A credit crunch is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and results into losses and lack of credit. The crisis began in United States due to heavy lending & Defaulting for housing loans during 2006-07 known as Subprime Crisis .
<ul><li>The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. The U.S. mortgage market is estimated at $12 trillion with approximately 9.2% of loans were in default through August 2008. </li></ul>
During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. During the week of September 14, 2008 the crisis accelerated, developing into a global financial crisis.resulting in the bankrupcy of some of the world’s biggest financial institutes..
The following week the Dow-Jones index of the largest companies traded on the U.S Stock market declined 22%, the worst week in the index's 118-year history
British Bank Northern Rock borrowed £3 billion from the Bank of England in the first few days of this crisis
Some of the worlds leading banks were nationalised
<ul><li>UBS AG bank $37.7 bln </li></ul><ul><li>Citigroup bank $39.1 bln </li></ul><ul><li>Merrill Lynch investment bank $29.1 bln </li></ul><ul><li>Morgan Stanley investment bank $11.5 bln </li></ul><ul><li>Crédit Agricole bank $4.8 bln </li></ul><ul><li>HSBC bank $20.4 bln </li></ul><ul><li>Bank of America bank $7.95 bln </li></ul><ul><li>CIBC bank $3.2 bln Deutsche Bank bank $7.7 bln </li></ul>
Barclays Capital investment bank $3.1 bln Bear Stearns investment bank $2.6 bln Royal Bank of Scotland bank $15.2 bln Washington Mutual savings and loan $2.4 bln Swiss Re re-insurance $2.04 bln Lehman Brothers investment bank $3.93 bln LBBW bank $1.1 bln JP Morgan Chase bank $5.5 bln Goldman Sachs investment bank $1.5 bln Freddie Mac mortgage GSE $4.3 bln Credit Suisse bank $9.0 bln Wells Fargo bank $2.9 bln Wachovia bank $11.1 bln
Fannie Mae mortgage GSE $0.896 bln MBIA bond insurance $3.3 bln Hypo Real Estate bank $0.580 bln Ambac Financial Group bond insurance $3.5 bln Commerzbank bank $1.1 bln BNP Paribas bank $0.870 bln [ estLB bank $2.74 bln American International Group insurance $11.1 bln BayernLB bank $6.7 bln Countrywide mortgage bank $4.0 bln Fortis bank $2.3 bln
The Central banks provided loans to help the system cope with liquidity concerns, where banks are unable or unwilling to provide loans to businesses or individuals.
A bank rescue package totalling some £500 billion (approximately $850 billion) was announced by the British Government on 8 October 2008, as a response to the ongoing financial crisis
U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities. The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities
Global crisis resulting in a number of bank failures and declines in various stock indexes, and significant reductions in the market-value of equities (stock) and commodities worldwide
<ul><li>World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change. </li></ul>
The crisis has roots in the subprime mortgage crisis and is an acute phase of the financial crisis of 2007–2008.