The traditional financial crisis was triggered by the failure of one or more banks, often during a period of declining asset prices. The cause was usually a failure to correctly assess credit risk, for example by lending against temporarily inflated asset values. Fire sales of assets and contagion led to runs on other banks and the emergence of a full-scale financial crisis.
Such a scenario is still possible today, particularly in an economy heading into recession, but it no longer represents the stereotype. For a start, bank supervision and banks’ own control of credit risk have improved enormously over the past decade. Also, financial disturbances are now more likely to originate in, and be transmitted through, financial markets than has been the case in the past.