What Are Financial Crises?
During a financial crisis, asset prices plummet, businesses and consumers cannot pay their bills, and financial institutions run out of cash. When people hear the phrase “financial crisis,” they frequently envision a panic or a bank run. During a panic or bank run, investors offer their assets or withdraw money from savings accounts as they believe the value of their assets will fall if they remain in a bank.
A financial crisis can also occur due to a speculative bubble economy’s demise, a stock market crash, a sovereign default, or a currency crisis. A financial crisis can affect individual banks, the entire economy, and economies worldwide.
What Causes A Financial Crisis?
Several factors could cause a financial crisis. A crisis can occur when institutions or assets become overpriced and worsen when investors act irrationally or like sheep. For example, when rumors of a failing bank circulate, a rapid series of selloffs can result in lower asset prices, prompting people to sell their assets or withdraw large sums of money to their savings.
A financial crisis can be triggered by systemic failures, unanticipated or uncontrollable human actions, rewards for taking excessive risks, a lack of regulation or a breach of regulation, or contagion, which occurs when problems spread from one organization or country to another, like a virus. If nothing is done to avert it, a crisis may give rise to a recession or depression. Even if steps are taken to avert a financial crisis, it may still occur, worsen, or worsen faster.
Examples Of Financial Crises
Financial crises do not occur frequently, but they have occurred for as long as money has existed. Here are a few examples of well-known financial crises:
Tulip Mania (1637)
According to some historians, the mania had little impact on the Dutch economy and should not be considered a financial crisis. However, it occurred simultaneously as a bubonic plague outbreak, severely impacting the country. Given this, it’s difficult to say whether the crisis was triggered by excessive speculation or the pandemic.
Credit Crisis Of 1772.
Following rapid credit growth, this crisis began in March or April in London. Alexander Fordyce, a partner in a large bank, lost much money after borrowing the East India Company’s shares and fleeing to France to avoid repaying his debts. Panic caused an upsurge in English banks, and more than 20 major banks went bankrupt or stopped paying depositors and creditors. The crisis quickly affected a large portion of Europe. Historians believe this crisis triggered the Boston Tea Party, a protest against undesirable tax laws in the 13 colonies. The subsequent protests sparked the American Revolution.
Stock Crash Of 1929.
The stock market crashed on Oct 24, 1929, after a period of wild speculation and borrowing funds to buy shares. It was the cause of the Great Depression, which lasted more than a dozen years and affected the entire world. One factor that contributed to the crash was a massive oversupply of commodities crops, causing prices to plummet sharply. As a result of the crash, many new market-management rules and tools were implemented.
1973 Opec Oil Financial Crisis
OPEC members imposed an oil embargo on countries that aided Israel during the Yom Kippur War in October 1973. When the embargo ended, a barrel of oil cost $12 instead of $3. Because modern economies rely on oil, higher prices and uncertainty contributed to the 1973-74 stock market crash. A bear market lasted from January 1973 to December 1974, and the Dow Jones Industrial Average index lost about 45% of its value.
Read Also: Banking Evolution: Harnessing The Potential Of Instant Payments
Asian Financial Crisis Of 1997–1998.
This crisis began in July 1997, when the Thai baht fell in value. The Thai government was forced to allow the baht to float because it lacked sufficient foreign currency to keep it pegged to the US dollar. As a result of the crisis, financial regulation, and oversight, the currency’s value plummeted, affecting most of East Asia, including Japan, and the debt-to-GDP ratio skyrocketed.
The 2007-2008 Global Financial Crisis.
This financial crisis has been the most devastating thing to the economy since the 1929 stock market crash. It started with a subprime mortgage lending crisis in 2007, and when the investment bank Lehman Brothers did not work in September 2008, it became a global banking crisis. Massive bailouts and other plans to contain the damage failed, and the global economy slumped.
Covid19 Pandemic Financial Crisis
A global stock market crash started in February 2020. The S& P 500 fell by more than 30% between February 20, 2020, and March 23, 2020. This occurred due to the COVID-19 pandemic, which caused many people to be fearful and uncertain regarding the future of the global economy. Although severe and affected the entire world, markets and national economies recovered quickly. By early April 2020, the S& P 500 had begun a clear rise, and by the end of August 2020, it had surpassed its pre-pandemic high.
Conclusion
A financial crisis occurs when asset prices fall sharply, companies and customers cannot pay their debts, and banks run out of cash. A financial crisis can be caused by various factors, including systemic failures, unexpected or insurmountable social interactions, incentives for taking on too many risks, a lack of or ineffective regulation, or natural disasters such as pandemic viruses.