Credit Crunch Research Articles

In financial crises, a period of overheated credit markets turns into a credit crunch accompanied by a systemic breakdown in the financial intermediary sector. Without a deep understanding of their roots, designing policies to decrease the probability of suffering from them or to avoid the worst consequences is like flying blind. In this review, I survey the recent development of the theory of financial crises. I focus on the answers these theories provide to four fundamental questions. What makes the booming phase fragile, and what are the incentives and frictions leading to that fragility? What triggers the crisis? Why is the downturn persistent? Should policy intervene, and if so, how?

Physical capital takes time to build. Yet, the measurement of time to build and of its response to firm behavior remain scant. We fill this gap using project-level data from India. We document new facts on cross-sectional heterogeneity in time to build; and exploit quasi-experimental variation in credit supply to establish that firms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findings with a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative to delayed cash flows. Firms then accelerate projects closer to completion and postpone unbegun projects. Such a mechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify our model to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits.

The real estate market in the United States is renowned for its cycles of rapid growth and subsequent decline, which have profound implications for the broader economy. This paper delves into the nature of real estate bubbles, investigating their formation, development, and the associated risks to the macroeconomy, with a particular focus on the U.S. market. Through a comprehensive analysis of historical data, key economic indicators, and case studies of significant real estate bubbles, including the infamous 2008 financial crisis, the paper elucidates how these bubbles emerge and the mechanisms through which they impact economic stability. Real estate bubbles are characterized by unsustainable increases in property prices driven by speculative investment, excessive credit expansion, and optimistic market sentiments. The study examines the underlying causes of these bubbles, such as lax lending practices and regulatory failures, and their subsequent bursting, which often leads to severe economic repercussions. The paper further explores how the collapse of a real estate bubble can trigger widespread financial instability, impacting the banking sector, leading to a credit crunch, and resulting in reduced consumer spending and economic growth. Additionally, the paper discusses the role of policy responses in mitigating the risks associated with real estate bubbles. Effective measures include monetary policy adjustments to control credit conditions, enhanced regulatory oversight to prevent lax lending practices, and macroprudential policies designed to address systemic risks. By providing a detailed analysis of these elements, the paper aims to offer insights into managing and preventing the adverse effects of real estate market fluctuations on the macroeconomy.

This paper approaches the issue by first considering whether such reluctance to lower interest rates even in the face of disinflation is supported by standard economic theory. Expanding through Neo-Fisherianism and reflective equilibrium, this paper examines how counterproductive effects further interest rate cuts could be and whether scope exists for conventional monetary policies. Practical limitations are in line with Keynesian economics prescription on lower interest rates to boost demand. The zero lower bound and liquidity traps render such measures, while not limited to, an inadequate remedy for the ailment as revealed by the not-so-distant experiences during the 2008 credit crunch and current COVID-19 outbreak. The debate also embraces other influences from the globe concerning economics and politics, like exchange rate volatility and public faith in the role of central banks. Since further rate cuts magnify the risks and reduce potential returns, a more appropriate strategy would therefore be a mixed policy approach—to alternative instruments—entailing fiscal stimulus plus quantitative easing in view of disinflation. The paper concludes, therefore, that the cautious approach by policymakers is based on theory as well as on evidence; this therefore underlines the call that responses in policy need to be nuanced and specific to the context.

This research analyzes the credit crunch phenomenon in Indonesia using the Simultaneity method. The data taken is time series data on the demand and supply side of credit. The research results show that the credit crunch phenomenon occurs from the demand and supply sides. The factors of credit demand are Credit Interest Rate (CIR) and Inflation. Meanwhile, from the supply side, namely Credit Interest Rate (CIR), Third Parties Fund (TPF), Net Interest Margin (NIM), and Non-Performing Loans (NPL). The results of research using the Two Stage Least Square approach show that, simultaneously, the variables inflation, CIR, NPL, NIM, TPF have an influence on the demand and supply of credit which triggers a credit crunch during the Covid-19 pandemic.

