Credit crunch - Financial definition
Concise definition of the term credit crunch
A credit crunch is a severe shortage of money or credit, causing financial institutions to reduce lending. This results in a significant decline in the availability of loans and credit to consumers and businesses.
Comprehensive definition of the term credit crunch
A credit crunch, often triggered by economic shocks or financial crises, leads to tightened credit conditions as banks become wary of lending due to heightened default risks and deteriorating asset values. This contraction in credit supply can slow economic growth, as businesses struggle to secure financing for operations and expansion, and consumers find it difficult to obtain loans for mortgages, cars, or other expenses.
For instance, the 2007-2008 financial crisis saw a major credit crunch where interbank lending froze, leading to widespread bankruptcies and a global economic downturn. Central banks and governments often respond with monetary easing and fiscal stimulus to restore confidence and liquidity in the financial system.