Credit Crisis

What Does Credit Crisis Mean?
A crisis that occurs when several financial institutions issue or are sold high-risk loans that start to default. As borrowers default on their loans, the financial institutions that issued the loans stop receiving payments. This is followed by a period in which financial institutions redefine the riskiness of borrowers, making it difficult for debtors to find creditors.

Investopedia explains Credit Crisis
In the case of a credit crisis, banks either do not charge enough interest on loans or pay too much for the securitized loan, or the rating system does not rate the risk of the loans correctly. A crisis occurs when several factors combine in the marketplace, affecting a large number of investors.

For example, banks will charge teaser rates on loans, but when the initial low payments change, they become too high for borrowers to pay. The borrowers default on the loans, and the loan's collateral value simultaneously drops. If enough lending institutions reduce the number of new loans issued, the economy will slow down, making it even harder for other borrowers to pay their loans.

Related Terms

American Recovery And Reinvestment Act
Credit Risk
Credit Worthiness
Economic Depreciation
Financial Stability Plan - FSP
Mortgage-Backed Securities - MBS
Public-Private Investment Program - PPIP
Subprime Credit
Subprime Lender
Troubled Asset Relief Program - TARP
More Related Terms

Related Links

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From Booms To Bailouts: The Banking Crisis Of The 1980s - The economic environment of the late 1970s and early 1980s created the perfect storm for a banking crisis.

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