We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Financial Crisis?

Jessica Ellis
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

In economic terms, a financial crisis is a situation in which widespread assets suddenly lose value. This can occur due to a variety of internal and external influences and, like a massive earthquake, take years of rumblings before the big crisis occurs. Financial crises often result in recessions, which are consecutive quarters of negative growth in the gross domestic product, or GDP.

Despite a global financial crisis developing in the early 21st century, the term and its implications are still little understood. This type of crisis has been a part of economics for centuries with varied results. Holland's Tulip Mania of the 17th century, the Australian banking crisis of 1893, and the Wall Street Crash and Great Depression of the 1930s are all examples of this type of incident. The ability to survive and rebuild after a financial crisis has depended on many different kinds of factors, including outbreaks of war, changing market, and new economic regulations.

One common type of financial crisis is known as a bubble. This economic oxymoron occurs when stock prices are driven so high through speculation that it becomes completely unreasonable to purchase more, as they will never yield at maturity what was initially paid. When the market reaches this “unreasonable” horizon, an enormous sell-off of stocks generally follows, resulting in an astronomical decline in value.

A banking crisis occurs when investors pull money out of financial institutions too fast for the bank to keep up. Since most modern banks lend out the money they take in, this means that the bank may not be able to return the money in investors' accounts if too much is pulled out. Without banking insurance, people can lose all money in their accounts, the fear of which can propel more and more investors to pull money out. If a bank fears it may not have enough capital to cover investments, it may be reticent to lend any, which can lead to a broader financial crisis by preventing approval of loans.

The global economy is often vulnerable to currency crises, which happen when a rapid devaluation in one region's currency that makes it too unstable to set exchange rates. If the region has a fixed exchange rate, it may use monetary reserves to make up the difference in value. This practice can in turn lead to a sovereign default, where a country can no longer afford to pay back the difference it owes and any amount it has borrowed from foreign partners.

One common factor in many financial crisis situations is the idea of a growing panic or herd mentality. In a bubble economy, investors egg each other on by buying more and more stock, sending the price and the expectations shooting up. In a bank run, what begins as a few investors pulling out money can play on fears of a bank run, leading more and more people to destabilize the bank for fear of it destabilizing. In many cases, after a crash has occurred, financial experts are faced with many questions about why the crisis was unforeseen or ignored, yet it may take years of context and distance to get a clear picture of the situation.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jessica Ellis
By Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis brings a unique perspective to her work as a writer for SmartCapitalMind. While passionate about drama and film, Jessica enjoys learning and writing about a wide range of topics, creating content that is both informative and engaging for readers.
Discussion Comments
Jessica Ellis
Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.