Irish banks said access to wholesale funding may deteriorate in the third quarter, according to the Central Bank, citing the euro region's lending survey.
"Participating institutions report that access to wholesale funding markets deteriorated across the maturity spectrum during the second quarter of 2010 with the exception of the market for credit risk transfer," the bank said.
"During the third quarter of 2010, access to these markets is expected to deteriorate further or remain unchanged."
The survey, which questioned the five Irish banks, said credit standards for loans to enterprises were unchanged but loan margins rose and terms and conditions became more restrictive.
Demand for loans from businesses fell in the second quarter, with banks noting lower levels of fixed investment and a decline in mergers and acquisitions activity.
Lending to firms is seen as crucial to economic health.
Consumers also felt the pinch during the three month period, with credit standards for mortgages tightening during the second quarter of 2010. They were unchanged for consumer credit and other lending to households.
The survey found loan margins increased in both categories, and mortgages showed reduced loan maturity.
Banks said demand for mortgages and other consumer loans were down during the quarter, which the Central Bank attributed to the declining housing market, falling consumer confidence and reduced spending.
In the wider euro zone, banks said they expect to continue to toughen lending rules in the third quarter.
But analysts pointed to the timing of the survey as an important factor and warned against over-interpreting the sentiment at the height of the sovereign credit crisis, which has eased since.
Two key German surveys also showed fears that tight credit conditions could hamper recovery in Europe's largest economy were fading, with companies reporting easier access to loans and banks expecting lending to rise.
The ECB's quarterly bank lending survey showed that a net 5 per cent of banks expect to stiffen lending rules for firms between July and September, after a far greater than originally expected 11 per cent did so in the second quarter.
Demand, however, is expected to pick up in the coming months, suggesting the potential for a credit crunch as firms battle to get access to the capital they need to fund investment and the economic recovery.
"The factors contributing to the reinforced net tightening of loans to enterprises relate to the deterioration of banks' own balance sheet situation, particularly as regards their liquidity position and access to wholesale funding," the ECB survey said.
"The negative spillover effects from the sovereign debt crisis appear to have worsened banks' ability to obtain funding."
Analysts said recent debt market woes that have hit Greece and other highly indebted euro zone countries were a key factor in the downbeat tone of the survey.
But there has been some evidence of those tensions easing, with Spain's cost of borrowing falling at a tender this week and optimism over the recovery suggesting banks balance sheets may be weighed down by fewer defaults than earlier expected.
"This (survey) is of course disappointing taken that banks were clearly expecting a normalisation of credit standards in the last bank lending survey and that did not happen," said Deutsche Bank economist Gilles Moec.
"I would not be too pessimistic though. In my view it is kind of a knee-jerk reaction to the difficulties in the market in June."
On a net basis, 29 per cent of the 120 banks surveyed between June 14th and July 2nd expected loan demand from firms to increase in the next three months, particularly among small and medium-sized companies.
Additional reporting: Bloomberg, Reuters