The Credit Crunch Lack of confidence by investors in Financial Institutions lead to an economic condition referred to as the ‘Credit Crunch’ whereby investment capital will be difficult to obtain, deposits tend to decrease, and as a consequence banks will be limited in their lending power due to lack of liquidity and working capital. A credit crunch makes it nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults, which results in higher rates, i.e. driving up the price of debt products for borrowers. (Investopedia, Undated) Today, due to the credit crunch manifestation in recent years, various Financial Institutions are facing problems in the running of their business operations. Traditionally, Financial Institutions based their lending on customer deposits, in modern banking this concept shifted to a new Inter-Banking concept, i.e. banks borrowing money from other banks. This gave rise to severe consequences since as soon as one bank was hit by the credit crunch phenomena, it also pulled down its inter related banks with it. This can only be avoided through stricter regulations and financial control. Financial Institutions hit by the Credit Crunch
In the U.S. banks are finding it more difficult to borrow money from customers as a consequence of sub-prime mortgage market due to poor credit borrowers being unable to settle their loans. As a consequence, interest rates on lending went up thus impacting both the U.S. and the global economy. As an example the U.S. private bank Bear Stearns sank into a grave liquidity crisis due to its failed speculation with the so-called sub-prime mortgages. These mortgages have involved heavy lending to parties with limited means to repay loans. Due to Inter-bank markets practices the U.S. credit crunch went global and today the world is facing a major crises. There is a global growing concern that the global financial crisis could push more private banks into bankruptcy. Worldwide private banks such as in the U.S., Britain, Germany, France, and elsewhere in Europe are facing similar difficulties due to failed investments in financial derivatives based on U.S. mortgages excesses. Recently the U.K. government nationalised Northern Rock Bank which went bankrupt due to heavy investments in the U.S. mortgage market. Another example is the IKB Deutsche Industrienbank which has received a state guarantee of 15 billion dollars to avert collapse over failed investments in the U.S. mortgages. (BlogSpot, 2008) Since January 2007, global banks reported a credit loss of about USD 387 billion due to this credit crunch crises, out of which USD 200 billion where incurred by European banks and the remainder by US banks (according to data from the Institute of International Finance). This revealed that US banks sold sub-prime security packages and other linked instruments to European banks in recent years. (Business Standard, 2008) All this highlight the importance and the necessity of stricter bank regulations and supervision in banking operations. | 
