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ECB says bank sector on the mend

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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.

[FRANKFURT] 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 that 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 July 2015 bank lending survey (BLS), euro area banks reported a net easing of credit standards on loans to enterprises in the second quarter of 2015," the ECB report said, attributing the development to "competitive pressures".

Banks also reported a net easing of credit standards on loans to households for house purchases, again as a result of competition, it said.

At the same time, demand for loans is increasing, the ECB found.

"Net demand for loans to enterprises increased substantially, owing mainly to the general level of interest rates. Fixed investment also contributed to an increase in demand. Net demand for housing loans continued to increase substantially owing to the low level of interest rates and to 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 the TLTROs was being used to grant loans.

Looking ahead to the third quarter, "banks expect no change in standards on loans to enterprises, an easing of standards for consumer credit and a net tightening of credit standards on housing loans," the ECB said.

AFP