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What is a Credit Crunch?

A credit crunch is when access to liquidity dries up dramatically in rapid fashion, or becomes less accessible due to a spike in borrowing rates.

Central banks will often step-in to try and curb the lack of liquidity by offering the markets access to cash at lower than market rates, in the event of a crisis.

Perhaps the most famous credit crunch in history occurred in late 2007 and early 2008, when bank balance sheets became highly leveraged overnight due to mark-to-market accounting rules that were applied to the mortgage backed security portfolios on their balance sheets.

Over-leveraged banks lost access to credit markets nearly overnight, which ultimately led to the demise of companies like Bear Sterns and Lehman Brothers.

Keywords: leverage, financial crisis, balance sheet, credit, central banks, Bear Sterns, Lehman Brothers,