There was considerable cross-country heterogeneity in this case too, with net redemptions taking place mainly in certain countries and loans to non-financial corporations continuing to grow in others. The worrisome picture of monetary developments was confirmed by the results of the Bank Lending Survey for the fourth quarter of 2011. Euro area banks tightened credit standards compared with the previous quarter for both loans to non-financial corporations and loans to households, and to a lesser extent for loans for consumer credit. Furthermore, survey participants expected a further tightening of credit standards in the first quarter of 2012. Even  BIS central bankers’ speeches  1  if the tightening was slower than during the 2007–2008 financial turmoil, it was starting from considerably tighter credit standards. Although it is always tricky to disentangle supply-side from demand-side factors, banks explained their changes in credit standards mainly by primarily referring to increased funding costs and balance sheet constraints, which were compounded by a rapidly deteriorating economic environment. The funding situation of euro area credit institutions worsened noticeably in the second half of 2011, as shown by the rise in withdrawals of deposits held by non-euro area residents with euro area banks and difficulties in issuing longer-term debt securities. This caused banks to make greater recourse to Eurosystem operations.
Yields of shorter-term notes and bills have declined, with two-year government bond yields of Italy, Ireland and Portugal declining by over 400 bps since 8 December 2011. Longer-term government yields have declined as well, although not to the same extent as shorter-term yields (Slide 7). The positive secondary market developments were accompanied by favourable primary market activity with sustained demand in auctions of T-bills and shorter bonds in several euro area countries. All in all, there is now strong preliminary evidence that the three-year LTROs have helped the banks to reduce liquidity risk and therefore allowed them to smooth the deleveraging process over a longer period of time and maintain exposures to SMEs – at least in some cases. Anecdotal evidence also points to the return of some institutional money market investors, with quite a number of banks reporting that funds (also unsecured) are becoming available again at somewhat longer maturities. While banks seem to have used the funds obtained from the first three-year LTRO mainly for refinancing purposes, when looking forward to the next six months, they now seem to expect a stronger use of these funds for granting loans. Whether these expectations will materialise remains an open question and the Governing Council will closely monitor these developments. Challenges ahead A side effect of the three-year LTROs is that the banking system in the euro area is now in a situation of abundant excess liquidity.