The formation of the credit crunch and a significant impact

The credit crunch means the financial institutions to improve lending standards for business loans, and the loans higher than the level of market interest rate conditions, even reluctant to issue loans, that is resulting in the decline in credit growth, and the social reproduction of capital needs are not met. Lead to the causes of the credit crunch, including external and internal reasons.

The caused by the direct cause of the U.S. subprime mortgage market turmoil, that U.S. interest rates rise and the housing market continued to decline. The subprime mortgage refers to a number of lending institutions provided loans to poor credit rating and income borrowers. However, due to rising interest rates, leading to increased repayment pressure, would have bad credit users feel the pressure of repayment, the event of default may impact on the recovery of bank loans crisis. And the credit crunch affects only Banks?

It is clear that bankruptcy due to subprime mortgage lending institutions, investment funds forced to shut down, stock market volatility caused by the storm. It resulted in major financial markets around looming lack of liquidity crisis. Moreover, the credit crunch is an American Problem? U.S. "subprime crisis" is gradually emerging from the spring of 2006, that sweeping the U.S., EU and Japan, the world's major financial markets in August 2007.

In addition, the credit crunch is a general phenomenon, rather than individual phenomenon. The small businesses are unaffected by the credit crunch? Regarding to Ding et al, (2004) also explained that credit crunch is widespread, and its negative impact particularly affects small banks and enterprises.

As the credit crunch, the funds obtained through the banking system tend to decreased, that more impact on SMEs (small and medium enterprises) by credit constraints. This is because the low level of SMEs credit, and the lack of alternative sources of financing other than banks. The SMEs credit rating is lower than the generally large enterprises, that financial institutions to improve lending standards to SMEs excluded. On other hand, compared with large enterprises, the SMEs through less equity financing or bonds issued to obtain funds. Once formed of the credit crunch, the real economy sector that lack of funds may cause economic activity cyclical "break". In particular, the continuing credit crunch will cause severe economic recession.

At present, according to Wigglesworth (2012) reported that “largest companies are mostly in fine fettle after cutting back on borrowing, trimming workforces and hoarding cash since the financial crisis. Many financial metrics of corporate health are at their strongest levels in decades.” But smaller companies in many countries still face a testing decade, as many banks in developed markets seek to shrink their loan books due to market pressures and regulatory changes, even as a wall of loan and bond repayments looms (Wigglesworth, 2012).

In addition, a recent BBC new (2012) pointed out a real debt of UK, which reflects why the financial crisis, and why has the recovery been so slow?  As this question, that many people have may blame the banks, which are banks made ​​mistakes. It is truth?

As Broadbent a member of the Monetary Policy Committee has argued that really fault tie to household for running up so much debt. And his also explained debt is indeed a large part of what caused the crisis, and a large part of the explanation for Britain's historically feeble recovery (BBC news 2012). There are can be seen in the right chart, that about the massive increase in UK household debt in the years before the bust, that it is the slow process of unwinding Britain's massive debts - public and private.

Furthermore, Broadbent has provide the another chart shows how much slower this recovery has been, in Britain and other parts of Europe than the long-term average, which includes other times when the government has tightened fiscal policy early on. As he points out, the chart showing the rise of household debt is usually accompanied by another one, adding all the debts of the UK private sector together, showing how Britain is the "most indebted country in the world" (BBC news 2012).


On other hand, There are by common view of it's true that losses in the UK financial system played a big part in the UK's crisis. But someone is disagreed with Broadbent, and argued that Households, as a group, have a lot of debt. But they also have a lot of assets - in fact, a lot more. (See right chart). And Households' total wealth, including housing, was worth eight-time annual disposable income at the end of 2010. That's above the 25-year average, despite everything that happened in 2008-10 (BBC news 2012). There are increase in UK households debt will bring any effect on the Britain's economic crisis recovery?