As the slump deepened, servicing credit then became more difficult for firms and households with outstanding loans, pushing higher numbers of borrowers into delinquency. The loop then returned back to the beginning, as banks’ original increase in lending rates was validated ex post. Starting in the summer of 2014, however, our measures began to increase competitive pressures on banks to reduce lending margins.
The Comprehensive Assessment meant that more banks were in a position to benefit from low funding costs and lend, while the Targeted Long Term Refinancing Operations (TLTRO) gave them stronger incentives to do so. Bank credit therefore became more affordable, which in turn stoked higher credit demand. And as that has fed through into a better macro picture, loan delinquencies have fallen.