Liquidity Crisis

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Loan-To-Deposit Ratio - LTD

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

    A dollar shortage occurs when a country lacks a sufficient supply ...
  3. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
  4. Bankruptcy

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

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

    The possibility that a company will be unable to meet its debt ...
Related Articles
  1. The Working Capital Position
    Investing Basics

    The Working Capital Position

  2. Understanding Financial Liquidity
    Options & Futures

    Understanding Financial Liquidity

  3. Is The Stock Market Rigged?
    Economics

    Is The Stock Market Rigged?

  4. Free Cash Flow: Free, But Not Always ...
    Markets

    Free Cash Flow: Free, But Not Always ...

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center