This document discusses financial crises, including their causes, types, examples, and responses. It provides definitions of financial crises and outlines three main types: currency crises, banking crises, and debt crises. Common causes are then discussed, such as macroeconomic circumstances, supervisory weaknesses, and credit bubbles. Global examples of crises are provided, including those in Mexico, Asia, and the US. Responses by governments and central banks are summarized, such as monetary policy actions, legislation, bailouts, and combined policy measures. The document concludes by examining the impact of COVID-19 on Sri Lanka's financial crisis and how its economy is responding.

1. FINANCIAL
CRISIS
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2. What is Financial Crisis
• A financial crisis occurs when the value of financial institutions or assets falls rapidly
• Most of the time stock market crashes and other bursts of financial bubbles, financial crises, and
sovereign defaults are referred to as other situations of financial crises
• A financial crisis can be confined to banks or spread through a single economy, the economy of one
region, or economies around the world
Three main types of Financial Crisis
1. Currency Crisis
2. Banking Crisis
3. Debt Crisis
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3. Causes of Financial Crises
• Macroeconomic Circumstances
High-interest rates, a shift of exchange rate regimes, and unnecessary slowdowns or sharp
increases in inflation like some macroeconomic reasons may cause to trigger a financial crisis.
• Supervisory Concerns
Weaknesses in supervisory activities, either due to insufficient legal framework or weaknesses in
supervision, may not detect the problems of financial institutions early. This type of supervisory
failure may lead to the downfall of one or many financial institutions of a country.
Other Reasons
Credit delivery
Government directions manifested by political reasons
Expansion of Financial products
Undue developments in the debt market
Credit
Bubble
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4. Global Examples of Financial Crises.
1. The Mexican Economic crisis during 1995-97
Weaknesses in managing the exchange rate caused the Mexican economic crisis which happened
during the 1990s. Those weaknesses led to exhaust Mexican foreign exchange reserves. Not only
political uncertainties, weaknesses in debt management, and fiscal monetary policies were also
highlighted as the causes of this crisis.
2. The Asian financial crisis in 1997-98
The Asian financial crisis which occurred in July 1997 started in Thailand with the collapse of the
Thai Baht caused by the decision of the Thai government to float the Baht, cutting its peg to the
US dollar, after exhaustive efforts to suppress it in the face of a sever real estate bubble.
3. The US sub-prime mortgage crisis starting from 2007
This crisis was one of the most seriously affected and recent financial crises. The expansion of
mortgages to high-risk borrowers, along with the bursting of the US housing bubble during
2005/06 led to this crisis.
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5. Responses Or Measures Used To Overcome Crises
• Monetary Policy Actions
The central banks implement monetary policy measures to remedy the crisis since the
crisis involved banks and financial institutions.
Some of the actions are cutting interest rate, conducting open market operations,
making available short term loans and increasing the frequency of conducting
auctions.
• Legislation and Regulatory Arrangements
Other than monetary policy measures legislation relating to lending practices,
bankruptcy protection, tax policy, housing, credit counseling, education, and licensing
of lenders have been drafted or amended by countries.
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6. Responses Or Measures Used To Overcome Crises cont.
• Government Bailouts
A series of government bailouts for the institutions which failed have been
introduced by various countries including the US, UK, Germany and several Asian
countries.
• Combined Policy Actions
A series of macroeconomic policy measures such as a shift of interest rates, exchange
rates and inflation rates have been also implemented with monetary policy measures
implemented by affected countries.
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7. Impact of COVID-19 on Sri Lanka’s Financial Crisis
• COVID-19 pandemic has been a terrific financial crisis to Sri Lanka. The IMF (2020)
estimates that the global economy will move 3% downwards which is much worse than
the 2008/09 financial crisis. Therefore, Sri Lanka’s economy will have to face terrific
challenges.
• Sri Lanka would potentially have a fall up to 8% in annual GDP if this Covid-19 crisis
continues for a longer period of time. Tourism and exports are two major sectors that
contribute to Sri Lanka’s economic stability. Due to this pandemic situation, both these
sectors are suffering a major crisis.
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8. Impact of COVID-19 on Sri Lanka’s Financial Crisis cont.
Sources: Central Bank of Sri Lanka, Sri Lanka Customs and Sri Lanka Export
Development
Board.
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9. Impact of COVID-19 on Sri Lanka’s Financial Crisis cont.
• When considering the financial market in Sri Lanka, it also suffered a major crisis due
to the countries situation. After confirming the first COVID patient, foreign direct
investments declined rapidly.
Sources: https://tradingeconomics.com/sri-lanka/stock-market?user=analyst339179

10. How the Sri Lankan Economy Responding to the
Present Financial Crisis?
The Sri Lankan Government plays a major role in responding to the present financial
crisis arise due to COVID-19
• The government transferred LKR 5000 subsidiary to households that were unable to
get their daily income due to the lockdown measures
• The Central Bank of Sri Lanka has reduced the required reserve ratio on local
currency deposits of Commercial Banks
• The President has also asked financial institutions to give more financial support to
SMEs
• The government took certain measures to suspend non-essential imports other than
raw material which are essential for production.
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11. THANK YOU