liquidity crisis
(economics) an emergency in which a financial or government inst-tution cannot meet its current obligations in an acceptable form of payment. different from insolvency, which is where that same inst-tution cannot be realistically expected to ever meet its obligations.
a good example of the difference is a run on a bank, especially in the days before deposit insurance. a perfectly honest, well-run bank could have all of its books in order, and be paying its depositors in legal tender, when suddenly a panic strikes and everyone wants their deposits all at once. this is necessarily impossible, and forces the bank’s officers to default on their debts.
often, the bank could resume operation later when it was established that it held performing -ssets greater than deposits. more recently, liquidity crises have been a problem suffered by countries facing capital flight
in 1997, several countries in east asia were stricken with a liquidity crisis. in many cases, such as malaysia, the panicked response had nothing whatever to do with fundamentals; it was sheer herd mentality.
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