- Definition of the Financial Crisis
- Types of the Financial Crisis
- Unveil the Financial Crisis Causes and its Consequences
- The major Financial Crisis in the World
Definition of the Financial Crisis
A Financial Crisis is a situation in which the value of financial assets falls sharply and rapidly, leading to a severe disruption of the economy. Here, the term “financial asset” represents financial instruments, such as stocks, bonds, currencies, derivatives, and others, which have a monetary value and can be traded in financial markets.
The Financial Crisis is not single-handedly limited to banks and other financial instruments. It spreads across the globe with a massive effect. Furthermore, the Financial Crisis led to crucial situations such as unemployment, recession, market fluctuation, downfall, and even depression (in employees).
Types of the Financial Crisis
There are majorly five types of Financial Crises that have an immense effect on the global economy. Just have a look:
Financial Crisis- Banks or Banking crisis: This type of financial crisis occurs when most banks face liquidity issues.
Financial Crisis- Currency A Currency crisis is expressed as an unexpected fall in the substantial value of a nation's currency with respect to other currencies.
International Financial Crisis
Stock market crisis: Economic turbulence is the reason why the stock market crashes suddenly. In the years 1929, 1999-2000, and 2008, it is witnessed that the U.S. faced some historical stock market crises that shook up the world's economy.
External debt crisis: It occurs when a country cannot meet its financial obligations to its foreign creditors, including both the interest payments and the principal repayment. This can happen for various reasons, such as a sudden drop in commodity prices, a financial crisis, or a large budget deficit.
Unveil the Financial Crisis Causes and its Consequences
Although, there are several factors causing financial crises, such as systemic failures, regulatory absence or failures, risk-taking opportunities, uncontrollable human behavior, and diseases that result in a massive problem spread from one company/organization/country to another.
Post any Financial Crisis, the market liquidity gets brutally disrupted. Actually, the Financial Crisis totally shatters the market, its participants, and their ability to invest in any financial instruments. This is because, at the time of the Financial Crisis, investors or individuals find the market or economy completely vulnerable. The participants often buy and sell financial assets without significant price changes or delays. Hence, face losses.
Other than the above, the Financial Crisis deploys the Credit crunch. It is a typical situation in which banks and other lenders reduce their lending activities. In short, the Financial Crisis makes it difficult for individuals and businesses to obtain credit from banks and other financial institutions.
Next, the Financial Crisis becomes a key reason for financial instability, often resulting from interdependencies or linkages. That is why it may result in systemic risk and disruption in the financial system. The examples of the major Financial Crisis in the world show how a Bailout (A government or central bank intervention to provide financial support) prevents a broader Financial Crisis.
The Major Financial Crisis in the World
Here are some examples of the famous Financial Crisis in the world:
- Credit Crisis of 1772
- Global Financial Crisis 2008
- COVID-19 Pandemic
- OPEC Oil Crisis 1973
- Credit Crisis of 177