How banks work - Coursework Example

How Banks Work How Banks Work Part The boom in subprime mortgages in the United s between 2000 and 2007 led to the biggest bankruptcy in the country. The Lehman Brothers filed for bankruptcy in 20009 and the liquidation process started. The failure of the financial institution was occasioned by inconsiderate lending of unsecured home loans (The Economist, 2013). The institution made huge financial gains in the first years of the boom. However, the situation reversed as the leveraging ratio worsened, reaching 31: 1 in 2007.

The excess leveraging made the business highly volatile. The situation could have been avoided if the company maintained a stable leveraging ratio, as well as thorough checks on creditworthiness of borrowers. A banks operations are optimal when it has sufficient reserves to contain any shocks in the business. The government and credit agencies should also enforce banking regulation since the failure is partly attributed to laxity in regulation.Part 2Banks generate revenues through lending. The financial crisis of 2009 affected most financial institutions.

Most mortgages given by the financial institution prior to that period did not consider the borrower’s ability to pay and thus default was imminent. The result was heavy loss and thus reduction of bank reserves and deposits. As such, the banks were wary of lending more funds to individuals and businesses. The result was that banks revenue declined as well as the growth of businesses. The risks involved in lending at the time was the main reason for the slow recovery. An example to illustrate this is that the Bank of America reduced its mortgages portfolio and invested more in investment loans.

In the period 2010-2012, mortgages reduced from $450 billion to $310 billion (Forbes, 2015)ReferencesForbes. (2015, March 11). U.S. Banks Witness Highest Post-Recession Growth in Loans Over 2014 - Forbes. Retrieved from http://www.forbes.com/sites/greatspeculations/2015/03/11/u-s-banks-witness-highest-post-recession-growth-in-loans-over-2014/The Economist. (2013, September 7). The origins of the financial crisis: Crash course. Retrieved April 29, 2015, from http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article/