Freeing up credit flow the major challenge

Since the outbreak of the financial crisis in 2008, a major challenge confronting monetary officials of many economies has been one of unblocking credit channels.

This is an issue that will certainly be the focus of attention when leaders of 20 nations meet in London next month to address the worsening financial problems dragging many major economies deeper and deeper into a recession. The crux of the issue lies in the vicious cycle of asset devaluation that is making it progressively difficult for banks to make fresh loans.

As asset values fall, banks are forced to keep on selling down their holdings and to curtail their lending to meet the international accepted capital adequacy ratio. The sell-down has the effect of further depressing asset values, requiring banks to dispose even more to maintain their ratios, resulting in a further tightening of credit.