European Funding Gap: Structural Divergence in a Higher-for-Longer Rate Environment
(Q2 2025 – Q1 2026)

• The European funding gap widened materially between Q2 2025 and Q1 2026, driven by a transition from segmented credit conditions to a broad-based credit contraction.
• SMEs remained structurally disadvantaged throughout the cycle, facing higher borrowing costs, stricter collateral requirements, and reduced credit availability relative to large corporates.
• Early 2025 saw a temporary divergence in pricing, with large corporates benefiting from lower costs, but this reversed as macro conditions shifted toward a higher-rate regime.
• By late 2025, a synchronized increase in financing costs emerged, accompanied by declining loan demand and rising rejection rates across the euro area.
• Country-level dynamics highlight persistent fragmentation, with Spain, France, and Germany experiencing the most pronounced restrictions in lending conditions, while Italy remained relatively stable.
• Monetary policy transmission weakened significantly, as bank risk aversion, funding pressures, and geopolitical factors offset the impact of rate adjustments.
• Aluna Partners expects the funding gap to persist and structurally expand, with private credit and alternative financing playing an increasingly central role in corporate funding ecosystems.

1. Financing Cost Disparities: From Segmentation to System-Wide Repricing

Between the second quarter of 2025 and the first quarter of 2026, European corporate financing conditions evolved from a segmented environment into one defined by broad-based repricing of credit risk. This transition underscores the structural limitations of bank intermediation in a late-cycle macroeconomic context.

In Q2 2025, loan demand rebounded strongly, with applications rising by 23%. However, this increase masked a growing asymmetry in pricing. Large corporates experienced declining borrowing costs, while SMEs faced rising interest rates. This divergence reflected banks’ deliberate reallocation of capital toward lower-risk exposures, as institutions sought to optimize regulatory capital usage and reduce vulnerability to macroeconomic shocks.
From a geographical perspective, the market remains overwhelmingly domestic, with €215.8 billion in Italian receivables. International activity increased at a faster rate, though from a smaller base, rising 13.8% YoY to €72.8 billion, supported by EU trade integration and Italian exporters’ need for diversified funding lines.

The resulting dynamic created a dual-track credit system. Banks competed aggressively for high-quality corporate clients, compressing margins in that segment, while simultaneously imposing stricter pricing and conditions on SMEs. This divergence was further reinforced in Q3 2025, as pricing gaps widened and non-price terms—including collateral requirements and loan maturities—became increasingly restrictive.

A notable shift occurred as large corporates accumulated liquidity buffers, reducing their reliance on bank lending and weakening credit demand from higher-quality borrowers. This left banks with excess capacity, but without sufficient risk appetite to redeploy it effectively toward smaller firms.

The inflection point arrived in Q4 2025, when macroeconomic expectations shifted decisively. A growing consensus around persistent inflation and additional monetary tightening led to a system-wide increase in funding costs. The share of firms reporting rising interest rates increased sharply, signaling the transition from selective credit allocation to a generalized repricing of risk.

By Q1 2026, financing conditions had become uniformly more restrictive. While the relative disadvantage of SMEs remained embedded, large corporates increasingly faced higher borrowing costs and less favorable terms. This reflects a shift in the dominant driver of credit conditions—from borrower-specific risk differentiation to systemic funding pressures and macro uncertainty.

2. Country-Level Gaps: Fragmentation Across European Credit Markets

The European funding gap remains deeply influenced by national characteristics, including banking sector structure, capital markets development, and macroeconomic resilience. While aggregate euro area indicators point to a broad contraction in credit supply, national divergences remain pronounced.

At the euro area level, Q1 2026 marked a period of significant credit compression. Lending standards became more stringent, loan demand declined modestly, and rejection rates increased materially. These trends reflect a combination of higher funding costs, deteriorating economic sentiment, and a recalibration of bank risk tolerance.

Spain stands out as one of the most constrained markets, with banks adopting highly conservative lending practices driven by elevated risk perceptions. France similarly experienced a noticeable shift toward more restrictive credit conditions, largely influenced by declining risk appetite and concerns regarding borrower resilience.
Germany’s trajectory reflects both cyclical and structural factors. The slowdown in industrial activity and external demand contributed to a reassessment of credit risk, prompting banks to adopt more cautious lending practices. The tightening of terms in Germany was particularly evident in collateral requirements and pricing adjustments.

Italy remains an outlier, with relatively stable lending conditions throughout the period. This may indicate a more conservative starting point in credit risk exposure or a delayed response to broader European trends. Regardless, Italy’s divergence highlights the importance of baseline conditions in shaping the pace and severity of credit cycle adjustments.

The Netherlands and Finland, while not central to the deepest dislocations, demonstrated relative resilience. More developed financial ecosystems and greater access to capital markets helped mitigate the severity of bank-driven constraints, although pricing pressures remained evident.

