A reduction in the availability of loans accompanied by an increase in the severity of the conditions required to be granted credit. There are several reasons why a credit crunch may occur. It may be due to tighter monetary policy that reduces ‘liquidity in the banking system or the direct imposition of credit control. Alternatively, banks may expect future losses on existing loans and so ration credit to avoid further exposure, or suffer a loss of confidence in the solvency of the banking system. A credit crunch followed the 2008 financial crisis.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|