Liquidity Crisis

Posted in Finance, Accounting and Economics Terms, Total Reads: 2137

Definition: Liquidity Crisis

Liquidity may be defined as the free availability of cash and cash equivalents in a business(or an economy).

Liquidity crisis is a situation wherein an institution (a business or the economy as a whole) faces a crunch of liquid funds. It is a situation of lack of liquid funds (cash and cash equivalents).

For a business, when it does not have sufficient liquid assets to meet its short term obligations, it may be said to be facing liquidity crisis. The company may have to file for bankruptcy or insolvency in case of acute liquidity crisis.

As for an economy, if banks either reduce the amount of credit or give no credit at all, liquidity crisis may arise.

Liquidity crisis is usually associated with high interest rates.


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