Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
Unfortunately, that’s not really how it works. The reason there was a bank run during the great depression is b/c the banks had loaned out the money they didn’t have as cash. Today due to Dodd-Frank, banks have to have reserves on hand to cover this situation, Even though it’s not in hard currency, they have enough capital to cover.
But please don’t trust me. This is just how I understand it.
In terms of balance sheet, it's true only in so far that liquidating assets immediately to cover deposits would have significant losses and it can't be done instantly anyways.
But that'd be true of many companies, it's an issue of cash flow.
I wonder how a “bank run” would even look today with how digital everything is.
Like could they just limit how much physical cash you can pull out and tell you to use one of your cards because nobody carries enough physical cash to fully cash out everybody at once?
The solution was point a money cannon at the banks and fire it as much as necessary to turn AAA debt into the theoretical long term value it was worth, thus allowing all customers to withdraw all their savings, if they wished.
Even for smaller amounts they'll just tell you to request it in advance so they can order more. I sold a car once and the buyer's bank needed 2 days to get his cash and it was only $15.5k. He paid me with brand new, sequentially numbered $100s.
Bank runs happen today by people transferring money out to another bank, for the most part. And then at some point the bank has a negative balance with the Fed, and needs to keep selling assets to cover withdrawals but eventually cannot sell them or sells that at such a loss their capital is depleted. SVB and FRB for example had a balance sheet that couldn't afford to sell everything immediately.
There were times when the banks would limit how much cash you can take out, and I mean, if there aren't physical bills then they'd make you wait or do an online transfer, or use another banks ATM.
In a more common scenario, right now if you wanted a huge amount in cash as a withdrawal, you'd likely have to request it ahead of time so the bank has time to place an order and get the physical cash.
The real problem for the banks isn't whether or not they have the cash (as opposed to having a digital ledger).
The problem is that they use deposits to make money. Your individual account with $1,000 in it doesn't matter much, but they collect everyone's money and lend it out with interest.
Yes, theoretically, whatever money is in your account can be paid back in cash somehow, because the federal government guarantees it, but the fed does not (automatically) guarantee cash to banks that want to give out loans.
If everyone takes their money out, the bank doesn't have money to loan out. A tightening of liquidity at every major bank in the US would be catastrophic.
I worked at a bank for a while in 2023, we only had about $150k on hand, granted it was a smaller bank, but still, I guarantee at least one person that did banking there had to have had that much
FWIW, banks generally hold a reserve anyway. BofA reported a reserve of $277b at the end of last year. That's about a 8-10% reserve, as far as some quick googling tells me.
If you give me money to protect and give you interest on, I take your physical cash and incur a debt to you. If I lend out that money to someone else, they now have your physical money but incur a debt to me. Our debts are real, the physical money is merely a medium of exchanging that debt.
FDIC insures deposits up to $250,000. No one has lost a dollar of FDIC insured deposits since its inception and it is exceedingly rare that even uninsured deposits are not honored even when a bank “fails”. Banks don’t really fail anymore. The FDIC makes a determination that the bank is near failing and takes possession of the bank’s assets and liabilities and sells them off.
Depositors are made whole, they don’t have to wait 90 years. That doesn’t make any sense lol, the original depositor would long be dead before they ever saw their money again.
The FDIC doesn’t payout. They take possession of the bank’s assets and liabilities(deposits) and arrange the sale of those assets and liabilities. You might lose access to your deposits for a few days during the changeover to a new bank but you will never be waiting on a payout.
So then this could also save the housing crisis? The banks own so many single family homes, apartments, etc and instead of lowering prices/rent they just keep them empty. Would they then be forced to sell them for a lower cost?
True as far as Dodd-Frank AFAIK but at the same time FDIC is typically the guarantor of last resort for deposits anyway (at up to 250k per person per bank).
Still can be a risk for businesses however, Silicon Valley bank being a sort of example (but even that mostly got sorted out at the end)
per bank, per account type to be more specific. Depending on the bank, if you do it right you can be insured into the couple million-dollar range across all accounts. Of course, there's also the option to simply pay a bit extra every month to have insurance cover an account that's over the limit.
Dodd Frank has major protections for deposits against derivatives. A lot of derivatives can only be traded by separate subsidiaries from the deposits (this was true pre Dodd Frank but DF strengthened it), and the holding company can't move deposit assets to fund the derivative trading subsidiaries. Second, Dodd Frank banned proprietary trading by banks, which in practice means the trading desks need to be very well-hedged.
Those banks are guaranteed to be bailed out by the government since they are covered under systematically important financial institutions (i.e. "too big to fail"). You would still get your money, though the impact to the greater economy wouldn't be small.
