Answer to Question #309204 in Finance for Comfort

Question

How did liquidity risk contributed to the financial crisis of 2008?

Answer 1

How did liquidity risk contribute to the financial crisis of 2008?

Financial institutions had enough assets to satisfy their long-term responsibilities, but not enough liquidity or assets that could be transformed quickly into cash to cover their short-term obligations. The present crisis and liquidity risk: downward liquidity spirals. The bursting of the housing bubble, along with a massive exposure by leveraged financial institutions, was the catalyst for the crisis. This resulted in major bank losses as well as funding liquidity issues. In late 2008 and early 2009, stock and commodities prices plummeted due to a lack of investor trust in bank solvency and a reduction in credit availability. The crisis quickly grew into a global economic shock, culminating in the bankruptcy of major banks.