Yes, that is the issue. Economics makes the mistake of assuming Banks can be modelled like other companies - it's not really the markets directly though.
Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults.
So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults.
The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.)
As you say, it's a very fragile system - and easy for excitable chimpanzees to break.
Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults.
So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults.
The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.)
As you say, it's a very fragile system - and easy for excitable chimpanzees to break.