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Your bank doesn't have a dollar on-hand for every dollar reported in customer accounts. It does fractional reserve banking - some proportion of the bank's asse
by Aaronontheweb 13y ago
Your bank doesn't have a dollar on-hand for every dollar reported in customer accounts.
It does fractional reserve banking - some proportion of the bank's assets are indeed held in liquid currency, but the rest are held in assets (read: interest-bearing loans) that are worth of the sum or excess of your deposits.
If every depositor tried to withdraw from the bank all at once, the bank would be in trouble and it would likely have to rely on deposit insurance from the government to cover it.
- derekp7 13y agoI doubt they would have to resort to deposit insurance. Those loans have value -- they would either borrow from another bank (one of the central banks, or the Fed) against the value of those loans, or sell the loans. Now this is another interesting thing -- the market value of the bank selling a loan fluctuates inversely with interest. If they have a loan that a customer is paying 8% on, then that loan has a market value much higher if current rates are 3%, and much lower if current rates are 12% (assuming the risk of the loan doesn't change -- that also affects its market value).
- Aaronontheweb 13y agoNo need to be a literalist. My point being: the cash needed to cover withdrawals would have to come from outside the bank's own reserves in the scenario I described.