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How Banks Work

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How Banks Work
Banks operate by lending money from the savers to the borrowers. The banks place an interest rate on loans to create a profit, and prevent them from losing too much money at any given time. For the most part, the banks can make very wise decisions on whom to lend money to, but sometimes they become too lenient. The financial crisis of 2008 is an example of a problem with loaning leniency. During the early 2000s, the housing market was promising; house prices continually were rising, so banks were loaning to almost anyone. The problem with this situation was that the people who were getting approved for mortgages weren’t at all qualified financially to buy such an expensive home. In the fall of 2008, the housing market dropped dramatically. This caused homes to drop in price, which made homeowners owe more for their home than it was worth. Many homeowners were unable or unwilling to pay, which caused banks to lose money and merge with other banks. As Mark Zandi on ABC news stated, “The last time we saw so many homeowners with home values that were worth less than the amount of mortgage they owed was back in the Great Depression”.
During this time, another bank failure was the financial panic of the stock market. The stock market started to plummet like it did during the Great Depression, and investors became very worried. Andrew Ross Sorkin of ABC news stated, “… this is the time to be investing, because this is when people make money”. The Dow had dropped 18 percent, and many people were worried that the stock market was going to crash, although it didn’t. During this time, investors were trying to switch from investing in risky assets, to safe assets. As a result, the prices of the stock market decreased dramatic...

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... ways to handle these risks, like interest rates, audits, diversified portfolios, and increase the amount of securities it holds.
During the financial crisis of 2008, the Fed decided to push banks to hold more reserves so they could have financial safety. The Fed came up with a plan to pay interest on reserves so that the banks would demand more reserves and get out of the poor condition they were in. The results were successful; the more the Fed paid interest on reserves, the more banks demanded reserves. This made the banks have confidence in the safety of the business, and slowly be able to loan to other banks.
Banks operate in a variety of ways, and without them our economy could ruin. Banks play a very important role in day to day life, and every day finances. Not only do individuals use banks, but large businesses and organizations dependent on them also.
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