Main roots of Financial crisis in simple English


Financial crisis means the position of financial company in which his assets loss his real value.

We can generally see financial crisis in banks. But financial crisis may happen in stock market and currency market also. So , financial crisis are three type
  • Financial crisis of bank
  • Financial crisis of Currency market
  • Financial crisis of Stock Market

Financial crisis is an accounting term and there are many reasons of financial crisis.


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Main reason of financial crisis of bank


If any banks whose amount are taken by its depositors hugely, at this time bank has incapable to pay cash to his customers because bank also invests their money in other financial market and there is risk factor is also involve in it. So, bank captured in this crisis and it is
ended by banks bankruptcy.



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Main reason of financial crisis of Currency market


You can also see financial crises situation in currency market . Some time value of currency is devalued by market fluctuations and speculative investors .


For Example


Suppose , 1 USA Dollar Currency Value is equal to Rs. 50 but due to speculative activity in currency market and if value of dollar is decreased means 1 dollar = Rs. 3 , then this will be very dangerous position for USA and it will say financial crisis of currency market . and its other name is international financial crises . Recession in business and depression also main factor for creating financial crises .



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Main reason of financial crisis of Stock market


Calculation of main reasons or roots of financial crisis of stock market is some difficult than calculation the reasons , causes and roots beyond currency and financial market like bank . Because value of share decreasing due to two or more happening factors at a time or due to bad performance of company for satisfying their customer and shareholders .


Common roots of financial crisis in any market


“ In simple word value of your company current and fixed asset suddenly decreased in market is called financial crises . “”


1st reason – Mistake in Expectations and forcaste ( forecast )

 
We know that finance’s flow is always in financial market and investors are main factors of financial market. But before invest money every investor can not guess the other investors, what they will do after this . Every good and bad expectations can change market situation . Suppose , if any country’s investor things that his currency will rise , then they invest more , after more investment in that currency , they withdraw more from bank but when they withdraw fund from bank , bank also thinks that depositors are withdrawing their money and more and more negative expectation gives him brain to do mistake , either bank can take loan on high rate for paying customers but they capture in this vicious circle of financial crises because more they take loan for paying customer in emergency , they reach near to bankruptcy.

2. Invest or borrow other country’s currency

Accounting crisis , it means if accounting shows assets are less than company’s liability at this time , it is no right to any bank to do trade . This is also known as accounting mismatch .

3. Lack of human farsightedness

It is the nature of human being that he is not farsighted means if he does not think about future with logic and scientific way of estimation , he can surely Butt in financial crises .

4. Govt. 's bad regulation on financial market

If govt. become corrupt , and make bad regulation regarding financial market , at that time , market of financial can face the problem of financial crisis .

5. Frauds and scams in financial market

It is also the nature of human being that he can commit frauds . When a person bears on the earth he is pure but due to the dirty environment , there are large numbers of evils absorb in human being and after this he wants to earn more and more money by cheating and fraud because in financial market , there are huge amount is of common person like me and you in the form of shares but few cheaters want to get our all money through frauds and scams . For this , they can also use creative accounting tricks and all burden will on company and in last company declare himself insolvent or bankrupt . Because , company is nothing , he is just live in the eye of law but it is just association of people me and you and harmful root is also following



6. Vicious Circle of all above factors



It means , if govt will corrupt , it will encourage other factors as default , means other people will also become cheaters and commit fraud . This is called vicious circle and it is very dangerous because , if financial market's one factor is weak and responsible for financial crisis , then all factors also get support from this factor and become weak , just like HIV/ AIDS disease .

So , please understand these roots and try to remove from initial point for making country strong and free from financial crisis.

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Accounting Education: Main roots of Financial crisis in simple English
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