Financial Crisis

Financial crisis is a term that has been used broadly to refer to a variety of situations such as a sudden loss in nominal value of some given financial assets (Nanto & Library of Congress, 2009). However, in 19th, 20th and early 21st centuries, financial crisis has been associated with the banking panics and recessions. In addition, stock market crashes and currency crises are some of the situations that have also been referred to as financial crisis. Financial crisis, basically directly results to a loss in paper wealth and not necessarily in changes in the real economy. Financial crisis in the banking sector occurs when banks suffer sudden rush of withdrawals by their depositors. This poses a difficulty on the banks part since they cannot quickly repay all the deposits when suddenly demanded hence rendering them insolvent hence causing the depositors to lose their deposits. This occurs as a result of risky lending and loan defaults (Nanto & Library of Congress, 2009).

The collapse of the free market forces economic ideology results to global financial crisis. This situation is capable of escalating into unmanageable proportions to any financial system which is dominated by banking sector (LaBrosse et al 2013). Due to the inter-relationship of the global economy, all the banking systems are very vulnerable hence the situation snowballs into worse scenario for the entire banking system and economy. Further, many studies have showed that financial crisis causes depression of the world’s capital market. For instance, the global financial crisis in 2007-2008 resulted to a threat of total collapse of many large financial institutions, national governments bailing out the banks and downturns in the stock markets globally. This in turn led to prolonged unemployment and hence the collapse of world economies (LaBrosse et al 2013).

Different studies have suggested many causes of financial crisis. The Levin-Coburn report indicates that financial crisis is mainly caused...