Current Credit Crisis

As of mid 2007 the world has experienced rather sudden and adverse changes in the financial markets. These changes are referred to as the “Credit crisis”, the “Liquidity crisis” or the “Financial crisis”. Due to intense media exposure these terms have become common household words. However, only a few people who use these words actually understand what they mean. In this article I will attempt to explain the dynamics of the credit crisis in relative laymen’s terms.

The article is divided into three sections. In the first section I will give some background information on banking. I will explain terms like “Liquidity” and “Funding”. If you are a banker and familiar with balance sheet management you can probably skip this part. These terms should be clear to understand the second section, in which I will describe the dynamics of the current crisis. In the third section I will explain how this crisis came to be.

Author: Muller, J.J.