What is a ‘lending freeze’
A credit freeze occurs when banks to meet the requirements for qualification of the loan to reduce the amount of new loans they take on. Banks use such techniques to protect their capital and risk.
Penetration ‘lending freeze’
A credit freeze protects the Bank’s capital by reducing credit availability for consumers and businesses. Banks monitor their credit risk when deciding whether to lend. Credit risks will increase, usually banks issue new loans at higher interest rates to cover possible increase in the default rate. In case of danger quickly, to rise or to influence a certain subset of potential creditors, banks can choose to effectively freeze lending for these groups to the established credit risk of the new loan is returned in accordance with Bank policy. As a result, borrowers considered high credit risk will have less access to credit during the freeze, and therefore may not be able to secure a mortgage, car loan or business loans. These, in turn, could have a negative impact on other economic factors such as hiring and business expansion.
Examples of lending freezes
Among consumers and customers of the banking business, most credit freeze is actually more similar to loans, as banks create more stringent requirements of the loan, and not flat out deny loans. The effect is the same as certain types of lenders struggle to get loans. For example, the decline in the economic prospects of a specific industry may lead banks to tighten restrictions on lending to small businesses, attempting to enter these markets.
In other cases, the credit squeezes of the protection of banking capital in risky economic situations. After the financial crisis of 2008, many banks took the risk Situation on lending in General. As a result, loans become more expensive much more complex for companies that are heavily dependent on loans, such as smaller, more innovative companies without alternative financing or strong periodic income streams.
When banks are actually not completely stop the loan, the consequences could be more serious. After the fall of Lehman Brothers in 2008, for example, many banks lost confidence in other financial institutions participating in interbank lending, which plays a key role in ensuring the liquidity necessary for banks to function normally. As banks began to freeze lending to each other, Central banks in Europe and the United States is perceived quite dare to lend itself to stabilize the interbank market.
Freezing credit compared to the credit freeze
While the terms sound similar, sharing the credit freeze and credit freeze, contact various activities. Where the lending freeze a deal with the Bank lending, a credit freeze offers consumers a mechanism to ensure that they credit information, by ending the access to new loans requested in their name.