A financial crisis is a sharp episode of instability in the global or local financial system that is usually caused by a bursting economic bubble. It is characterized by depressed asset prices on the heels of dramatic run-ups before the crisis, steep increases in real interest rates and a reversal or slowdown in capital flows. The crisis can be triggered by depositor runs on banks, though the most common trigger is the general realization that systemically important institutions are in trouble.
A key cause of the 2008 Global Financial Crisis was the deterioration of lending standards, particularly in the mortgage market, and the amplification and concentration of exposures to this market through securitization and derivatives, together with inadequate capital and deep interconnectedness. Regulatory factors also played a role, including the dismantling of regulations that separated banking and non-banking activities, notably through the repeal of the Glass–Steagall Act, as well as the incentive effects of low interest rates on risky lending practices.
The crisis climaxed in September 2008 with the collapse of Lehman Brothers and the failure or near-failure of a number of other major institutions. It led to a major recession in the United States and elsewhere, a collapse of stock markets, and widespread panic in financial markets as investors sought safety. It also highlighted the extent of inequality in the United States and opened the door to the discourse of the “1% vs. the 99%” that gave rise to Occupy and other movements on the left.
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