What is the Credit Crunch?

What is the credit crunch? Most of us have heard the expression "Credit Crunch", but may not understand what exactly it is. It basically means that finance such as loans and mortgages are not as readily available as they were and when banks do lend they are charging more for the privilege.

There are a number of reasons why banks may suddenly increase the costs of borrowing or make borrowing more difficult. This may be due to an anticipated decline in value of the collateral used by the banks when issuing loans, or even an increased perception of risk regarding the solvency of other banks within the banking system. Monetary conditions (for example, where the central bank suddenly and unexpectedly raises interest rates or reserve requirements) may result in a credit crunch.

Why has this credit crunch happened?
Anxiety in the world financial market at the moment is mainly as a result of what has happened in America, (most of the UK Lenders receive thier funds from Americam banks). Property values in America have fallen greatly, so there is not enough equity in property. the banks and lending institutions do not have any equity that they can claw back their investment. As such they are all very nervous about lending too much more money unless the odds are stacked highly in their favour.

• A credit crunch is generally caused by a reduction in the market prices of previously "overinflated" assets and refers to the financial crisis that results from the price collapse.
  
• Billions of pounds, euros and dollars have been wiped off the value of listed companies across Europe and the US.
• A credit crunch is generally caused by a reduction in the market prices of previously "overinflated" assets and refers to the financial crisis that results from the price collapse.
• A shortage of available loans. In well-functioning markets, would usually result in a rise in interest rates, but in practice it often means that some borrowers cannot get loans at all, a situation of credit rationing.
• A few months ago, the credit markets started to get worried about the fall-out from the sub-prime market in the US. Most of these sub-prime loans are packaged up and then sold on (in order remove them from their balance sheets) as structured products to financial institutions such as banks, insurers and hedge funds.
• US, interest rates are rising, house prices are falling and people can't refinance as quickly as first thought. If sub-prime markets are doing so badly then who in their right mind wants to buy structured products of any type.
• The panic in world financial markets has led to sharp falls in share prices and has led to the contraction of credit markets.