A financial crisis is a state of extreme uncertainty about the ability of institutions and individuals to meet their financial obligations. It is often characterized by a sudden, severe drop in asset prices and liquidity shortages in financial markets.
The 2008 Global Financial Crisis (GFC) arose from several factors including deterioration of lending standards, especially in the mortgage market; amplified and concentrated exposures to mortgage-related assets by means of securitization and derivatives; inadequate capital; and deep interconnectedness of the financial system. Governments around the world responded with various measures to stabilize the financial system and support economic growth. These included monetary stimulus to stimulate demand; direct lending to banks and other financial firms; guarantees of deposits and bank bonds to bolster confidence; and the purchase of ownership stakes in some banks and other financial firms to prevent bankruptcy, which would have exacerbated the panic in financial markets.
The seeds of the GFC were sown in the 1970s, when bankers began to loosen their credit requirements for lower-income customers, leading to the proliferation of subprime mortgage debt. This mortgage debt was securitized and sold to investors as asset-backed securities. As the housing market declined, the value of these securities plummeted, and the underlying bad loans became a major source of stress on the financial system. Investors reacted by shunning the securities and withdrawing savings from banks, setting off a chain reaction that climaxed in the collapse of Lehman Brothers on September 15, the bailout of American International Group the next day, and a worldwide recession.