Banks are supposed to do an honest business by taking money from depositors and lending them to businesses at a higher interest rate and to make profits from the spread in interest rate, less the operating expenses. To make profit, they have to work hard, provide good service to their customers, work efficiently and earn an honest profit.
But, the banks found an easier way to make super profits. During an economic slowdown, when savers are risk averse and accept negligible interest rate, the banks used the money to speculate in all types of asset classes - housing, forex and government debts. It seemed so easy to make money, especially on government debt which was considered to be "safe". They can make a good margin on lending money to the government to earn a high interest rate - better than the money lent to businesses.
But,governments can become insolvent. We now have a situation where the government of several European countries are not able to repay their debts and found it difficult to refinance their short term borrowings. This is the crisis in Greece and possibly Italy. When these governments cannot repay their debts, the European banks that bought their debts get into financial difficulty, causing a potential banking crisis.
http://financialedge.investopedia.com/financial-edge/1111/How-PIIGS-Defaults-Could-Affect-The-Markets.aspx?partner=ntu11#ixzz1dFm08zM8DISCLAIMER:
Banks should be required to go back to their traditional business of handling payments and giving loans to small businesses. They should not be speculators in asset classes, including government debts. These asset classes should be invested by mutual funds.
But, the banks found an easier way to make super profits. During an economic slowdown, when savers are risk averse and accept negligible interest rate, the banks used the money to speculate in all types of asset classes - housing, forex and government debts. It seemed so easy to make money, especially on government debt which was considered to be "safe". They can make a good margin on lending money to the government to earn a high interest rate - better than the money lent to businesses.
But,governments can become insolvent. We now have a situation where the government of several European countries are not able to repay their debts and found it difficult to refinance their short term borrowings. This is the crisis in Greece and possibly Italy. When these governments cannot repay their debts, the European banks that bought their debts get into financial difficulty, causing a potential banking crisis.
http://financialedge.investopedia.com/financial-edge/1111/How-PIIGS-Defaults-Could-Affect-The-Markets.aspx?partner=ntu11#ixzz1dFm08zM8DISCLAIMER:
Banks should be required to go back to their traditional business of handling payments and giving loans to small businesses. They should not be speculators in asset classes, including government debts. These asset classes should be invested by mutual funds.
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