Question

Banks claimed that they were earning more profits with lower risk, but others argued that banks were earning more profits at higher risk. Why does this distinction matter? What would be the impact on the financial sector and potentially the economy as a whole if this continues? From the move Inside job

Answer 1

This distinction matters, because banks want to lend those entities who are more reliable and less scope of default even if they pay a lower rate of interest, in comparison the claims made by entrepreneurs and political leaders, that high risk people or profile,will give higher return and profit will increase. But, banks are concerned about growing non performing assets and many cases of default. It will have an impact that financial sector will witness slow growth and economy will also face slower growth, because banks will only lend to those who present less risk and scope of default is negligible. Though the government via Fed can make it to be a mandatory lending to firms of specific sectors. The similar conflict is also shown the movie, where banks are refusing to finance that venture that is high risk and scope of failure of the venture is high.