>Where are the losses? There don't have to be actual losses in the confidence game that is our fractional-reserve banking system. Banks only need to hold a ce

>Where are the losses? There don't have to be actual losses in the confidence game that is our fractional-reserve banking system. Banks only need to hold a certain fraction of their depositors money in liquid reserves (hence "fractional-reserve"...). Every modern bank would be insolvent immediately if all depositors decide to withdraw their money, the money that they own but keep at the bank. We rely on this being a very unlikely event, and it is unlikely as long as depositor behavior is uncorrelated. But if there's panic it becomes correlated and boom. > What are the impaired investments? Again, there don't even need to be impaired investments for this to happen, but the problem appears to be that safest of possible investments: government bonds. Which banks may even required to hold. The recent rise in interest rates means that the liquid value of the low-interest (we even had negative interest rates for Bunds, for example) bonds that banks are holding has declined massively. These bonds will still get paid out in full when reaching maturity, so the money isn't really gone and there isn't a loss. If you can wait for them to mature. But if they have to sell those bonds now because an unexpectedly high number of depositors want their money, then they have to sell them at a loss. So central banks are now facing a conundrum: raise interests rates to fight inflation, but risk the financial system going boom. Or lower rates again and risk inflation running out of control.