Bank Lending to Euro Area Firms - What Have Been the Main Drivers During the COVID-19 Pandemic?

The coronavirus (COVID-19) pandemic had a strong impact on firms’ business plans and financing needs. In view of the importance of bank borrowing as a source of financing for euro area non-financial firms, the banking sector has played a key role in facilitating the flow of credit to the corporate sector during the COVID-19 pandemic. This role has been crucially supported by the sizeable support measures by monetary, fiscal and supervisory authorities, which have so far acted as a backstop against the risk of an adverse feedback loop between the real and financial sectors. This article discusses the main drivers of bank lending to euro area firms during the pandemic. Understanding the relative role of credit supply and demand forces as well as the impact of the various policy measures is crucial for policy makers in order to draw appropriate conclusions with respect to the effectiveness of the implemented measures and the possible need for further action. Against this background, the article first focuses on the early stages of the pandemic, when acute emergency liquidity needs arising from the lockdown measures were satisfied by bank borrowing at very favourable conditions. Then, it examines bank lending dynamics in the second phase of the pandemic, which was characterised by abating liquidity needs, a continuation of the policy support measures, but also by the emergence of pressures on bank intermediation due to intensifying concerns about the deterioration of borrowers’ creditworthiness. The article concludes by highlighting some of the risks to banks’ credit intermediation capacity in the near future.