Financial crisis is a significant decrease in the value of financial instruments and assets that affects the ability of individuals, businesses, and governments to meet their debt obligations. It is associated with economic contraction and often leads to a recession or depression. Among other things, it can result in the loss of jobs and homes, a disruption of essential services, and a general loss of confidence in the economy. It is generally caused by systemic failures, unanticipated or unexpected human behavior, incentives to take excessive risk, regulatory absenteeism or failures, and contagions that amount to a virus-like spread of problems from one institution or country to another.
The most severe financial crisis in modern times, the global financial crisis of 2007-08, began with a contraction in liquidity in financial markets and engulfed major investment banks, commercial banks, mortgage lenders, insurance companies, savings and loan associations, and the housing market. It also contributed to the decline in global economic activity and the Great Recession, the worst economic downturn since the Great Depression (1929-c. 1939).
In the United States, the financial crisis was ignited by a steep decline in home prices and a large buildup of subprime mortgage debt. It was exacerbated by financial innovation that allowed investment bankers and hedge funds to place enormous wagers on the performance of mortgage-related securities far beyond the value of the underlying mortgage loans, using derivatives such as credit default swaps and collateralized debt obligations.
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