Question

-What is the financial crisis?

-Dynamics of financial crises, the stages of crisis

-2007/9 financial crisis

Answer 1

Financial Crisis: Financial crisis is a situation where there is a decline in value of asset, companies are not able to close its position due to liquidity cruch and the debt holders are not able to service their debt.

Stages of Financial Crisis:

1> Initiation of financial crisis: It happens due to lax in regulations, or change in regulation, some new financial product introduction without analyzing its risk, increase in prices of asset without any justifications etc.,

2> Financial institution crisis: Either banks or insurance company or mortgage companies are start failing due to not payment of dent , liquidity cruch or unable to serve the insurance.

3> Debt Deflation: It is the final stage where banks are start increasing the demand by reducing the rate on debt instruments.

2007-09 Financial Crisis: It all started due to new financial innovation of CDS and mortgage market. Which lead to the default of Lehman Brothers and Bear Sterns. Which lead to default of insurance compnay as well who ahs exposure in CDS and then there was a liquidity cruch which cases the prices to fall further.