Overall, the European funding gap reflects a combination of cyclical stress and structural fragmentation, with peripheral and bank-dependent economies experiencing the greatest constraints.

3. Spain, UK, France & Germany: A Multi-Speed Funding Cycle

A closer examination of Spain, the United Kingdom, France, and Germany provides a comprehensive view of how credit conditions evolved across major European economies, capturing both euro area and non-euro area dynamics.

In Q2 2025, all four economies experienced a recovery in credit demand, driven primarily by working capital needs and supply chain adjustments. Firms responded to geopolitical disruptions by reconfiguring operations, increasing their reliance on short-term financing instruments. However, the availability and pricing of credit diverged significantly depending on borrower profile and geography.

By Q3 2025, macroeconomic uncertainty intensified. Firms across Spain, France, and Germany reported deteriorating business conditions, leading to a reduction in growth expectations and a more cautious approach to borrowing. The decline in loan applications during this period reflects both reduced demand and increased discouragement due to perceived barriers to access.

The UK exhibited similar dynamics, though with additional sensitivity to Bank of England policy expectations and domestic inflation pressures. UK corporates increasingly prioritized liquidity preservation, aligning with broader European trends toward defensive balance sheet management.

In Q4 2025, the environment shifted decisively toward higher funding costs. Across all four economies, firms reported increased borrowing costs and a stronger preference for short-term financing solutions, particularly working capital and inventory financing. Trade finance demand rose significantly, reflecting both operational adjustments and the need to manage rising input costs.

Spain and France experienced particularly pronounced credit constraints, with banks imposing stricter conditions and reducing exposure to higher-risk segments. Germany followed a similar trajectory, driven by concerns over industrial performance and export demand. In contrast, the UK market reflected a combination of pricing pressures and selective credit availability, shaped by domestic monetary policy expectations.

By Q1 2026, credit conditions across these economies had become uniformly more restrictive. Loan demand declined as firms deferred investment decisions, while banks continued to impose stricter lending criteria. This convergence marks the transition from a multi-speed credit cycle to a synchronized phase characterized by reduced availability, higher costs, and elevated selectivity.

4. Bank Lending Constraints: Structural Limits to Monetary Transmission

One of the defining features of this period is the limited effectiveness of monetary policy in easing credit conditions. Despite periods of rate stabilization in 2025, access to financing remained constrained due to structural factors within the banking system.

Bank lending surveys indicate a sustained increase in the restrictiveness of credit standards over the past year. This shift has been driven primarily by declining risk tolerance and heightened concerns regarding borrower creditworthiness. As economic uncertainty increased, banks prioritized capital preservation over loan growth, leading to a contraction in credit supply.

Funding pressures further exacerbated this dynamic. Banks faced higher costs in accessing market-based financing, including securitizations and bond issuance. At the same time, expectations of rising non-performing loans led to more conservative underwriting practices.

Non-price terms became increasingly significant in shaping credit availability. Collateral requirements increased, covenant structures became more stringent, and loan maturities shortened. These adjustments reflect a broader shift toward defensive balance sheet management, as institutions sought to limit exposure to long-duration risks.

Geopolitical uncertainty added an additional layer of complexity. Supply chain disruptions, trade tensions, and regional realignments increased both the demand for financing and the perceived risk associated with lending. As a result, even when benchmark rates stabilized, the effective cost and availability of credit remained constrained.

This disconnect highlights a critical structural issue: monetary policy alone is insufficient to restore credit flow when banking sector behavior is dominated by risk aversion and balance sheet constraints.

5. Aluna Partners Outlook: Private Credit as a Structural Solution

Looking ahead, Aluna Partners expects the European funding gap to persist and potentially widen under a higher-for-longer interest rate scenario. The likelihood of additional rate increases by the European Central Bank and the Bank of England reinforces the expectation of sustained pressure on both borrowing costs and credit availability.

In this environment, banks are expected to maintain disciplined lending practices, characterized by selective credit allocation, elevated pricing, and continued emphasis on risk-adjusted returns. This will further limit access to traditional bank financing, particularly for SMEs and capital-intensive sectors.

At the same time, alternative financing channels are set to play an increasingly prominent role. Private credit markets are well positioned to absorb demand displaced by bank retrenchment, offering flexible solutions across working capital, trade finance, and long-term investment needs.

The growing use of structured instruments, including receivables financing and synthetic risk transfer mechanisms, reflects a broader transformation in the European financial ecosystem. These tools enable banks to manage balance sheet constraints while facilitating continued lending, albeit indirectly.

Aluna Partners views this evolution as structural rather than cyclical. The reallocation of credit intermediation from banks to non-bank financial institutions represents a fundamental shift that will shape the European financing landscape over the coming decade.

In this context, private credit is expected to transition from a complementary source of funding to a core pillar of corporate finance. Investors with the capability to originate, structure, and manage credit risk are likely to benefit from sustained demand and attractive risk-adjusted returns.