Banks are the ultimate leveraged business. They operate at very high levels of leverage and the fractional reserve portion of the money they create is created for nothing. So the cost of that money is nothing. Of course they do have overhead and other costs, and they operate on slim margins. Leverage works wonders when things are going good and things are getting better. Same can be said for leveraged farmers. As long as farming is good and profitable good leverage that returns more than the cost of interest improves the bottom line. A bank is the same situation on steroids. But like when times get tough for farmers and the margins are negative, leverage works multiples against the farmer. With a bank being the ultimate leveraged bet, bad times for them are terribly bad. It does not take many bad loans to eat through their capital and make them either not meet mandated requirements to be a bank or worse, all the equity wiped out.

This is why bankers do not want deflation nor some tough times. If it is bad for everyone else, is is multiples bad for a fractional reserve bank that has loans going bad. It is a gravy train when times are good, and death to a bank when they are bad.

That is the reason banks are SUPPOSED to be so conservative. Have adequate capital. Have well secured loans with adequate cushion in valuations of collateral.  Many, many of your local banks are run that way. But then there are those where the temptation to push the limit is just too much. Maybe their managers management bonus is based on their loan book size and profits. If they can push leverage to the limit and loan more risky loans (which garner larger interest rates) their banks profit is up, their year end bonus is larger. So you can see there is definite moral hazard particularly in banks that are owned publicly where the managers are playing with other peoples capital. If they win, they win big. If they loose, all they lose is their job only to move on to another. Local banks owned by local people, they tend to be more careful in the way they run their business. It is often mostly THEIR capital on the line, not some faceless stockholder that individually has little power to oversee how the bank is run.

Regulations are supposed to keep the big publicly owned banks in check. We've seen how well that has worked out.