What is the Credit Crunch and will it affect you? We will explain the first part of this and the answer to the second part, will it affect you is YES! The Credit Crunch is when banks stop lending money to each other; this is generally in the form of short term loans made between banks to balance their books. Why does this happen?
It is because the banks do not trust the financial stability of other banks and are afraid that they will not get their money back. This is what led to the demise of Northern Rock and Lehman Brothers. Are the banks not stable, yes the UK banks are better capitalised than the European Banks, but there is a worry that some of the European banks are over exposed to loans they have made to Ireland, Greece, Portugal, Spain and now Italy. If anything happened to the European banks then this will have a domino effect on the UK’s banks.
King is already saying to the UK Banks that they should build up their capital reserves against events that are happening in Europe. What this means is the banks will hoard their cash, and the way this is done is by reducing their lending to businesses and you and me. So you can forget any lending to businesses and personal loans and mortgages will be even harder to come by.
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