Irish banks expect demand for home, consumer and business loans to fall further, and lending criteria to continue to tighten in the first three months of this year due to the credit crunch, according to a survey by the European Central Bank (ECB).
Banks reported a fall in demand for mortgages and consumer loans, and a tightening in credit conditions on all loans, the survey found.
The lending criteria on business loans tightened during the final three months of 2007 and banks expect even tighter conditions in the first quarter of 2008 due to the higher cost of funds in the international money markets.
The survey found that the credit crisis had reduced competition in retail banking. Banks reported a tightening in the size of business loans and collateral requirements. Bank of Ireland and ICS Building Society yesterday became the latest lenders to announce the raising rates on some of their mortgages.
The financial turmoil has increased the cost at which banks borrow money from each other in the wholesale markets. This higher cost has been passed on to customers in the form of higher rates on bank loans and mortgages. The standard variable rate at Bank of Ireland and ICS will rise by 0.1 of a percentage point to 5.44 per cent from Tuesday next. Tracker rates will climb by 0.1 - 0.25 of a percentage point.
According to the ECB survey, demand for short-term business loans worsened in the final quarter of 2007 and was lower among Irish banks than their European counterparts.
Permanent TSB, Ulster Bank, First Active and AIB have already increased rates on some of their mortgages. The higher rates are reflected in the survey which shows lower demand for loans and a tightening of conditions.
Ulster Bank chief economist Pat McArdle said: "Things are more static on the availability of credit in Ireland. It is not just that the banks have stopped lending - it is that people have stopped borrowing." He expected banks to offer more favourable terms to stimulate borrowing.
The survey of 89 financial institutions found European banks will make it harder for companies and consumers to get loans in the next three months. This will weaken the case for further interest rate increases, as banks expect "difficult" funding conditions to continue.
The three-month Euribor rate at which banks borrow money from one another fell again yesterday, to close at 4.41 per cent - down from a seven-year high of 4.95 per cent on December 12th. Wholesale funding costs have continued to ease after the ECB injected a record €348.6 billion to end a logjam in the money markets. The ECB left its main rate unchanged at 4 per cent last week on concerns that the US subprime loans crisis would drive Europe into a recession.
The bank has refused to follow the US Federal Reserve and the Bank of England in cutting rates, despite inflation, which the ECB aims to keep below 2 per cent, remaining at around 3 per cent in the euro zone.
