Interest Rates and Rates of Return

Abstract

From early 2008 to 2010, the United States banking system faced significant challenges. Bank failures rose, leading the government to spend over 250 billion dollars to purchase the property of several banks, including the major ones in the country, in the fall of 2008.
The issue with the banking system was that commercial banks accepted deposits and then allocated the cash into loans and securities. If the bank's investments decrease in value below the depository's value, the bank must either declare bankruptcy, voluntarily shutter, or be shut down by federal regulators and transfer its obligations to a financially stable bank. By 2009, the Bank of America, the largest bank in the United States, had a 94% decrease in its shares within the initial 18 months due to widespread investor concerns about the bank's financial stability. Failure.
Why have the investments of numerous banks fallen in value? In 2007, a collapse occurred due to a rise in the number of homeowners defaulting on mortgage loans. The banks that possessed these loans experienced a drop in their value. The majority of these loans underwent securitization, which turned them into mortgages supported by bonds-like instruments. Banks have purchased numerous securities-backed mortgages, considering them secure investments that would yield better interest rates compared to other investment options. Regrettably, the value of these mortgage-backed securities decreased by 50% or more in 2008 and 2009. The banks had underestimated both the default risk and the interest rate risk associated with these bonds.