Lesson 5
Credit Availability vs Credit Demand
Read SLOOS for BOTH standards and demand. The combination tells you more than either alone.
Credit conditions have two sides: supply (willingness to lend) and demand (willingness to borrow).
Credit Supply (Lending Standards):
Banks decide whether to lend based on perceived risk, capital requirements, competitive pressure, and past losses.
Credit Demand:
Borrowers decide whether to borrow based on investment opportunities, existing debt levels, interest rates, and confidence.
The Four Quadrants:
| Strong Demand | Weak Demand | |
|---|---|---|
| Loose Supply | Credit boom | Liquidity trap |
| Tight Supply | Crowding out | Credit freeze |
Why This Matters:
- Tight supply + strong demand: Companies struggle to grow, recession likely
- Loose supply + weak demand: Fed's nightmare — pushing on a string
- Both weak: Credit crunch, severe recession
- Both strong: Boom, but watch for late-cycle excess
Check your understanding
Lesson Quiz
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Quiz Check
A major private credit fund announces it's suspending redemptions. What should you watch for?
Quiz Check
How do you distinguish between a contained credit event and systemic contagion?