EU BANKS MARGINS AND CREDIT STANDARDS December 2000

Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. 3 Contents Executive summary 5 Introduction 7 1 Banks' margin developments 7 1.1 Main observations 13 1.2 Factors affecting banks' margins 14 1.3 Conclusion of the section 17 2 Reasons for changes in the competitive environment 18 2.1 New entries into banking 18 2.2 Other structural developments 21 2.3 Cyclical considerations 21 2.4 Conclusion of the section 22 3 Assessment of banks' lending standards 22 3.1 Evolution of risk measurement and pricing tools 23 3.2 Supervisory measures 24 4 Sustainability of margin development 26 4.1 Impact on the total spread 26 4.2 Conditions for sustainability 27 References 29 ANNEX I 30 ECB EU banks' margins and credit standards • December 2000 1 In accordance with Community practice, the EU countries are listed in alphabetical order, as indicated by the country names in the national languages. ECB EU banks' margins and credit standards • December 2000 5 Executive summary The Banking Supervision Committee – in the context of the Eurosystem's task of contributing to the smooth conduct of national policies on prudential supervision and financial stability – carried out an assessment of EU banks' margins on lending and deposit taking, and of their credit standards. The reasons for embarking on this study were, first, the fact that EU banks' margins have fallen significantly since 1997 on their new lending and, second, the fact that bank managers might have had incentives to expand businesses in order to maintain or improve profitability. In this environment an important question is whether banks are maintaining sound lending standards in a sufficiently forward-looking manner or whether they may be basing their decisions too much on the currently prevailing economic and asset price conditions. The main findings of the report are as follows: First, the analysis indicates that many factors other than changes in competition can affect the development of banks' margins. However, it appears that there are good reasons to argue that, for a significant part, the narrowing of banks' lending margins is indeed attributable to the ongoing tightening of pricing conditions owing to competition. It should be noted, however, that this conclusion is not so clear-cut for all countries. The narrowing of lending margins has affected banks' interest revenues, but the widening of the margins on the deposits …