What is "credit crunch"

n. (context economics finance English) A period of economic crisis in which credit and investment capital are difficult to obtain.

n. a state in which there is a short supply of cash to lend to businesses and consumers and interest rates are high [syn: liquidity crisis, squeeze]

A credit crunch (also known as a credit squeeze or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments (often at the expense of small to medium size enterprises).