U.K. banks expect to toughen the criteria on loans to companies and households in the first quarter because of strains in wholesale funding markets and the weaker economic outlook.
“Lenders expected a tightening of credit-scoring criteria for granting” mortgages and a “tightening of covenants on loans to large and medium-sized companies,” the Bank of England said in its Credit Conditions Survey published in London today. “Developments in the euro area and their impact on banks’ funding conditions would be a key determinant of credit availability over the coming quarter.”
Data from the central bank yesterday showed mortgage approvals were little changed in November, underlining the fragility of the housing market. The Bank of England’s Financial Policy Committee said in December that risks to U.K. financial stability from the euro-area debt crisis have increased and “stronger action” is needed to make banks more resilient to potential shocks.
“Although lenders expected a small increase in overall credit availability in the coming three months, factors such as the economic outlook and tighter wholesale funding conditions were expected to impact negatively on credit availability,” the Bank of England said today.
Mortgage Terms
The survey also showed that mortgage demand (UKMSVTVX) fell in the fourth quarter and banks expect a further decline in the current three months. Demand for loans from small companies will probably drop in the first quarter after it fell “sharply” in the fourth quarter. For large and medium-sized companies, loan demand will also probably decline in the current quarter, the central bank survey said.
On mortgages, lenders expected credit-scoring criteria to be tightened in the current quarter, reducing the proportion of loan applications being approved. Some banks have “revised down expectations for households’ disposable incomes and hence the affordability of taking out new secured loans,” the survey said.
The FPC said last month that while the impact on the cost of loans had so far been “relatively muted,” if funding stresses persist “credit conditions could be expected to tighten materially in 2012.”
Credit Demand
A gauge of demand for mortgages fell to minus 21.2 in the fourth quarter from 15.3 in the previous three months, the Bank of England said. The expectations index for the first quarter was minus 6.8. A measure of mortgage availability fell to 1.9 in the fourth quarter from 8.4.
For companies, the index of credit availability rose to 11 in the fourth quarter from 3.9. The first-quarter measure was 8.1. Demand for loans from medium-sized companies was at minus 1.6 in the fourth quarter and minus 9.2 for the current quarter. Demand among large companies was 1.5 in the fourth quarter and minus 5.2 in the first three months of 2012.
The BOE survey was taken among U.K. lenders between Nov. 22 and Dec. 13. It also showed that an index of default rates on mortgages fell to minus 24.4 from minus 12.3. A gauge of losses from defaults rose to 14.6 from minus 0.8. The expectations index on losses for the next three months was at 9.7.
