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.

Related or Semi-related Video

Finance: What are Credit Scores and Wort...21 Views

00:00

Finance allah shmoop What are credit scores and credit worthiness

00:08

Remember that scene from wayne's world Alice cooper lets him

00:12

backstage They bow and chant Where'd i worthy We're not

00:15

worthy Well basically just swap one of the greatest rock

00:18

and roll singers with your local banker Yeah well as

00:21

much as you'd rather hang out with alice cooper this

00:24

nerdy guy here is wet A more important to your

00:28

credit That long hair thing worked when he was in

00:31

his twenties And not so much now I guess Anyway

00:33

if you have a bank account or a credit card

00:36

or are generally tapped into the banking and credit system

00:39

of the world in any way shape or form you

00:42

have a credit score You might not know it But

00:45

you do Where does that score come from And yeah

00:48

It's known as yours Fico score While fico stands for

00:52

fair isaac corporation that's a publicly traded company and that's

00:56

what they do they provide credit scores and they try

00:59

to be fair like isaac Anyway those scores were requested

01:03

and released through one of the big three credit bureaus

01:06

Equifax experian in trans union Oh my These guys give

01:10

you a number That kind of thing finds your reliability

01:13

in making payments to banks or other lending institutions who

01:17

might loan you dough Well why would you care home

01:20

Because that number you get directly affect the price you

01:24

pay to rent money The worst Your credit score the

01:28

higher your rent have will likely be in who likes

01:31

to pay high rent especially when it comes to renting

01:33

money Well the worst fico score is a zero and

01:36

were wondering what you'd need to have done Teo get

01:39

that like three bankruptcies in a bank robbery Maybe Well

01:43

we want to meet the third guy who loaned you

01:45

money at that point Anyway the bill gates perfect score

01:48

is an eight Fifty on such a show off And

01:50

here are roughly the breakdowns for how banks think of

01:53

credit Score c it's all color coded here with the

01:56

red yellow and green Well the goal here in having

01:59

a score is to determine your reliability in paying back

02:02

a given loan Yes the amount you're borrowing also matters

02:06

But to speed up the initial evaluation of you is

02:09

a borrower Wealthy credit score is applied to you and

02:11

it lets banks quickly come to a yes or no

02:14

or ah maybe decision Yeah quickly that credit score thing

02:17

helps and if the answers and no well then you

02:19

can always backpack across the country and stay in youth

02:22

hostels So yeah you don't want to be murdered by

02:24

a deranged dutch businessman and we suggest you stay current

02:27

on your us visa payments and have a high credit 00:02:30.173 --> [endTime] score Be creditworthy because you are worthy Hope yellow

Up Next

Finance: What is a Line of Credit?
133 Views

What is a line of credit? A line of credit is kind of like a loan. A bank gives a borrower a line of credit, which basically says they can borrow ...

Finance: What is the Credit Rating Agency Reform Act Of 2006?
4 Views

What is the Credit Rating Agency Reform Act Of 2006? As signed by President George W. Bush in 2006, the Credit Rating Agency Reform Act required th...

Finance: What is the Equal Credit Opportunity Act?
6 Views

What is the Equal Credit Opportunity Act? Signed into law during the Nixon-Ford era in 1974, the Equal Credit Opportunity Act is essentially an ant...

Find other enlightening terms in Shmoop Finance Genius Bar(f)