A financial crisis is a serious disruption in global markets that occurs when asset prices decline steeply, businesses and consumers can’t pay their debts, and financial institutions suffer liquidity shortages. It is often accompanied by a recession or depression. There are many contributing factors to a financial crisis, including systemic failures, unanticipated or uncontrollable human behavior, incentives to take too much risk, and regulatory absence or failures. Financial crises are often contagious – they spread from one institution or country to the next.

The most recent and dramatic example of a financial crisis is the 2007-2008 global financial crisis, which began with subprime mortgage lending but quickly expanded to include investment banks, such as Lehman Brothers, that collapsed in September 2008. It also involved a housing bubble, a credit contraction, and huge government bailouts. It was the worst economic disaster since the Stock Market Crash of 1929 and the Great Depression in the 1930s.

Some analysts blame governmental affordable housing policies for the crisis, while others point to deregulation of the over-the-counter (OTC) derivatives markets and the lack of proper credit rating oversight. Others cite excessive borrowing and risky investments by households and financial institutions, especially in the run-up to the crisis.

A defining characteristic of a financial crisis is the mismatch between an institution’s short-term liabilities, such as deposits, and its long-term assets, like loans to businesses and homeowners. This is often a result of uncontrolled risk and heightened leverage, which can lead to a sudden loss of confidence in the institution.