ECB rate hikes see corporate loans drop to record low

"The decrease was again substantially stronger than expected by banks," the ECB reported, in a sign that the steepest interest rate hikes in the bank's history is slowing down economic activity in the 20-country eurozone.

By reducing lending, the ECB hopes to return to its two percent inflation rate target without derailing the economy.

But the survey "does not provide an optimistic view," Bart Colijn, a senior economist at the ING bank, wrote in a press release following the publication of the survey.

Perceived risk is pushing banks to reduce lending across the board. Loans to small and medium-sized businesses have especially fallen off and are now lower than during the depths of the 2008 financial crisis. Figures are only slightly better for large firms.

Eurozone banks also reported a significant drop in residential and commercial real estate loans, of minus 41 and 42 percent respectively, and a further decline is expected later in the year.

Furthermore, borrowing costs are expected to rise further later this week as the ECB is posed to raise its main interest rate by another 0.25 points, to 3.75 percent on Thursday.

Banks also said their stock of bad non-performing loans pushed them to lend less.

In a May report, the EU Court of Auditors criticised the ECB for insufficiently pushing commercial banks to reduce bad loans.

But on Thursday, the ECB reported that the higher perceived risk caused banks to lend less and does not signify an increase in defaults.

Climate Risk

The ECB survey also included climate risk impact on lending for the first time.

Over the past twelve months, banks were less likely to lend to polluting 'brown' companies due to perceived climate risk exposure, while credit standards and terms and conditions on loans were less stringent for green companies.

Eurozone banks also indicated that demand for loans was up for green firms, while it had fallen for polluting firms.