A liquidity crisis occurs when financial institutions or businesses cannot meet their short-term obligations due to a lack of liquid assets. This situation often arises when there is a sudden loss of confidence among investors or customers, leading to a rapid withdrawal of funds. As a result, banks and companies may struggle to access cash, which can exacerbate financial instability. During a liquidity crisis, the market for selling assets can become illiquid, meaning that assets cannot be quickly converted to cash without significant losses. This can lead to a broader economic downturn, affecting various sectors and potentially requiring intervention from central banks or government entities to restore stability and confidence in the financial system.