Credit Crunch! Credit Crunch! Credit Crunch?

This paper was written at a time when despite an improving economic outlook in the Philippines, bank loans continued to shrink. Many groups criticized banks for not expanding their loan portfolio fast enough to support the economic turnaround, and held the banks responsible for credit crunch, a situation when a decline in the supply of credit causes bank loans to decline. The paper points out the reasons for credit crunch as:

• Availability of less credit over a wide range of interest rate;
• Allocation of credit by banks through non-price mechanisms and not by interest rates.

Credit crunch can be confirmed through four essential indicators:

• Real interest must be rising over a period of time;
• Spread between loans and risk-free assets must be widening;
• Bank intermediation spread must be widening over time;
• Credit rationing is exercised and intensified by banks.

The paper examines macro-level data for the four indicators mentioned above, to find whether the economy faced credit crunch. The paper remarks:

• Slowdown in bank loans resulted from economic recession and was not a result of credit crunch;
• Bank loans were expected to recover following resurgence in the economy;
• Banks should not loosen lending policy as it would endanger the sustainability of the economic recovery.