Academic journal article National Institute Economic Review

Data on the Credit Crunch

Academic journal article National Institute Economic Review

Data on the Credit Crunch

Article excerpt

One might expect bank borrowing to rise during a recession as businesses seek extra credit to tide them over; the data have to be seen in this context. Indeed, in the 1990s recession lending by banks adjusted for inflation continued to rise (with one interruption) until almost the end of the recession. However, recently lending to UK businesses has been declining, as figure 1 shows. This indicates lending by UK and foreign banks to non-bank businesses with data available up to the end of the third quarter of 2008 after deflating with the GDP deflator.

We can see from the figure that the decline has been driven by a reduction of lending by foreign banks. However, sterling lending by UK banks continued to rise. Thus the first phase of the crisis associated with the failures of Northern Rock and Bradford and Bingley had no real effect on lending to businesses.

The second phase of the crisis began with the bankruptcy of Lehman Brothers in mid-September and this is scarely reflected in the quarterly data below. However, monthly data are available on lending by monetary sector (M4) institutions in the UK up to the end of December 2008. These, not deflated, shown in figure 2, suggest that in the final months of the year outstanding loans to UK businesses by UK banks turned down. The graph also shows falling secured mortgage lending and unsecured consumer credit lending to individuals falling more sharply, while lending to small businesses has stagnated. Thus, in the second phase of the crisis, the problems began to affect UK banks' willingness to lend to British businesses. …

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