The banking and financial crisis that began in 2007, so-called because a principal characteristic was a catastrophic sudden tightening in the availability of credit. From the 1980s onwards, new techniques for risk management and the loosening of regulations led to a huge growth in the global financial services industry. There was a massive expansion in the availability of cheap credit, and loans at relatively low interest rates were offered to customers previously considered bad credit risks. In the mid-2000s concerns grew about the resulting levels of debt and the security of a financial system increasingly reliant on the repackaging of this debt in complex derivatives products; but the trigger for the crisis was ‘sub-prime’ mortgages in the USA. Many mortgages had been sold, sometimes fraudulently to unsuitable borrowers, on the assumption that house prices would continue to rise. This assumption proved false when the resulting US house-price bubble burst in 2006. Sophisticated financial products based in part on these ‘toxic’ loans had been widely traded in world financial markets, and questions were now asked about their precise value. In many cases these questions proved impossible to answer: the original loans had been subdivided and repackaged in such complex ways that the resulting composite products could not be valued accurately. There were also cases of fraud, where high-risk products had been knowingly sold as low-risk. Faced with this uncertainty, the financial markets assumed the worst case, and many banks had to write down the value of their assets and sustain huge losses. In September 2007 concerns about the solvency of Northern Rock, a British bank, led to the first run on a bank in the UK since the 1860s. In order to maintain confidence in the banking system, the British government nationalized Northern Rock rather than allow it to go bankrupt. By contrast, Lehman Brothers of New York collapsed on September 15, 2008 after the US government refused to support it. Faced with this precedent and still unsure about the value of their assets, finance companies lost confidence in each other’s creditworthiness and became suddenly much more cautious about risk. Credit became harder to obtain, which led to a sharp global recession in 2008–09. Some countries suffered very severely: Iceland (2008), Ireland (2008), and Cyprus (2012) were almost overwhelmed when their oversized banking sectors failed; and the concerns about creditworthiness spread to states, which led in particular to the Eurozone Crisis.

By the mid-2010s the worst consequences of the Credit Crunch seemed to have passed. However, credit was still only available on cautious terms, which slowed economic recovery; some finance companies were still burdened with toxic assets; some countries were still in recession; and others had not yet recovered their 2008 levels of GDP. Debate on the lessons of the Credit Crunch and how to prevent a similar occurrence in future has continued.