Credit Crisis

Filed Under » , ,
Dictionary Says

Definition of 'Credit Crisis'

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 Says

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 Definitions

  •

    Credit Risk

    The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a ...
    Read More »

  • Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a ...
    Read More »

  • Economic Depreciation

    A measure of the decrease in value of an asset over a specific period of time. This usually pertains to property such as real estate that can lose value due to indirect causes such as ...
    Read More »

    • Credit Worthiness

      An assessment of the likelihood that a borrower will default on their debt obligations. It is based upon factors, such as their history of repayment and their credit score. Lending ...
      Read More »

    • Financial Stability Plan (FSP)

      A plan unveiled by the Obama administration in April, 2009, that was designed to stabilize the U.S. economy during the financial crisis of 2008-2009. The Financial Stability Plan (FSP) ...
      Read More »

    • Subprime Credit

      General term for borrowings of subprime debt, or loans made to people with less-than-perfect credit or short credit histories. Subprime credit includes the original borrowing itself, as ...
      Read More »

    • Subprime Lender

      A type of lender that specializes in lending to borrowers with a tainted or limited credit history. Subprime lending is more concentrated in a smaller number of large lenders than prime ...
      Read More »

    • Troubled Asset Relief Program - TARP

      A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury ...
      Read More »

    • Public-Private Investment Program - PPIP

      A plan designed to value and remove troubled assets from the balance sheet of troubled financial institutions in the U.S. Essentially, the Public-Private Investment Program's goal is to ...
      Read More »

    • American Recovery And Reinvestment Act

      An act initiated and signed by U.S. President Barack Obama in February, 2009. The act was set into motion as a response to the weak economic state facing the country. The American ...
      Read More »

Articles Of Interest

Sponsored links
Hot Definitions
Partner Links
Suggested Definitions