The starting point is the idea that banks must provide safe deposits to their clients. A research paper from the Wharton School at the University of Pennsylvania, described an interesting perspective on the behavior of banks.
People need safe deposits to perform transactions
Banks make loans to companies and individuals. When clients put their money in banks, they don’t expect a high rate of return. They just need to make transactions. In the paper, they described the real goal of a bank as creating safe assets. Lots of safe deposits means very cheap funding for banks.
That’s why banks are reluctant to invest in tech startups. A risky stock portfolio doesn’t help ensuring that the deposits are safe. That’s why banks invest in mortgages or offer loans to companies which can use their assets as a guarantee.
Growing demand for safe assets contributed to subprime boom
Many economists claimed that during the rise of China (a fast-growing country with a weak financial system) increased the global demand for safe assets.
The Chinese (particularly the Chinese central bank) were buying US government debts. That led to lower safe borrowing rates, making the creation of safe assets much more lucrative. That gradually forced banks to get involved with riskier parts of the financial sector. They had to start buying riskier assets than they had in the past.
In other words, the subprime boom happened because eventually, the rising demand for creating safe assets by banks led to providing loans to more risky clients. Banks exhausted the creditworthy market and had to go into the subprime sector.
-jk-