Extreme events like the credit crunch, the September 11th attacks, the coronavirus pandemic, and Hamas' attack on Israel each have in common that they should not have come as a surprise, yet still did. One reason surprises happen is that a risk assessment reflects the knowledge of the assessors, yet risk also includes uncertainties that extend beyond this knowledge. A risk assessment is thus susceptible to surprises as it focuses attention on what is known. Developing an expectation for surprises is key to their avoidance and requires that risk assessors specifically consider their "unknowledge"-that is, what they do not presently know about an event, outcome, or activity and its potential consequences and triggers. One way to emphasize the need for risk assessors to consider unknowledge is to explicitly include it as a separate component in risk-assessment frameworks. This article formalizes the inclusion of unknowledge in a contemporary risk-assessment framework.

According to the model on production revolutions, elaborated by Leonid and Anton Grinin, the Covid-19 pandemic and the fourteenth century's Black Death have similar impacts on economic trajectories in terms of production principles. Andrea Komlosy added the spatial dimension to the model, which allows the identification of the ‘focal groups’ of revolutionists and their seedling nurseries of a new production principle in late fourteenth and early fifteenth century Europe. Ming Admiral Zhèng Hé's voyages across the Indian Ocean (1405–1433) had an indirect impact on the European economy: Trading on the re-established ‘Maritime Silk Road’ required silver for payment, whose eventual shortage caused a credit crunch in Europe, jeopardizing the phase transition to the mercantile-industrial production principle. Renaissance Humanists promoted a revolutionary epistemology in the fifteenth century. Christopher Columbus's discovery of America, a by-product of efforts to reconnect Europe to the Maritime Silk Road in response to the credit crunch was portrayed as a revolutionary achievement. The author's participation at a focal group of the Cybernetic Revolution before Covid-19 motivated his tracing the Renaissance Revolution.

New data covering 23 countries reveal that banking crises of the Great Depression coincided with a sharp international increase in deposits at savings institutions and life insurance. Deposits fled from commercial banks to alternative forms of savings. This fueled a credit crunch since other institutions did not replace bank lending. While asset prices fell, savings held in savings institutions and life insurance companies increased as a share of GDP and in real terms. These findings provide new explanations for the fall in credit and aggregate demand in the 1930s. They illustrate the need to consider nonbank financial institutions when studying banking crises.

Abstract Various shocks, including the Gulf War, the US recession, the 9/11 attacks, financial credit crunch, and domestic political shocks like coups, and revolutions, have contributed to the persistence of high uncertainty. This uncertainty has direct implications for economic activity, affecting both business investment and household consumption decisions. This article explores the mediating role of the quality of pro‐market institutions in the relationship between economic performance and changes in the uncertainty. It also investigates whether reforming pro‐market institutions during a period of uncertainty can mitigate the negative effects of the uncertainty on economic performance, while analyzing the channels through which the mediating effect of reforms during uncertainty manifests. Using a sample of 61 developing countries over the period 1990–2014, our results, robust to various tests, indicate that higher quality of pro‐market institutions significantly reduces the negative effects of uncertainty on economic performance. Indeed, the reduction in GDP growth due to a change in uncertainty decreases by 93 percentage points with higher levels of pro‐market institutional quality, and this variation depends on the nature of the pro‐market institutions considered. Furthermore, implementing pro‐market institutional liberalization reforms during a period of uncertainty could not only alleviate the negative effects of uncertainty but also contribute to medium‐term economic growth. The analysis of channels suggests that this effect is mediated by the impact of reforms on household consumption and business investment. These results highlight how pro‐market institutions and reforms in these institutions can enhance the resilience of economies facing high uncertainty or unexpected and substantial economic shocks.

