Via The ECB:

The decline was again substantially stronger than expected by banks in the previous quarter. The net decrease in loan demand was the strongest since the start of the survey in 2003 for SMEs (net percentage of -40%, see Chart 7), while the net decrease in demand for loans to large firms (net percentage of -34%) remained slightly more limited than during the global financial crisis. In addition, the net decrease in demand was the strongest over the history of the survey for long-term loans (-46%), while demand for short-term loans decreased to a lesser extent (-22%) but still close to the historical low of the global financial crisis.

Rising interest rates and declining fixed investment remained the main drivers of the net decrease in loan demand (see Chart 6). Lower financing needs for M&A activity (included in "other financing needs"), available internal funding with improved corporate profits, and, to a smaller extent, debt securities issuance (included in "use of alternative finance") contributed to firms' reduced loan demand. There was also a small dampening impact on loan demand from inventories and working capital.

While the percentage of banks reporting tighter credit standards was smaller than in the previous quarter, it remained above the survey's historical average and came on top of already substantial tightening, the central bank said.

Demand for mortgages also dropped sharply, though not as much as the "very large" decrease in the previous two quarters, but a further moderate drop is likely during the third quarter, the ECB added.

Banks said that their stock of non-performing loans (NPL) also pushed them to tighten credit standards.

While NPL ratios have not changed substantially, banks' perception of refinancing and repayment risk increased, the ECB added.

Banks expect to continue tightening credit standards this quarter.