Trust is Paramount

Most people pay their loan.

Even now during times of economic hardship it is estimated that only 7% of all borrowers are behind on their loans. So it does not make any economic sense if banks only lending out capital that is in their possessions.

Prior to 2004 the capital requirement on loans not backed by deposits were capped at 15 to 1. This meant that banks were able to lend up to $15 for every dollar in their vault. After 2004 however that cap was removed and banks were able to increase their lending without raising extra money. So a high proportion of banks were lending up to $30 for every dollar they had.

So banks attained a fair chunk of their capital through sub-prime mortgage bonds and banks were approving more and more loans without raising any more capital. By working under these parameters it did not take a high percentage of mortgage default before banks started to run short on money. So without going further into specifics that was exactly what happened to banks. If it wasn't for government bailouts, banks would have been completely broke taking the depositors money with it.

Therefore to put in a nutshell, this financial crisis threatened the public's trust in the whole banking system. Without the peace of mind that money is safe in a bank vault, people would end up storing all their savings under their bed.

The whole financial system is way too vulnerable to greed and excessive risk taking. Unless the financial system gets a drastic overhaul, the public will continue not trusting banks and stop providing the capital business needs to grow.

Without trust in banks the world will stumble back into the Dark Ages!!