Specifically, it discusses credit crunch origins with close reference to the automotive industry in the United Kingdom showing its impacts on the industry.
Credit crunch, otherwise known as credit crisis, finance crunch or credit squeeze refers to an abrupt decrease in the general availability of credit or loans or a drastic increase in the banks’ and other lenders’ rate of lending with the aim of reducing their risks. In other words, credit crunch is a time of mild recession characterised by fewer liquid assets, slow growth of debt and money being tied up in debt and being not instantly available. It involves a fall of credit availability independent of an increase in official interest rates and a tightening of the conditions necessary to obtain loans from lenders. A clear relationship between credit availability and interest rates ceases to exist. A credit crunch is often followed by investors’ and lenders’ flight to quality as they search for investments that are less risky. This is usually at the expense of enterprises that are medium to small in size (see Cooper 2008).
A credit crunch arises when there is a continued period of inappropriate and careless lending resulting in investors and lending institutions incurring losses and being in debt once the borrowers default the loans and the full extent of bad debts is realised. Consequently, the lending institutions may reduce credit availability and increase credit accessibility cost by increasing interest rates. At times, they may be incapable of further lending however much they may wish due to previous losses. Cooper (2008) further points out that generally credit crunch is caused by a decrease in market prices of assets that have been previously over inflated.
The credit crunch origins can be traced back to the huge and unstable United State sub prime mortgage markets problems that arose in the period between year 2004 and 2006. A number of banks in the