A financial crisis is a sudden breakdown in the economic and financial system that leads to recession or depression. It often starts with a stock market crash or the bursting of a financial bubble. It can affect a single industry or the entire economy and can be caused by many different factors such as systemic failures, unsustainable debt, incentives to take too much risk, regulatory absence or failures or contagions that spread problems from one institution to the next.
There have been a number of financial crises in the 19th and 20th centuries including banking panics, credit crunches, sovereign defaults and stock market crashes. They can be local, regional or global and often lead to recessions and depressions.
The most recent financial crisis, the Great Recession of 2007 to 2009 (GFC), started in the United States with a downturn in the housing market and then spread globally due to its linkages in the global finance system. Banks and other financial institutions incurred large losses and had to be rescued with taxpayer money. Governments also increased spending to stimulate the economy, guaranteed deposits and bank bonds, purchased ownership stakes in financial firms to restore confidence, and implemented other policies to contain the crisis.
Companies that prepare for financial turmoil by diversifying revenue streams, increasing cash reserves and running financial stress tests to assess their resilience can weather a crisis. Leaders that can guide their teams through a crisis must have open communication and foster adaptability. They must also reshape their operations with digital transformation that improves forecasting, automates processes and allows for rapid pivoting during uncertainty.
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