Question

In your own words write a paragraph or two about “financial crisis” such as the defination, the importance of it, advantages and disadvantages, real life examples and etc ...

Answer 1

A financial crisis is when there is a disturbance in the financial market or markets causing asset prices to fall(especially equity prices) which causes a chain effect to become the cause of insolvency for many debtors and asset holders. The net effect of a financial crisis is the disruption of the market's ability to allocate its capital.

Advantages of Financial Crises:

1. Incorrect assumptions and theories discredited and new efficient theories are put in place
2. Breaks the bubble of unending growth and helps investors and everyone in the capital market to start focussing on the fundamentals once again

Disadvantages of Financial Crises:

1. Higher Cost of Credit
2. Falling asset prices causing balance sheets to weaken
3. Fall in consumer spending and economic confidence

Real life examples of Financial Crises:

• US Housing and Sub-prime crisis (2006-08)
• Global financial Crisis (2008-09)
• Sovereign Debt Crises in the Euro-zone (2010-13)
• EM Mini-crisis (2013-15)