Say a loan of $ 500,000 is made to a borrower, secured by his house. Borrower defaults, lender sells house for say $450,000 Bank records a loss of $ 50,000 which reduces their income that year, maybe causing them to reduce their dividend that year
2 points to note
1 The Bank does not lose the whole $ 500,000
2 The shareholders of the bank wear the $ 50,000
This happens all the time. If there are a lot of bad loans, then the lenders will take a bigger hit, but this does not drag down the entire world financial system of the world.
