Yet another Credit crisis question

May end up in GD, but I’m looking for factual answers as much as possible.

So one common scenario of the recent credit crisis is that lending will dry up as banks are unwilling to make loans.

This seems odd, as banks make money by issuing loans. Shouldn’t it now be somewhat easier to get a loan if you are a good credit risk? I would think banks would be tripping over each other to get the customers that have good credit ratings, stable incomes, and are taking out loans that are reasonable considering their income?

I suppose interest rates might go up, but wouldn’t banks be quite interested in giving out loans to good customers?

I would think they would, if they had money to lend. The problem is that they may well be below their capital requirements already and therefore cannot lend money. I would expect to see bank interests rate rise as they try to get additional capital to lend. I further guess that people are not running to deposit money in banks these days. Among other things, the average jack and jill are way over their heads in debt and see that their best investment is to pay them off. That’s why it is called a liquidity crisis.

Possibly because as unemployment rises, they can’t count on you still having a stable income and a good credit rating.

Capital requirements is the answer. Here’s a technical article from the Wall Street Journal that spells it out.