Types of financial crises

Financial crises are a very common phenomenon in today's economy and
bring a lot of trouble to businesses and governments alike. Financial crisesand their mechanisms and consequences are quite varied. In order to better understand the essence of the phenomena taking place, it is useful to be able to identify crises. To "get to know" the financial crisesWe will consider their typing and the general characteristics of each type.

The concept of financial crisis

The financial crisis are quite a variety of situations in which certain financial companies or assets (such as stocks or bonds) lose a significant amount of their value.
It is clear that financial crises The financial sector of the economy is the first to be affected. However, due to the fact that the real sector is closely linked to the financial sector, eventually such crises are reflected in all spheres of the economy and lead to a decline in production, an increase in unemployment, a decrease in the welfare of the population, etc.

Types of financial crises

Now that the first introduction to the concept of financial crisis and its consequences have occurred, let us move directly to the types of financial crises:

Banking crisis

The banking crisis is a situation when a bank experiences a sudden and massive influx of clients wishing to withdraw deposits, as a result of which the bank cannot pay out to all depositors.

It is worth explaining that there is no element of fraud on the part of the bank in the described situation: the banking system is set up so that banks make money by issuing loans at the expense of depositors' funds; it is clear that a sudden demand for a refund cannot be fulfilled by the bank without "outside help".

The situation when an influx of clients wishing to withdraw their deposits at the same time experienced by many banks, called systemic banking crisis.

It is clear that if a bank (or several banks in a systemic crisis) does not receive support from the outside, there is a threat bankruptcy the bank itself. Also, the bank in a crisis stops lending, which dramatically affects the producers of goods and services, which need loans for normal functioning. So bank crisis spreads throughout the economic system.

Examples of crises of this type are, for example, the banking crises in Latin America in the 1980s.

Crashes of market bubbles

Economists say that the financial asset exhibits bubbleif its price exceeds the present value of future income from the asset.

In other words, a bubble occurs when the price of an asset is unreasonably high compared to the returns that the asset itself will generate. Thus, it is a situation where people too optimistic about the prospects for a particular asset.

Clearly, this situation cannot last forever, and sooner or later the bubble bursts. 1. As a result of the rapid decline in the value of assets, their owners become dramatically poorer. What was worth a lot yesterday may be worth nothing today. Since various assets in advanced economies are often used as collateral or a guarantee to attract other credit, a sudden loss of funds results in a lower credit rating or even a bankruptcy 2 owners of depreciated assets. It is clear that in the case of mass bankruptcies the creditor companies of today bankrupts become candidates for bankruptcy tomorrow.

Very importantly, due to such shocks, both the directly affected companies and their partners change their behavior to a more cautious one: new investment projects are postponed, hiring of employees is suspended, and production volumes are reduced. All this can lead to a "slowdown" of the economy. stagnation.

Examples of bubbles: tulip mania in Holland, the Japanese real estate market bubble of the 1980s, the high-tech company (dotcom) bubble in 2000, the 2007 mortgage-backed securities market bubble in the U.S., etc.

1. It should be noted that not all bubbles burst: sometimes the overestimation of expectations and, consequently, the decline in price can occur gradually. In these cases, we speak of the "deflation" of the bubble.

2. This was the case in 2008, when, after the collapse of the bubble in the mortgage-backed asset market, many companies that held such assets in their accounts went bankrupt.

Currency crisis

Currency crisisThe foreign trade crisis, or, as it is also called, a balance of payments crisis, occurs when the value of domestic currencies changes sharply. Such situations can be the result of the voluntaristic actions of governments, or they can be the consequence of so-called speculative attacks.

So, for example, when the active sale of foreign currency assets by foreign (capital outflow) and domestic by investors - the exchange rate begins to experience "pressure. This situation is exacerbated if a country has adopted a fixed exchange rate system: the government has to choose between spending a significant amount of reserves to support the exchange rate and abruptly changing the exchange rate to relieve the "pressure. As a result, the currency often changes its value dramatically, with consequences for both the real and financial sectors.

An example of a currency crisis is the sharp devaluation that occurred after the sovereign Default in Russia in 1998.

Sovereign default

Sovereign default is state bankruptcy: a situation in which the state admits that it cannot pay its obligations.

So is the currency crisis, sovereign default can be a consequence of both ill-considered economic policy and economic shocks. In any case, immediately after the announcement sovereign default government liabilities are dramatically losing value, capital outflows begin, and the threat of a currency crisis arises.

An example sovereign default is the 1998 crisis in Russia.

Liquidity crisis

The concept of liquidity crisis describes one of the situations:

- A general state of mutual distrust in the banking system, which leads to a temporary disappearance of loans.
- Cash shortages experienced by a particular company.

Sometimes the term is used synonymously with credit crunches.

If we're talking about liquidity crisisIf the financial crisis is an economy-wide one, then it is in a sense a special kind of financial crisis: most often it arises as the first consequence of other crises, such as banking crises or collapses. speculative bubbles.

The situation liquidity crisis was observed, for example, in the U.S. market after the collapse of the mortgage-backed securities bubble in 2007.

Summary

The financial crisis is a situation of a sharp and significant decline in the value of financial assets or entire organizations. The complexity of the financial system determines the existence of different types of financial crises, among which are banking crises, market crashes bubbles, currency crises, and sovereign defaultsand liquidity crises. Because of the close connection between the financial system and the real economy, financial crises quickly spread to the production of goods and services and often cause a decline in production, an increase in unemployment and a general decline in prosperity.