What is typically affected by a financial crisis?

A financial crisis typically impacts the value of financial institutions or assets. During such a crisis, there is often widespread panic among investors, leading to a decline in asset prices, which can affect banks, investment firms, and other financial institutions. These entities are interconnected, and the failure or distress of one can lead to a domino effect, impacting the overall stability of the financial system.

The value of financial institutions can decline due to rising defaults on loans, deterioration in asset quality, and loss of investor confidence. This broader impact goes beyond individual stock prices, small banks, or specific sectors like real estate. Instead, it encompasses a systemic risk that affects various financial markets globally, illustrating how interconnected and vulnerable financial institutions are during periods of crisis.

This systemic risk leads to a ripple effect through the economy, potentially resulting in severe economic downturns, job losses, and reduced consumer spending, emphasizing the importance of understanding the holistic effects of a financial crisis.