A credit crunch is a period in the economy, distinct from a recession or depression, but potentially heralding one or the other.
‘The credit crunch’ is widely used to explain the financial services catastrophes created by the collapse of the sub-prime mortgage lending market in America in 2007, but a credit crunch can apply to any period in which credit is squeezed. Credit, including mortgage loans, personal loans, car finance, credit cards and any other type of lending become much harder to obtain in a credit crunch.
This can be due to fears or actual restrictions on wholesale funding – the money used by banks when providing loans. Tighter credit can be caused by much higher than expected interest rates.
Furthermore, governments may impose stern credit controls or prevent mortgage lenders from engaging in their business. All of the above constitutes a credit crunch. During a credit crunch, consumers may find it increasingly difficult to get any kind of loan, and they may also find that their debt becomes increasingly more expensive and hard to manage.
The credit crunch affects consumers and financial services businesses, making mortgage lending less profitable and harder to access. The 2007/2008 credit crunch has completely changed the face of the global economy, with hundreds of business (including some of the foremost financial services companies in the world) on the brink of collapse.
Companies such as Lehman Brothers, once considered one of the most powerful investment banks in the world, have filed for bankruptcy.
Countless other companies have been nationalised. Governments, including the UK government, have had to expend billions to restore liquidity to troubled economies.