Euro area banks tightened lending standards for businesses and consumer credit in the third quarter of 2026, while demand for business and housing loans fell, as higher interest rates, geopolitical uncertainty and weaker confidence weighed on borrowing, according to the European Central Bank’s (ECB) latest bank lending survey.

The ECB’s October survey also found that banks faced worsening access to several funding sources, while the impact of digital assets on their business strategies was expected to become increasingly positive over the next 12 months.

Credit standards for business loans tightened further, with a net 9 per cent of banks reporting stricter approval criteria in the third quarter, exceeding the 5 per cent that had expected a tightening in the previous survey round.

Banks attributed the stricter standards mainly to heightened perceptions of risk and reduced tolerance for risk, with some also pointing to growing pressure from geopolitical uncertainty and developments in energy markets.

For loans to households for house purchases, credit standards remained unchanged, with a net balance of 0 per cent of banks reporting a change, while consumer credit and other household lending faced further tightening, reported by a net 14 per cent of banks.

The tightening in consumer credit exceeded banks’ expectations, largely because of increased risk perceptions and lower risk tolerance.

Looking ahead, banks expect credit standards to tighten further for businesses in the fourth quarter of 2026, with a more pronounced tightening anticipated for both housing loans and consumer credit.

The actual terms and conditions agreed in loan contracts also became stricter across all lending categories, mainly because of higher interest rates.

Banks additionally reported a net increase in the share of rejected loan applications across all borrower groups, with the rise more pronounced for consumer credit than for business loans and housing loans.

The survey also examined how banks are adapting their lending practices to the growing use of artificial intelligence (AI) by businesses.

Most banks said they had not yet introduced specific quantitative criteria into their credit standards to assess lending linked to AI adoption or development.

A small number reported that AI adoption and its associated risks were increasingly being considered in qualitative assessments of borrowers, with information technology companies attracting the closest scrutiny.

On the demand side, banks reported a net 6 per cent decline in demand for business loans and credit lines, reversing expectations of a 4 per cent increase in the previous survey and following a net 3 per cent increase in the second quarter.

The general level of interest rates was the main factor reducing demand, while weaker demand for fixed investment among small and medium-sized enterprises and a shift towards alternative sources of finance also played a smaller role.

Some banks said uncertainty surrounding geopolitical and energy developments continued to suppress business borrowing, although demand for inventories and working capital provided some upward pressure.

Banks also expect AI adoption to generate a gradual but sustained increase in demand for loans to finance digital infrastructure, particularly data centres.

They indicated that current and prospective AI-related lending was more likely to target infrastructure providers than software developers or companies adopting AI, with this focus expected to become more pronounced in the coming months.

Demand for housing loans fell sharply, with a net 27 per cent of banks reporting a decline in the third quarter, compared with 15 per cent in the previous quarter and expectations of a 12 per cent decrease.

Higher interest rates were the main reason for the decline, followed by falling consumer confidence and worsening prospects for the housing market.

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

Despite the substantial decline, demand for housing loans remained well below the peak recorded during the previous cycle of interest rate increases.

Demand for consumer credit and other household lending also declined, although more modestly, with a net 2 per cent of banks reporting a fall, contrary to expectations that demand would remain unchanged.

Higher interest rates and weaker consumer confidence were the main factors behind the decline, followed by subdued spending on durable goods.

For the fourth quarter, banks expect demand for housing loans to fall further, with a net 36 per cent anticipating a decline, while a net 14 per cent expect consumer credit demand to decrease.

Demand for business loans is expected to remain broadly unchanged, with a net 1 per cent of banks anticipating a decline.

The survey also found that banks’ access to funding deteriorated further in the third quarter, particularly for retail deposits, debt securities and money markets, while access to securitisation remained broadly unchanged.

The deterioration in access to retail funding was still moderate but represented the largest since the series began in 2011, slightly exceeding the previous peak recorded in the third quarter of 2023.

Both short-term and long-term retail funding contributed to the deterioration, and banks expect access to worsen further across all funding sources over the next 3 months.

The ECB’s reduction of its monetary policy asset portfolio had a mildly negative impact on banks’ market financing conditions and liquidity positions over the previous 12 months, while prompting them to increase their holdings of euro area government bonds.

The impact on profitability was slightly positive, as higher net interest income was partly offset by small capital losses.

Banks expect these effects to continue over the next 12 months, while also anticipating a further tightening effect on lending conditions across all loan categories.

Non-performing loan ratios and other credit quality indicators also contributed to tighter credit standards for business loans, housing loans and consumer credit in the third quarter, mainly because banks perceived greater risks.

For the fourth quarter, banks expect credit quality developments to continue tightening standards for business lending and consumer credit.

In a new question on digital assets, banks reported that these had contributed slightly positively to their business strategies over the previous 12 months, while their impact on the broader financial situation had been neutral.

Over the coming year, banks expect digital assets to have an increasingly positive influence on their business strategies but a negative impact on their retail funding business.

Digital assets had a neutral effect on credit standards over the previous 12 months, and banks expect them to contribute to an easing of standards for housing loans during the next 12 months.

The quarterly Bank Lending Survey was developed by the Eurosystem to improve its understanding of bank lending behaviour across the euro area.

The October 2026 survey was conducted between September 21 and October 6, covering changes during the third quarter and expectations for the fourth quarter unless otherwise indicated.

A total of 159 banks took part, with a response rate of 100 per cent, the ECB reported.