Track 13 of 25

Credit cycles and liquidity

How credit conditions tighten, what happens to funding, and why lenders get more conservative at exactly the wrong moment for a borrower.

25 lessons

Mark a lesson complete and it is remembered here.

What a credit cycle is, measured in terms rather than in ratesMost of a tightening happens in what counts as collateral, and no published figure records that part.7 min
Availability and price are two different thingsA line can carry an unchanged rate and be entirely unusable, and no statement will mention the second fact.6 min
What a spread widening actually isTwo things move it: the chance of loss, and the price of bearing that chance. The second is larger.7 min
How funding conditions tighten before any term changesThe first thing to move is the answer to a request, and nobody publishes the answers.7 min
The funding chain behind a line, and the haircuts inside itA second discount sits above yours, set by parties you will never meet, and it decides how much your lender can lend.7 min
Why the lender's own borrowing sets the floor under yoursA rise in what the lender pays for money arrives in what you pay, through one of three channels it chooses.7 min
Market liquidity and funding liquidity, distinguishedOne asks whether an asset can be sold, the other whether cash can be raised against it, and either can fail alone.7 min
Depth, spread and immediacy: three measures that disagreeThe screen prices one share. What governs a liquidation is the size standing behind the quote, and that is not displayed.7 min
Why liquidity is abundant until the moment it is neededIt is supplied by people whose willingness to supply it falls with the same thing that raises everybody's need for it.7 min
The liquidity spiral, one turn at a timeEach turn is small and each is reasonable, and the total sold comes to twenty-four times the shortfall that began it.7 min
Why a haircut rises during a decline rather than before itThe input is a backward-looking average, so the rule cannot move until the fall it measures has already happened.7 min
Procyclicality: the same rule tightening at the worst momentAny buffer sized from a risk measurement must grow when risk grows; a rule without that link is stable and permanently expensive.7 min
Why a lender becomes conservative exactly when room is neededThe fall and the revision multiply rather than add, so a 30 percent decline removes 44 percent of borrowing capacity.7 min
Reclassification during a tighteningSeveral holdings change row on the same night, because thresholds are fixed levels and a decline arrives as a percentage.7 min
A concentration limit that binds only in a drawdownA cap on one holding's share of the total can be breached by the other holdings falling instead.6 min
Credit rationing: when price stops clearing the marketBeyond a certain rate a lender expects less back rather than more, so it shortens the queue instead of raising the charge.7 min
A flight to quality, stated in collateral termsThe gap between schedule rows widens more than any single row moves, so two portfolios of equal size stop being equal collateral.7 min
Why the bid thins before the price fallsSize behind the quote is the first casualty of rising volatility, and it can halve while the last traded price is unchanged.7 min
Fire sales, and the price impact of forced sellingWhat a sale costs is set by how fast it must happen, the one variable a forced seller cannot choose.7 min
Why one borrower's cure is another borrower's shortfallThe sale that fixes one account marks down that holding everywhere, and the total removed can exceed the problem solved.7 min
Contagion through shared collateralYour exposure to strangers is not in your portfolio but in how much of theirs looks like yours on one book.7 min
Dealer balance sheets and the capacity to absorbHow much risk the system can hold is somebody else's internal limit, and it shrinks on a calendar.6 min
What a backstop does, and what it does not undoIt restores the willingness to hold risk from a date forward; it cannot restore a holding that was sold the week before.7 min
Recovery: why terms normalise more slowly than pricesA price can retrace in a fortnight; an estimator built on sixty trailing days cannot, and a committee meeting quarterly will not.7 min
One unchanged portfolio, through one tightening cycleNothing is bought and nothing is sold, and nine months later four fifths of the headroom has gone.8 min

Educational only. Nothing in this track is investment, legal or tax advice, or a recommendation to enter into any transaction. Completion is stored in this browser and nowhere else.