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Financial Crisis

What is a Financial Crisis?

A Financial Crisis is a sudden, severe drop in the value of financial assets, disrupting the economy. It affects a wide range of financial instruments, including stocks, bonds, currencies, and derivatives. The effects of a Financial Crisis are widespread, leading to issues like unemployment, recession, and market instability. 

Financial Crisis Categories

Five main types of Financial Crises impact the global economy: 

  • Banking crisis: Occurs when many banks experience liquidity problems.

  • Currency crisis: An unexpected significant fall in a nation's currency compared to others.

  • International Financial Crisis

  • Stock market crisis: Caused by economic instability leading to sudden stock market crashes.

  • External debt crisis: Happens when a country can't meet its financial obligations to foreign creditors.

Causes and Results of Financial Crises 

Many factors can cause financial crises, including systemic failures, poor regulation, risky behavior, and widespread disease. After a Financial Crisis, market liquidity is significantly disrupted, hindering investment. It also results in a credit crunch, where lending activities are reduced. Financial Crises can lead to systemic risk and financial system disruption, often requiring government or central bank intervention. 

Examples of Major Financial Crises

Here are some well-known Financial Crises: 

  1. Credit Crisis of 1772
  2. Global Financial Crisis 2008
  3. COVID-19 Pandemic
  4. OPEC Oil Crisis 1973
  5. Credit Crisis of 177