Credit Cycle
The recurring expansion and contraction of credit availability in an economy, closely tied to the business cycle.
What is Credit Cycle?
The credit cycle is the cyclical pattern in which the availability and cost of credit in an economy expands during economic upturns and contracts during downturns, driven by shifts in bank lending standards, risk appetite, asset prices, and regulatory conditions. During expansions, lenders loosen underwriting standards, extend more credit at lower rates, and accept greater risk — which fuels economic growth but also accumulates systemic financial fragility. During contractions, lenders tighten standards, pull back credit, call in loans, and raise rates, which amplifies downturns as businesses and consumers reduce spending due to reduced access to capital. The credit cycle typically lags the business cycle slightly, reaching its peak of looseness just before a downturn and its tightest point just as recovery begins. Credit cycles that become extreme in their expansion phase — as in 2003–2007 — can cause financial crises when they reverse.
Example
The 2003–2008 credit cycle was one of history's most extreme expansions: mortgage lending standards collapsed, banks created and sold subprime mortgage-backed securities globally, corporate leveraged loan standards eroded, and total US mortgage debt doubled to $14.6 trillion. When credit contracted sharply in 2008–2009 — banks stopped lending, securitization markets froze, and short-term funding markets seized — the Federal Reserve and Treasury had to intervene massively to prevent a complete collapse of the financial system.
Source: Federal Reserve History — Financial Crisis of 2007–2009