Conditions that likely contributed to a credit crunch during the global financial crisis include
A)capital shortfalls caused in part by falling real estate prices.
B)regulated hikes in bank capital requirements.
C)falling interest rates that raised interest rate risk,causing banks to choose to hold more capital.
D)increases in reserve requirements.

Question

Quizplus · Accepted Answer

During the financial crisis, falling real estate prices led to capital shortfalls. Banks had lent money to homeowners and investors who used their property as collateral for the loans. As property values declined, banks were left with assets that were worth less than the value of the loan. This caused several banks to suffer losses and require additional capital to remain solvent. This, in turn, made it difficult for other banks and financial institutions to access credit, contributing to a credit crunch.

B, C, and D are not likely to have contributed to the credit crunch during the global financial crisis. While regulated hikes in bank capital requirements and increases in reserve requirements can restrict the amount of credit that banks can provide, these measures were not significant factors in the financial crisis. Falling interest rates may have contributed to the crisis by creating an environment in which lenders were more willing to lend to borrowers with higher levels of risk, but it did not directly cause a credit crunch.

Conditions That Likely Contributed to a Credit Crunch During the Global