Essay on Some Causes of the Credit Crunch

Essay on Some Causes of the Credit Crunch

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Credit crunch is a normal phenomenon. Every economy faces it. It is a situation where “there is reduction is the availability of loans in the market in spite of the increase in interest rates”. (Turner, 2008) This results in a mismatch. It is a situation where “the interest rates don’t match with the credit availability as a result the relationship gets hampered”. (Turner, 2008) It is a situation which happens during recession. It is important to find out the reasons. Some of the reasons for it are
• Decrease in bank capital: After a recession situation banks are not able to match the demand. The demand for loans rises. During the recession period banks incur loss. As a result they are not able to lend in the same way. So, when the demand peaks, banks are not able to generate it. This causes deficiency. It gives arise to a situation where “not only does the bank’s capital fall but the minimum capital standards also rises”. (Clair & Tucker, 1993) This reduces the money. As a result a credit crunch like situation arises.
• Mismanagement of risk: Not proper management of “risk results in credit crunch due to the inter-connection relation between business activities and management”. (Priddy, 2008) This results in risk. As a result, there is not “proper reporting of risk and financial transaction”. (Priddy, 2008) It results in non clarity. As a result the situation leads to crisis.
• Lack of training: Not able to “understand the business model leads to poor management” (Priddy, 2008) as a result there is a problem. This leads to taking wrong decision. Organisations continuously face it. This results in over estimating the market. So, organisations run out of money. This spreads and the entire economy is engulfed in it.
• Human Weak...

... middle of paper ...

...t. It is important that new policies are drafted. It is important that government take necessary steps. This will help to face when such a situation arises in the future.
It is important that such situation is dealt cautiously. Policies need to be developed to deal with it and steps taken to come out of credit crunch.

Works Cited
Andrew L, 2008, “Causes of credit crunch”, Financial Express, India

Bell a, Brooks C & Moore T, 2009, “The credit crunch: consequences, causes and aftermath”, University of Reading, Henley School Business

Clair R & Tucker P, 1993, “six causes of credit crunch”, Federal Reserve Bank of Dallas, Economic Review, 3rd Quarter

Priddy S, 2008, “Climbing out of the credit crunch”, Association of Chartered Certified Accountants, Policy Paper, India

Turner G, 2008, “The credit crunch: housing bubble and economic crisis”, Pluto press, UK

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