Finschool By 5paisa

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Asset values endure a sharp decrease in value during a financial crisis, firms and individuals are unable to pay their loans, and financial institutions face a shortage of liquidity. During a panic or bank run, investors sell off their assets or withdraw cash from savings accounts out of fear that their value will decline if they keep them in a financial institution. This is a common feature of financial crises.

The deflation of a financial bubble, a stock market crash, a sovereign default, or a currency crisis are further circumstances that could be classified as a financial crisis. A financial crisis might only affect certain banks, or it might affect the entire global economy or just one particular economy.

Multiple factors may contribute to a financial crisis. In general, an overvalued asset or institution can trigger a crisis, which can then be worsened by irrational or herd-like investor behavior. For instance, when a bank failure is rumored, a rapid succession of selloffs can lead to decreased asset prices, causing people to dump assets or withdraw substantial sums of money from their savings.

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