The credit crisis is a major threat to the economy. It is a situation where the
availability of lending gets tightened due to the various activities. It will have an impact on
the short-term debt, long-term debt and the day to day operations of the bank. These
credit crises are popularly known a...
IMPACT OF CREDIT CRISIS ON FINANCIAL MARKET LIQUIDITY 1
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IMPACT OF CREDIT CRISIS ON FINANCIAL MARKET LIQUIDITY 2
Credit Crisis
, The credit crisis is a major threat to the economy. It is a situation where the
availability of lending gets tightened due to the various activities. It will have an impact on
the short-term debt, long-term debt and the day to day operations of the bank. These
credit crises are popularly known as the credit crunch, in this case, the amount that is
available for companies to obtain a loan for the commercial purposes gets tightened, and
there will be less supply of funds (FRBSF, 2012). On the other hand, there will be a
reduction in the amount of credit available for the retail customers, and it creates more
crunch to the money supply.
The credit crisis is mainly used for referring to the crisis that took place during
2007 and 2008 in the United States. The main reason for terming the great recession
as a credit crisis is that it has created a catastrophic effect on the entire economy of
the country and the rest of the world. Having an understanding of the reasons for
such a crisis is essential. The credit crisis is triggered when the event of
non-repayment of loan is increasing in the market. In other words, when the default
rate of the borrowers is increasing it is the initiation phase of the credit crisis, and it
is the primary reason for the 2007-08 crisis (FRBSF, 2012).
In the US, due to the housing bubble, many subprime loans were disbursed at
the higher rate of interest on the mortgage-backed securities and asset-backed
securities vehicles. These instruments were more famous and highly demanded in
the market by the investors as they were providing a higher rate of interest to the
people. Many investors invested in various tranches of these instruments (FRBSF,
2012). These instruments had various tranches with each tranche having their
identifying characteristics like the rate of interest, level of risk, repayment method,
etc. Based on the requirement and as per the risk tolerance level and amount of
investment that can be made by the institutions and individual investors investment
were made on these instruments.
IMPACT OF CREDIT CRISIS ON FINANCIAL MARKET LIQUIDITY 3
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