Liquidity Crisis


DEFINITION of 'Liquidity Crisis'

A negative financial situation characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets (i.e., cash) necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying its employees. If the liquidity crisis is not solved, the company must declare bankruptcy. An insolvent business can also have a liquidity crisis, but in this case, restoring cash flow will not prevent the business's ultimate bankruptcy.

BREAKING DOWN 'Liquidity Crisis'

For the economy as a whole, a liquidity crisis means that the two main sources of liquidity in the economy, banks and the commercial paper market, severely reduce the number of loans they make or stop making loans altogether. Because so many companies rely on these loans to meet their short-term obligations, this lack of lending has a ripple effect throughout the economy, causing liquidity crises at a plethora of individual companies, which in turn affects individuals.

  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  3. Loan-To-Deposit Ratio - LTD

    A commonly used statistic for assessing a bank's liquidity by ...
  4. Dollar Shortage

    A dollar shortage occurs when a country lacks a sufficient supply ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, ...
  6. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
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