The financial crisis and its types and its consequences

The financial crisis and its types

First: Definition of the financial crisis 

Is a state of imbalance in the financial markets that exacerbate the problems of both the opposite choice and moral risks, and the markets become inefficient

Second: the types of crises

The various crises are related to the banking system and financial institutions, including those related to the foreign exchange market, including those associated with indebtedness, as follows

1-Banking Crisis

Is the decline in the value of the assets of the bank for the value of its obligations, arising from the mismanagement of credit and the increase in withdrawals from the bank is not offset by an increase in the performance of deposits and deposits, which leads to imbalances in the exchange budget and the Bank's inability to meet its obligations are two types of banking crises

  • Liquidity crisis

The inability of the bank to meet its contractual obligations due to the lack of liquidity to meet the obligations, although the actual evaluation of its assets cover all obligations including shareholders' equity, but liquidity is not available, which leads to the acceleration of depositors to withdraw their deposits and the inability of the bank to pay and And then the occurrence of a default of the bank and the beginning of the crisis

  • Crisis faltered

This means that the size of liabilities in the bank exceeds the size of the bank's assets and the inability of the assets to cover shareholders' equity

2- Currency crisis (exchange rate).

The currency crisis occurs in the event of speculative operations to devalue the currency of the country against other currencies. The decline in the value of the local currency causes the monetary authorities to withdraw large amounts of their international reserves or raise the value of the currency. The Frankel & Rose study found that the currency crisis requires a decrease in the value of the local currency by at least 25% per year, noting that the current rate of decline is greater From 10% on average In the previous year

3-External debt crisis.

It occurs when the State is unable to pay off its external debts from interest or installments to these debts on time and to enter into debt rescheduling negotiations

4-Balance of payments crisis

In the case of a decrease and loss of the country's balance of international reserves, the increase in domestic demand for foreign imports compared with foreign demand on domestic exports is significant

5-Stock market crisis (stock market crash)

-:Is a series of consecutive events which are represented in

  • A sharp decline in the prices of shares traded.
  • The decline in the prices of shares traded occurs suddenly and unexpectedly.
  • The collapse of the stock market creates panic among dealers.
  • Dealers will lose a lot of their money invested in stocks.

Adapted from the Book of Economic Volatility

Written by: Dr. Saber Shaker