations expressed in the previous survey, when banks had anticipated a net 4 per cent increase in business borrowing. It also followed a modest net increase of 3 per cent in the second quarter.

Higher interest rates were identified as the principal factor discouraging businesses from seeking new loans.

Other contributing factors included weaker demand for fixed investment among small and medium-sized enterprises and a shift towards alternative sources of financing.

Some banks also reported that uncertainty surrounding geopolitical developments and energy markets continued to discourage companies from taking on additional debt.

However, demand for financing inventories and working capital provided some support to business lending, partially offsetting the broader decline.

Despite the weaker borrowing environment, banks expect demand for business loans to remain broadly stable during the fourth quarter, with a net 1 per cent anticipating a decline.

Housing loan demand records a particularly sharp decline

The most pronounced weakness in borrowing demand was recorded in the housing market.

Banks reported a net 27 per cent decline in demand for housing loans during the third quarter, compared with a net 15 per cent decline in the previous quarter. The latest figure was also considerably worse than the net 12 per cent decline banks had anticipated.

Higher interest rates were the main reason households were less willing to borrow for property purchases. Falling consumer confidence and deteriorating expectations for the housing market were additional factors.

The ECB noted that the influence of interest rates was consistent with monetary policy changes being transmitted smoothly into financing conditions.

Despite the substantial deterioration, the decline in housing loan demand remains below the peak recorded during the previous cycle of interest rate increases.

Demand for consumer credit and other household lending also weakened, although to a considerably smaller extent. A net 2 per cent of banks reported a decline in this category, contrary to expectations that demand would remain unchanged.

Higher borrowing costs and weaker consumer confidence were again the principal factors. Reduced spending on durable goods also contributed to the decline.

Banks expect household borrowing conditions to deteriorate further during the final quarter of 2026. A net 36 per cent anticipate a decline in demand for housing loans, while a net 14 per cent expect consumer credit demand to fall.

These expectations suggest that households are likely to remain cautious about taking on additional debt, particularly for property purchases, as financing costs and economic uncertainty continue to influence decisions.

Banks face growing difficulties accessing funding

The survey also identified further deterioration in eurozone banks’ access to funding during the third quarter.

Access to retail funding, debt securities and money markets weakened, while conditions for securitisation remained broadly unchanged.

Although the deterioration in retail funding access was still considered moderate, it represented the most significant worsening since the ECB began collecting the relevant data in 2011. It also slightly exceeded the previous peak recorded in the third quarter of 2023.

Both short-term and long-term retail funding contributed to the deterioration.

Banks expect access to funding to become more difficult across all sources during the next three months, adding another potential source of pressure to the lending environment.

ECB balance sheet reduction continues to influence banks

The ECB’s reduction of its monetary policy asset portfolio also affected the financial position of eurozone banks during the preceding 12 months.

According to the survey, the reduction had a mildly negative impact on banks’ market financing conditions and liquidity positions. At the same time, it encouraged institutions to increase their holdings of government bonds issued by euro area countries.

The overall effect on bank profitability was slightly positive. Higher net interest income provided support, although part of the benefit was offset by relatively small capital losses.

Banks expect these effects to continue over the next 12 months. They also anticipate that the reduction in the ECB’s asset portfolio will exert further tightening pressure on lending conditions across all categories of loans.

Credit quality concerns add to lending restrictions

Developments in non-performing loan ratios and other credit quality indicators also contributed to tighter lending standards during the third quarter.

Banks reported that concerns about credit quality had a tightening influence on lending to businesses, housing loans and consumer credit, primarily because of increased perceptions of risk.

Looking towards the fourth quarter, institutions expect developments in credit quality to continue exerting pressure on lending standards, particularly for business loans and consumer credit.

This suggests that banks remain concerned about the possibility of further deterioration in borrowers’ financial positions and are adjusting their lending policies accordingly.

Digital assets expected to play a growing role in banking strategies

The October survey also included a new assessment of the influence of digital assets on banks’ financial positions, business strategies and credit standards.

Over the preceding 12 months, digital assets had made a slightly positive contribution to banks’ business strategies, while their impact on the broader financial position of institutions was assessed as neutral.

For the coming year, banks expect digital assets to have an increasingly positive influence on their business strategies. However, they also anticipate a negative impact on their retail funding activities.

Regarding lending policies, digital assets had a neutral effect on credit standards during the previous 12 months. Banks nevertheless expect them to contribute to an easing of credit standards for housing loans over the next year.

Survey covers 159 banks across the euro area

The quarterly Bank Lending Survey was developed by the Eurosystem to improve its understanding of lending behaviour and financing conditions throughout the euro area.

The October 2026 survey was conducted between September 21 and October 6 and examined developments during the third quarter, alongside banks’ expectations for the fourth quarter, unless otherwise specified.

A total of 159 banks participated, representing a 100 per cent response rate.

Overall, the findings point to a more cautious eurozone banking sector, with tighter business and consumer lending standards, weakening demand for housing and corporate loans, and increasing difficulties in accessing funding.

Although banks expect business borrowing to stabilise, the outlook for household lending remains considerably weaker. The anticipated further decline in housing and consumer credit demand, combined with tighter financing conditions and concerns about credit quality, suggests that restrictive borrowing conditions will remain an important feature of the eurozone economy during the final months of 2026.

At the same time, investment in artificial intelligence and digital infrastructure could provide an emerging source of demand for bank financing, offering a potential area of growth amid the broader slowdown in traditional lending.

By fLEXI tEAM