Credit Crunch Law and Legal Definition

Credit crunch is an economic condition where it is extremely difficult to obtain investment capital. There is a reduction in the general availability of loans or credit or a sudden tightening of the conditions required to obtain a loan from the banks. It indicates a situation where the banking institutions are unwilling to take an additional credit risk. Credit crunch usually occur during recessions.

Credit crunch may occur in situations where:

1. regulatory bodies increase capital requirements for financial institutions;

2. reduction in the market prices of previously "overinflated" assets;

3. decline in bank capital;

4. Bank supervision overreaction; and

5. New credit standards set by bankers.

The end result of credit crunch is the higher interest rates and also a slowdown in growth that leads to a slower recovery. Credit crunch is also known as a credit squeeze or credit crisis.