ECB's Q2 2026 Credit Terms Report: Uncovering Market Tensions and Liquidity Stress

The ECB's June 2026 SESFOD survey results reveal heightened market volatility from March to May 2026. Escalating conflict in the Middle East triggered an oil supply shock, driving commodity prices sharply higher. This weighed on risk sentiment in March, while markets recovered strongly in April and May. Against this backdrop, credit terms proved broadly resilient, with survey respondents reporting that overall terms had eased slightly for all counterparty types for a second consecutive quarter. The easing was entirely due to price terms, as non-price terms remained basically unchanged across the board. Looking ahead, respondents expected credit terms to remain basically unchanged from June to August 2026, with only a very small net percentage expecting price terms to tighten somewhat for banks and dealers (Chart 1).

Credit Terms and Financing Markets' Transformation

■Overall credit terms: A slight easing was observed for all counterparty types in a second consecutive quarter, but this was entirely due to price terms.

■Financing rates: Financing rates/spreads rose across all collateral types, with significant increases reported for asset-backed securities (ABS) and high-yield corporate bonds, each showing a net 31% increase.

■Demand growth: Demand for funding grew across almost all collateral types, particularly for equity-secured funding, which saw a net 33% increase.

■Collateral markets' liquidity: Liquidity in collateral markets deteriorated slightly for equities, high-yield corporate bonds, and high-quality financial corporate bonds.

Frictions in OTC Markets

■Initial margin requirements: Initial margin requirements increased slightly for most derivative types, most notably interest rate derivatives.

■Liquidity and trading: Liquidity and trading deteriorated slightly for foreign exchange, equity, and commodity derivatives.

■Valuation disputes: The volume of valuation disputes rose across all derivative types, with significant increases for equity derivatives.

While markets have shown resilience to these conditions, the ECB's report highlights the intense stress financial markets faced following the conflict in the Middle East. Financing conditions have tightened, and liquidity issues have emerged. This situation requires careful monitoring for future market movements. Additionally, the frictions in OTC markets underscore the need for central banks to provide liquidity support.