A financial crisis is a severe disruption of the financial system that causes businesses and households to stop spending and invest, and can lead to a recession. It usually occurs because of irrational investor behavior and herd-like herding, which pushes asset prices down and triggers panic withdrawals from banks. Financial crises often require government intervention to resolve them.
The 2008 crisis was triggered by the failure of Lehman Brothers and the near-failure of many other financial firms, especially nonbank institutions that were deemed too large to fail (now known as systemically important financial institutions). It was compounded by:
a long period of global economic stability and growth that convinced many bankers, government officials, and economists that extreme economic volatility was a thing of the past; and a culture of deregulation and self-regulation that made it easier for executives at large financial firms to ignore or discount warning signs.
The collapse of the financial system and subsequent global recession led to a sharp slowdown in the economy and widespread unemployment that has not yet fully subsided. Although the policy response prevented a global depression, millions of people lost their jobs and large amounts of their wealth. The crisis also ushered in significant reforms to the financial sector and its regulation and supervision, including new requirements for capital, particularly larger increases for so-called systemically important institutions; liquidity standards; and more explicit disclosure of risks. In addition, Dodd-Frank established a clear process for dealing with the failure of a systemically important financial firm.
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