Drivers of firms’ loan demand in the euro area – what has changed during the COVID-19 pandemic?

Qualitative indications from banks on firms’ loan demand and actual loan growth generally correlate with developments in real economic variables. However, during the coronavirus (COVID-19) pandemic, longer-term lending seems to have decoupled from developments in fixed investment. Owing in part to sizeable monetary and fiscal policy support measures, firms’ demand for longer-term loans has increased, while their financing need for fixed investment has declined. By contrast, developments in short-term loans for firms continue to co-move closely with their loan demand for working capital, owing to their acute liquidity needs during the pandemic. Loan demand increased more strongly for small and medium-sized enterprises (SMEs) than for large firms in the second quarter of 2020, benefiting substantially from the policy support measures for bank lending during the pandemic. Developments across economic sectors have been heterogeneous during the pandemic. In the sectors most affected by the crisis, demand for bank loans increased considerably, while value added dropped. The decline in gross value added in the manufacturing sector is particularly relevant in explaining the fall in business investment during the pandemic. While some degree of recovery in investment activity is expected in the second half of 2020, the end of fiscal support schemes in some countries may lead to renewed fears about the creditworthiness of borrowers. Overall, the continuation of a supportive policy environment in the near future will be crucial in preserving favourable financing conditions and facilitating the flow of credit to firms. JEL Classification: E2, E22, E32, E44, E5, E52, G21