Credit Crisis

Think back to 2008. Following the collapse of Lehman Brothers, we witnessed a remarkable paralysis in the global credit markets. The day-to-day lending (short-term lending required to meet daily cash needs) came to a halt. We experienced a scenario where short-term lending stalled, as companies began to halt lending to businesses and consumers. Companies typically rely on short-term loans while they wait for consumers to pay for products.

The credit crisis had a catalyst: a wave of defaults by borrowers. In this case, mortgage holders and counterparties for default swaps who struggled to meet their obligations.

With capital not coming into banks, the institutions tighten their lending capabilities and engage in a “flight to quality,” only selecting borrowers that have extremely low default risks. The tightness in loan issuance also drives up the cost of borrowing for even the most creditworthy companies as they compete for available credit.