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Financial Crisis

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The financial crisis is when different assets depreciate in terms of their value; in the

recent past, the crisis was often blamed on financial institutions and the stock market. The

impact paper wealth negatively even though it doesn't cause recognizable effects on the real

economy. Economists have come up with theories that explain what causes a financial crisis

while looking into which it can be evaded. There are various types of financial crisis.

Financial Crisis Types

1. Bank crisis

This type of crisis occurs in a bank when customers rush to withdraw their savings, in most

cases, is contributed by the fact that most banks lend the deposited money more often. As a

result, it will be difficult for banks to pay all the deposits if there's a rush by the depositors. In

most cases, when there's a bank run, the bank becomes insolvent, leading to customers losing

all their deposits since they are not even covered by any deposit insurer. Bank runs can be

distributed all over, often referred to as banking panic.

2. Currency Crisis

In most cases, the crisis is often known as a devaluation crisis; this kind of crisis is caused

when monthly exchange rate depreciation exceeds the standard deviations by more than two

times.

3. International Financial Crisis

This type of crisis is attributed to various factors, including debt and currency crises and

sovereign default. Currencies, more so those that formed the European exchange, have faced

a crisis resulting in them being devalued.

Various causes result in a financial crisis simultaneously; financial crisis impacts can be felt

on the economy, both in the local and international. scenes

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Financial crisis causes

1. Leverage

This involves financial borrowing to finance various investments frequently; this is regarded

as a catalyst for a financial crisis. This norm increases the chance of earning a profit from an

investment at the same time so risky in that it can cause bankruptcy, with an institution being

bankrupt implies that the firm can't be relied on to fulfill its promises in terms of payments to

other firms hence resulting into a financial crisis.

2. Mismatch of Asset-liability

This is a condition in which both the debts and assets of an institution are not aligned

properly; in a real-world example, financial institutions create room for the creation of

deposits accounts that can be withdrawn from the account at any time. This can lead to a

mismatch between the institution's liabilities that are short term which happens to be the bank

deposits, at the same time its long-term assets, which include loans; in most cases, this is

often considered as the main cause for the occurrence of bank runs, some organizations have

failed as a result of them not being able to regenerate debts that are short term to enable them

to finance their investments that are long-term which in many occasions happens to be

mortgage securities.

Financial crisis effects

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1. Regulatory failures

The financial crisis has resulted in different states failing to regulate the finance sector; the

government is trying to ensure that the finance sector has sufficient assets to achieve their

obligations through various requirements that include both reserve and capital at the same

time limits based on leverage.

2. Contagion

This refers to the concept that a financial crisis may move quickly from one institution to

another.

Various theories have been developed by economists to try and explain the causes of the

financial crisis and give a detailed explanation of how to control the crisis. Some of the

theories include Marxist and also Minsky’s theories. Financial crisis can be controlled

through different measures such as identifying problems causing a financial crisis and

creating a budget plan. In addition to this, financial institutions mostly should put in place

mechanisms to track finances progress.