How banks work Banks operate by lending money from savers to borrowers. Banks impose an interest rate on loans to create a profit and prevent them from losing too much money at any given time. In most cases, banks can make very wise decisions about who to lend money to, but sometimes they become too lenient. The 2008 financial crisis is an example of a lending leniency problem. In the early 2000s, the real estate market was promising; house prices were rising all the time, so banks would lend to almost anyone. The problem with this situation was that the people who were approved for mortgages were not at all financially qualified to purchase such an expensive home. In the fall of 2008, the real estate market collapsed dramatically. This caused home prices to decline, which resulted in homeowners having to pay more for their home than it was worth. Many homeowners were unable or unwilling to pay, which caused the banks to lose money and merge with other banks. As Mark Zandi said on ABC News, "The last time we saw so many homeowners with home values ​​that were worth less than the mortgage amount they owed was during the Great Depression." During this period, another banking failure was the financial panic. of the stock market. The stock market began to crash like during the Great Depression and investors became very worried. Andrew Ross Sorkin of ABC News said, "...this is the time to invest, because that's when people make money." The Dow had fallen 18% and many people feared that the stock market was about to collapse, but that wasn't the case. During this period, investors were trying to shift from investing in risky assets to safe assets. As a result, stock market prices have fallen dramatically… middle of paper… ways to manage these risks, such as interest rates, audits, diversified portfolios, and increasing the amount of securities held .During the 2008 financial crisis, the Fed decided to push banks to hold more reserves so they could have financial security. The Fed devised a plan to pay interest on reserves so that banks would require more reserves and get out of the dire conditions they were in. The results were positive; the more the Fed paid interest on reserves, the more banks required reserves. This made banks confident in the safety of the business and slowly were able to lend to other banks. Banks operate in various ways and without them our economy could be ruined. Banks play a very important role in daily life and everyday finances. Not only do individuals use banks, but also large companies and the organizations that depend on them.