What role do banks play in financial crises?

Let me put it this way: you can imagine the entire economy as a human body, and the banking system is its "cardiovascular system," responsible for delivering money (the "blood") to all the places that need it, such as businesses, households, and so on.

From this perspective, a financial crisis is like the body suffering from a severe cardiovascular disease, such as a heart attack or a massive blood clot. The role of banks in this scenario becomes somewhat complex: they are both the cause and the symptom, and ultimately, they are also the ones that need to be rescued.

Specifically, they play several roles:

1. The "Troublemakers" and "Gamblers" – Creators of the Crisis

Before a crisis erupts, banks often "go wild."

• Reckless Lending: When the market is booming, banks, in their pursuit of higher profits, loosen their lending standards. They end up lending money not only to creditworthy individuals who can repay but also to those with little ability to repay. The most classic example is the 2008 subprime mortgage crisis in the US, where banks lent massive amounts of money to people with poor credit to buy homes. This is like giving a Ferrari to someone who can barely drive; an accident is bound to happen sooner or later.
• Playing High-Risk Games: Banks aren't content with just the "small change" from loan interest. They package those "unreliable" loans into seemingly sophisticated financial products (like MBS and CDO, terms you might have heard of) and sell them to others. What's worse, they often use "leverage," meaning they use borrowed money to play even bigger games. Once the market sentiment shifts, these complex, high-risk investments explode, leading to massive losses.

2. The "Domino Effect" – Amplifiers of the Crisis

Why does a problem with one bank end up affecting the whole world? Because banks are tightly interconnected.

• Interbank Debt: Banks also lend money to each other. If Bank A collapses, it can't repay Bank B, which might then face problems, followed by Bank C, Bank D... It's like pushing over the first domino, and a whole row tumbles down. The collapse of Lehman Brothers in 2008 sent shivers down the spine of Wall Street for precisely this reason.
• Cutting Off "Blood Supply": When a crisis hits, banks get scared and stop lending money. They immediately tighten credit, a phenomenon known as a "credit crunch." This is akin to the blood vessels in the body suddenly constricting, preventing blood flow. Businesses can't get loans to expand production, or even to maintain operations, forcing them to lay off staff; ordinary people can't get loans for homes or cars, leading to reduced consumption. The entire economic activity is thus "frozen."

3. The "Patient Awaiting Rescue" – Sufferers of the Crisis

After their reckless behavior, banks themselves become the biggest victims. Their assets (like those unrecoverable loans) become worthless, stock prices plummet, and they even face bankruptcy.

However, the problem is that this "patient" – the bank – is too special; it's "too big to fail." If large banks were allowed to collapse, the entire nation's "cardiovascular system" would be paralyzed, leading to a complete economic meltdown. Therefore, the government (the "doctor") has no choice but to intervene.

• Government Bailout: The government uses taxpayers' money to inject capital into banks, helping them overcome their difficulties. This is highly controversial because it feels like the troublemakers don't bear the consequences themselves, and everyone else has to clean up their mess. But there's no alternative; to prevent the entire body (the economy) from dying, the heart (the bank) must be saved first.
• Regulatory Follow-up: After the illness is treated, the "doctor" (i.e., financial regulatory agencies) imposes a host of rules on this "patient." For example, they are forbidden from eating too much greasy food (no more high-risk investments), encouraged to exercise more (increase capital adequacy ratios), and undergo regular check-ups (subject to stricter supervision) to prevent future misbehavior.

In summary:

So, you see, in a financial crisis, banks are simultaneously the "troublemakers" who, driven by greed, ignite the powder keg, the "dominoes" that push the first piece and allow the crisis to spread, and finally, the "giant babies" lying in bed waiting to be rescued, even dragging everyone else down. They are both the cause, the transmission mechanism, and the core of the problem.