the story is like this:
Banks around the world were over-rolling their money recklessly
in the good years leading up to 2007 creating 1:80, 1:100 gearing
ratios. This means that they OVERLEND 80x or
100x the money they have in the bank to pay creditors(actually it
is the book value but to make it simple for layman ppl ^^) Why do
they overlend? Greedy lo.
For those that don’t know how a bank makes money this is how it
works. Borrow short, lend long, creating credit and liquidity in
the process.
If banks ANYHOW lend ppl money ofc they
make alot of profit on the interest, and the bank revenue looks
good unless you checked out the other parts of their financial
statements. Lots of telemarketers pushing credit cards, or
‘financial planners’ pushing investment plans, loans on ppl that
couldn’t really afford them.
Hence a typical balance sheet of a bank might show very large
loan numbers with very little cash on hand to pay ppl they might
want to withdraw their money.
The money went to ppl taking the loans, these ppl spend the
money and went bankrupt, and the banks are left high and dry with
not enough liquidity.
Since banks DEPEND on credit from other
banks to run their business(borrow short, lend long) and all banks
face this problem, you can guess what happens next.
Thereforce the gov has to pump in liquidity into banks, and at
the same time guarantee ppls deposit to prevent the situation from
getting worse.