Financial crisis

A financial crisis occurs when banks experience a sudden and unexpected drop in liquidity. This situation may occur when depositors suddenly withdraw more funds from their bank accounts than expected, likely due to a belief that the money will soon run out or that inflationary pressure is reducing the value of their holdings. When this happens, banks do not have sufficient short-term liquidity to meet withdrawal demands, forcing them to scramble for funds. If they are unable to meet the demands of depositors, banks may have to close their doors, causing a massive decline in confidence in the banking system. Financial crises frequently require bailout funding from the government in order to restore confidence in the banking system.