Quantifying the Credit Crunch

Chart of the Week for March 6 - March 12, 2009

The ability of businesses and consumers to access credit has decreased over the last year for many reasons. The lack of credit is commonly referred to as the "Credit Crunch". The chart above examines this trend by illustrating corporate credit risk and banks willingness to lend money to consumers. The perceived corporate credit risk is measured by the U.S. Treasury Euro Dollar Spread, or the "TED" spread. The TED spread is a ratio of the 90-Day U.S. Treasury Bill interest rates to the London Interbank Offered Rate ("LIBOR") interest rates and is used as an indicator of perceived fear or confidence in the market for private financing. An increase means perceived credit risk is rising, while a decrease means credit risk is decreasing. Banks Willingness To Lend To Consumers represents the survey results of senior loan officers, gathered by The Federal Reserve Board. The survey measures the quarterly changes in bank sentiment for granting loans to consumers.

Beginning in 2007, the TED spread began to rise signaling more perceived credit risk. Another jolt to the TED spread came in late 2008 with the decline in corporate stock valuations. Since its peak in October of 2008, the TED spread has come down, but remains relatively high compared to past levels.

Banks willingness to lend to consumers fell from May 2007 to October 2008 and remains at a low level. In January 2009, 60% of those responding to the survey reported having tightened lending standards and 55% reported reducing the credit available to customers who did not meet credit score thresholds.

Credit appears more elusive and expensive to consumers and businesses than in years past. The drop in credit availability has dampened economic activity. Current U.S. government fiscal and monetary policy seeks to reverse this trend and move the economy through the Credit Crunch.

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