Reviewed by Aug 16, 2023| Updated on
In a financial crisis, asset prices notice a sharp decline in value, consumers and businesses are unable to pay their debts, and financial entities face a shortage of liquidity. Often, a financial crisis is related to a bank run or panic during which investors sell their assets or withdraw money from their savings accounts because they believe that if they stay in a financial institution, the value of those assets will decrease.
Certain circumstances that could be described as a financial crisis include a global financial bubble bursting, a sovereign default, a stock market crash, or a currency crisis. Financial crises can be confined to banks or spread across a single economy, a region's economy, or worldwide economies.
There could be multiple causes for a financial crisis. Generally, when organizations or properties are overvalued, a crisis can arise and can be compounded by unreasonable or herd-like actions of investors. A rapid string of seals, for example, can result in lower asset prices, prompting individuals to dump their assets or make huge savings withdrawals when a bank failure is rumoured.
A financial crisis can take several forms, comprising credit panic and banking or a stock market crash. But, it is different from a recession that is often the result of a crisis like that. Financial crises lead directly to paper wealth loss but do not necessarily lead to significant changes in the real economy. When the value of financial institutions or properties declines quickly, a financial crisis arises.
Factors backing financial crisis include unanticipated/uncontrollable human behaviour, systemic failures, risk-taking opportunities, regulatory absence or failures, or diseases that result in a virus-like spread of problems from one organization or nation to another. When left unchecked, a crisis could lead to a recession or depression in an economy. Even when action is taken to prevent a financial crisis, they can still happen, deepen, or accelerate.