When the financial system or the economy as a whole undergoes a rapid and large decline, it is said to be in a financial crisis. Financial assets like stocks, bonds, and real estate often see a sharp and significant decline in value during financial crises. They can also be identified by a decline in credit availability and a loss of faith in financial institutions like banks.
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Financial crises can be caused by a variety of factors, including:
- Overleveraging: When people, businesses, and governments take on excessive debt, they put themselves at risk of a financial collapse.
- Asset price bubbles: When the cost of an asset, such as a home or stock, rises quickly, it can lead to a financial crisis when the price falls sharply.
- Bank runs: When enough customers attempt to withdraw money from a bank at once, the institution may become insolvent and shut down, triggering a financial crisis.
- Financial institution mismanagement: Financial institutions that are poorly managed may become bankrupt or fail, which could trigger a financial catastrophe.
- Economic recessions: A financial crisis can result from an economic recession, which is defined by diminishing economic activity and growing…
