Our Free Sample Essay About Financial Crisis

Finance and Policy

Credit conditions broadly refer to data on bank capital, the standards set for lending/loans, and the assets that reflect the net worth of corporations, the interest rates, state of the economy, industry trends, or legislation that inform lenders’ decision of financing firms. Essentially, it is the metric used in credits markets denoting the price at which financial institutions lend each other or other firms within the short-term in relation to interest rates on short-term government bills and debts (OBR, 2018). It may also denote the terms of credits and their availability for firms.  Before the financial crisis and well from the 1970s, the credit conditions for non-financial firms especially the mortgage market were liberalized.

A 2006 survey by Fernandez and Muellbauer showed that ratios of income of secured and unsecured loans rose from the 1980s onwards due to low nominal interest rates, low inflation, and interest rate non-surety environment, and the increased actual asset prices and actual incomes (Fernandez-Corugedo & Muellbauer, 2006). 

During the financial crisis, banks reviewed their lending practices since there was a fall in the capital and enacted stringent capital requirements which created great cautions when lending to firms. Banks raised the interest rate margins for firms. The cost of insuring unsecured loans against the risk of default increased (Fernandez-Corugedo & Muellbauer, 2006). What led to tighter credit conditions was the increased cost of bank funding to interest rates placed on fully safe assets like government bills and facility fees were imposed as banks became increasingly risk-averse (Riley et al., 2014).

The credit conditions remained the same until after 2011, but before then the government implemented various measures and projects which eased the credit conditions for non-financial firms to obtain loans (Judge & Korzhenitskaya, 2012). Indeed this has helped since according to the Bank of England’s 2018 report on credit condition, showed that the availability of both secured and unsecured credit had increased from prior years, the demand for loans had increased, and the loan pricing had significantly narrowed while the default rates had also fallen for non-financial businesses due to credit ease (Bank of England, 2018).