In the winter of 2007, the "credit crunch" started , creating huge effect at that time in the housing markets & the value of mortgage-backed securities, which is controlled by maximum banks, began to tumble. Financial institutions or banks suffered a sudden loss that was beyond expectations, as a result financial institutions strictly controlled & tightened their credit-lending policies and offered more conservative credit opportunities to their consumers.
The crunch transformed into a "liquidity crisis"in September-2008. The banks were losing their liquid cash caused by the crunch worrying that other financial partners might not be able to help when the time comes to repay their internal debts. So, banks began to control their reserves, stopped or gradually reduces interbank lending, and the premium on short-term loans went much more higher than before.
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In the beginning of October, the Treasury Department of US government gave financial support to the banks. This efforts was aimed at getting over from the "Credit Crunch" & getting financial agencies or banks to support to each other again.
Experts say the programs have largely worked. Banks have started repaying their internal debts & interbank lending has also increased. It is assumed that the critical situation has passed. But the crunch is here to stay for awhile.
Why?If banks are healthier, then what is the reason for such delay?
Mostly, because the economy is still tumbling from the mass effect of "Credit Crunch". Unemployment level is increased by 10% than before , the value of household wealth & assets are decreasing, foreclosures still rising. Banks aren't quite ready to invest their liquid cash to the incoming customers without being totally assured that the money will be paid back with the interest in the confirmed period of time.
It is certain that whether liquidity is gradually getting back to normal, that doesn't mean that financial institutions or banks are healthy enough to lending money to the borrowers. If we have a close look , it can be noticed that losses , caused by the previous lendings & mortgage-backed securities, are still increasing. Markets are still tumbling by the affect and banks are still remaining in their internal debts.
Experts predicts that the credit crunch will come to an end in about a year. It can be said that low rates of assets & household wealth will probably spur inflation at some point, and financial institutions or banks will make more liquid cash to balance the total situation.