Abstract Organizational and political responses to strategic surprises such as the credit crunch in 2008 and the pandemic in 2020 are increasingly reliant on scientific insights. As a result, the accuracy of scientific models has become more critical, and models have become more complex to capture the real‐world phenomena as best as they can. So much, so that appeals for simplification are beginning to surface. But unfortunately, simplification has its issues. Too simple models are so generic that they no longer accurately describe or predict real‐world cause‐effect relationships. On the other hand, too complex models are hard to generalize. Somewhere on the continuum between too simple and too complex lies the optimal model. In this article, the authors contribute to the ongoing discussion on model complexity by presenting a logical and systematic framework of simplification issues that may occur during the conceptualization and operationalization of variables, relationships, and model contexts. The framework was developed with the help of two cases, one from foresight, a relatively young discipline, and the other from the established discipline of innovation diffusion. Both disciplines have a widely accepted foundational predictive model that could use another look. The shared errors informed the simplification framework. The framework can help social scientists to detect possible oversimplification issues in literature reviews and inform their choices for either in‐ or decreases in model complexity.

Purpose: General objective of the study was to explore the financial crises and economic downturn of commercial banks in North Rift Region in Kenya. The study specifically sought to establish the effects of interest rates crisis, currency crisis, corporate debt crisis and liquidity crisis on economic downturns of commercial banks in North Rift Region in Kenya. The study was anchored on Credit Crunch Theory, the Debt Overhang Theory, the Liquidity Preference Theory and the Credit cycle Theory. Methodology: A descriptive survey design was adopted. The study population consisted of all the 44 commercial banks in the North rift region in Kenya and in each commercial bank, branch managers were also targeted who gave a clear overview of financial crises and how it affected the economic downturns of their respective banks. Purposive sampling was employed to select the 44 branch managers. The primary data was collected by using a questionnaire that was pretested for reliability and validity. The study also analyzed the data using both descriptive and inferential statistics. Descriptive statistics including percentages, frequencies, means and standard deviations were adopted in analyzing the data. Linear Regression analysis and correlation analysis as the inferential statistics were used to show the relationship that existed between the variables. The findings were then presented using tables. Findings: The study findings indicated that interest rates crisis had a significant negative effect on the economic downturns of commercial banks (p = 0.027, <0.05). The findings also indicated that currency crisis had a significant negative effect on the economic downturns of commercial banks with p = 0.033, <0.05. corporate debt crisis had a significant negative effect on the economic downturns of commercial banks (p = 0.015, <0.05). Liquidity crisis had a significant negative effect on economic downturns of commercial banks where the regression model also indicated that p = 0.002, <0.05. The study concluded that interest rates crisis, currency crisis, corporate debt crisis and liquidity crisis had a negative effect on the economic downturns of commercial banks. Unique contribution to theory, practice and policy: The study recommends that the commercial banks should develop products with flexible interest rates to cater to borrowers during periods of high interest rates. The management should consider offering fixed-rate loans for a limited term to provide some stability to businesses. The policy makers such as the Central Bank of Kenya should implement measures to stabilize the national currency and promote foreign investment during crises.

Loan guarantees in a crisis: An antidote to a credit crunch?

This study shows that in peripheral economies that are linked into circuits of global capital on unequal terms, attempts to change the core features of an existing growth regime without broader political support intensify externally induced conflict among the ruling coalition. Under these circumstances, a transition to a new demand regime within a short time frame is more likely to take place via authoritarian intervention when the political cost of repression is lower than the cost of redistribution. In developing these points, the analysis builds on evidence from Turkey: following the 2008 global credit crunch, the Justice and Development Party’s (Adalet ve Kalkinma Partisi, AKP) domestic demand-led and credit-fueled growth under dependent financialization has experienced a major crisis. However, the subsequent push to replace this regime with a profit-led model with an emphasis on exports worsened the conflict among the political coalition supporting the party as their preferences over monetary policy began to diverge. A temporary resolution of this deepening rift has been possible by way of an authoritarian intervention under R. T. Erdogan’s presidential bid in 2017–18. By situating the debate on the relationship between growth regimes and political institutions, the study further unpacks the nexus between democratic backsliding, dominant social blocs, and economic growth in the periphery of Europe.

