Euro zone banks tighten credit access on war fears

FRANKFURT, July 21 (Reuters) - Euro zone banks tightened access to credit in the second quarter over geopolitical instability fears, and they expect further tightening in the current quarter, the European Central Bank's quarterly Bank Lending Survey showed on Tuesday.

The survey, a key input in policy deliberations, also indicates that while business loan demand increased, lenders rejected a larger share of applications, and credit standards tightened most in sectors such as the car industry and energy-intensive manufacturing, the ECB said.

The survey results are largely consistent with the ECB's long-held view that the Iran war will be a small drag on economic growth as the 21-nation euro zone is a large energy exporter and any surge in oil prices weighs on consumption and dents manufacturing profits.

"Perceived risks to the economic outlook and banks' lower risk tolerance remained the main factors contributing to the tightening, as banks remain highly attentive to risks related to geopolitical and energy developments," the ECB said. 

"For the third quarter of 2026, banks expect credit standards to tighten further across all loan categories," the ECB said, based on a survey of the bloc's 159 largest banks. 

The ECB is almost certain to keep interest rates unchanged later this week, partly because economic growth is weak, but a hike in September remains most ECB watchers' base case as the energy surge induced by the Iran war has lifted inflation to around 3%, far above the ECB's 2% target.

For housing loans, demand already fell sharply in the second quarter and banks project a further decline, the ECB added.

(Reporting by Balazs Koranyi, Editing by Timothy Heritage)