Credit Creation / Credit Crunch - Dictionary of Economic Terms

When a bank deposits its first deposit (the first deposit received), the bank leaves only a certain amount of reserves, and the rest of the loans are made. If the loan is used again, the bank will make a loan again. In this way, the phenomenon that a bank creates a deposit currency more than several times the initial deposit amount through a loan is called credit creation or deposit creation.


And a multiple of the amount of money raised in the process of credit creation is called a credit multiplier. - Loans and deposits are repeated and the entire loan is deposited back into the bank in the form of derivative deposits (deposits deposited with current deposits) Once the process is repeated, the credit creation limit (X) for a given original deposit is defined as X = C (1-R) ​​/ R.


Where C is the original deposit, and R is the bank's reserve prepayment rate. - Credit crunch means that households or businesses suffer difficulties as financial institutions do not provide money to the market in order to reduce risk. A credit crunch is a comparison of a cardiovascular system that is healthy in the normal course of life to a disease that does not run well. - In general, the credit crunch is due to monetary tightening policies, external financial market instability, And the restructuring of financial institutions. - Korea experienced a credit crunch in the aftermath of the IMF foreign exchange crisis, the bankruptcy of the Daewoo Group in 1999, and the credit card crisis in 2004. In 2007, the US subprime mortgage loan Domestic financial markets have also been affected by the turmoil in the global financial markets, including the crisis and the bankruptcy of Lehman Brothers in 2008.