How does a credit crunch occur

A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing. This happens when lenders have limited funds available to lend (or are unwilling to lend additional funds), or have increased the cost of borrowing to a rate that is unfordable to most borrowers.

A credit crunch can do a lot of damage to the economy by stifling economic growth through decreased capital liquidity and the reduced ability to borrow. Many companies need to borrow money from lending institutions to finance and/or expand operations; without this ability, expansion is not possible and in some cases, companies will need to cease operations. When coupled with a recession, a credit crunch can often lead to many corporate bankruptcies. This increases the crunch's economic impact by stifling the economy's ability to recover.