Credit rating agencies during credit crunch

This paper develops a hybrid model with an agent-based financial accelerator framework embedded in a standard new Keynesian economy. It explores the interactions between the financial accelerator and the credit market, focusing on the effects of bankruptcy. The paper replicates credit-market relationships, modeling various credit crunch scenarios. It uncovers endogenous fluctuations and “animal spirits” in entrepreneurs’ expectations, driving investment and production decisions. Notably, higher pro-cyclical leverage can have destabilizing effects in the presence of small shocks, increasing entrepreneurs’ bankruptcies. The results suggest that monetary policy’s effectiveness in stabilizing fluctuations depends on factors such as heterogeneity, bounded rationality, and heuristic updating mechanisms. Moderate monetary policies perform better in terms of economic growth with moderate-to-low volatility, while aggressive policies on inflation assist bounded rational agents in reducing errors in investment decisions and default rates, fostering a more stable macroeconomic environment. Increasing forecasting options introduces diversification among entrepreneurs, reducing volatility and stabilizing investments. More options mitigate investment fluctuations, acting as a counterbalance to prevailing market sentiments. Over time, individuals weakly adhering to trends or adopting contrarian approaches come to dominate the population of entrepreneurs, enhancing the overall stability of investment decisions.

ABSTRACT This study investigates the determinants of the rate of return on shipping sale-leaseback (SLB) transactions. Since the credit crunch in the shipping industry after the 2008 crisis, SLB has emerged as an alternative funding source. However, little is known about the use of SLBs in the shipping industry. Therefore, this study analyzes 62 shipping SLB transactions occurring between 2017–2022. Examining 23 factors related to financial characteristics, firm- and vessel-specific aspects, and shipping market indices, this study finds that the SLB rate of return is negatively associated with the operating margin of a shipping firm, and this result is robust even when controlling for variations in the key interest rate. In addition, with winsorized values of the financial ratios that fluctuate during the sample period, it is also found that a lower rate of return is required for vessels with time-charters. The findings of this study provide shipping companies with valuable implications for understanding the cost of debt financing.

Under crisis conditions, the significant decline in bank credit growth is associated with the credit crunch phenomenon. The ability of the banking system to provide credit in the economy is limited compared to the demand for credit. During the Covid-19 pandemic, credit growth in Indonesia reached its lowest point when compared to the pre-Covid-19 period. However, the causative factor is still ambiguous. Using a credit market disequilibrium model estimated with Maximum Likelihood, this study tested whether the decline in credit during the Covid-19 pandemic was a credit crunch phenomenon. The results of this study show that the parameter of the probability of credit decline during the Covid-19 pandemic is an insignificant credit crunch phenomenon. This means that the estimated demand for credit is less than the excess supply. Thus, the implications for the role of monetary policy by lowering interest rates have been hampered due to the decline in economic activity during the Covid-19 pandemic.

Abstract We develop a theory of endogenous uncertainty in which the ability of investors to learn about firm-level fundamentals is impaired during financial crises. At the same time, higher uncertainty reinforces financial distress. Through this two-way feedback loop, a temporary financial shock can cause a persistent reduction in risky lending, output, and employment that coincides with increased uncertainty, default rates, credit spreads, and disagreement among forecasters. We embed our mechanism into standard real business cycle and New-Keynesian models and show how it generates endogenous and internally persistent processes for the efficiency and labour wedges.

Oil price uncertainty, financial distress and real economic activities: Evidence from China

This study aims to analyze the impact of a credit crunch on a firm's likelihood of conducting an IPO during the COVID-19 pandemic. The study on credit crunch is still limited, the majority of which focuses on the financial crises of 1998 or 2008. Meanwhile, the credit crunch during the COVID-19 pandemic was triggered differently, beginning with the real sector rather than the financial crisis. On the other hand, the industry may take into account conducting an IPO as a solution to the issue of a capital shortage brought on by the crisis. Studies on the effects of the COVID-19 pandemic's financial crunch on Indonesian IPO businesses have never been done. When the COVID-19 crisis hit the Indonesian market, it appears from the number of IPO companies and the number of shares outstanding during IPOs in Indonesia that the decline was not as severe and that companies continued to undertake IPOs. While credit growth in the banking sector is more sensitive in Indonesia than in other nations, it nevertheless tends to slow down and even turn negative during the COVID-19 epidemic. By using the logistic regression test, the results show that when funding is becoming increasingly scarce (credit crunch), it would be increasing the probability of a company going for an IPO during the COVID-19 pandemic.