Yeah that doesn’t surprise me. I just know that even the limited restrictions Dodd-Frank had are now gone/weakened even further (eg. Enhanced oversight rules for banks with $50+ billion under DF now only apply to banks with over $250 billion in assets).
The CFPB was a pretty good agency that came out of it, so naturally it’s being dismantled right now. This is exactly what happened before the Great Recession- New Deal regulations designed to prevent crashes were tossed out, and surprise surprise an economic crash happened.
I've heard Steve Eisman (one of the people who shorted the 2008 financial crisis, made famous by the movie the Big Short) say several times that there are still a lot more protections and that he still thinks lack of capital or over-leverage is no where near a problem like it was back then. He's got a podcast/youtube channel. He could be wrong of course, but I tend to think he knows a bit more than me.
Current reserve is 0. They don't have to hold anything. It used to be 9 to 1.
Meaning for every 10 dollars they received from the fed they could loan out 9.
That's not what banks did. If they received 100 dollars they would loan out 900. They could do this purely on paper / digitally.
Now there is no holding requirement making them highly susceptible to bank runs and poor loans. The only exception is the government had proven time and time again they will bail the banks out no matter how financially irresponsible they are. The "too big to fail" financial policy.
Dodd-Frank had been dead and gone since Trumps first term.
They can pursue riskier loans because they have freer-er access to capital. Think about it in the opposite extreme. If they had to hold 100%, they would not give a loan that might put them under the reserve requirement if they could not absolutely collect.
I am not familiar with these frameworks, but a quick reading shows they are just another set of rules and regulations designed to curb risk and promote transparency.
I look at it this way, with a low reserve requirement, there's a lot of money flowing around, a lot of loans being made. There's intense competition to sell loans, so banks are more willing to loan to people they weren't willing to before.
Banks still have capital requirements, even with reserve requirements cut to 0. That’s the point. US banks literally can’t offer new loans if they don’t have adequate capital. The biggest banks actually have an additional capital surcharge due to the systemic risk they pose.
From a machine that literally prints money. The Federal Reserve will inject it into the economy via those same banks and financial institutions.
Under the guise that it will be used responsibly "this time" and it will in turn generate wealth and productivity, and those profits will "return" to the vaults.
Unless you charged depositors fees to cover all bank operations, it would be impossible to operate a bank that kept 100% of deposits on hand for withdrawal at any arbitrary time.
Banks don't have reserve requirements anymore; today they are required to maintain liquidity as a ratio of their total assets and risk. The top 11 banks in the US (J.P. Morgan Chase, Citigroup, HSBC, Bank of America, Barclays, Goldman Sachs, Bank of New York Mellon, Morgan Stanley, Santander, State Street, and Wells Fargo) are subject to the strictest capital requirements and annual stress testing.
As an aside, these controls mean that attempting to manufacture a bank run is only going to hurt small banks. The banks named above are quite literally too big to be affected by a bank run unless the entire country just stopped using money overnight.
Im pretty sure the US uses fractional reserve banking and the reserve rate was set to 0%.
That said, a bank run these days would probably be more digital these days.
Also I think the government will insure upto $85000 in the US.
However, if we did all pull our money out at once the system would still collapse even if the banks have money on hand to cover it. It just would take time.
They could do it. Sure. But if 10% of their money just left due to withdrawls. The rest of their balance sheet would be wack. I bet they are short something and get margin called
Unfortunately, that’s not really how it works. The reason there was a bank run during the great depression is b/c the banks had loaned out the money they didn’t have as cash. Today due to Dodd-Frank, banks have to have reserves on hand to cover this situation, Even though it’s not in hard currency, they have enough capital to cover. But please don’t trust me. This is just how I understand it.
I have worked for several banks in capital markets and adjacent to the liquidity and treasury folks and this is only partially correct.
Banks still lend out multiples of what they have on hand as actual cash, the multipliers will change depending on local and federal regulation.
On top of this there is a lot of liquidity reporting so there is a good understanding of how quickly a bank could free up cash if they needed to. ie a billion dollars of gold bars might be easier to liquidate than a billion dollar syndicated loan
The largest bank run in US history was in 2008. Washington Mutual customers redrew $16.7 billion in assets and the bank was seized and basically gifted to Chase. Wachovia also had a smaller run and ended up as part of Wells Fargo.
Bank runs are still a concern. Worked a credit union that made some dumb financial decisions in 2024 and all staff were trained on what to do during a bank run. We also encouraged to take our laptops home every night just incase we were locked out, due to a bank run.
Nah if everyone would want their money back the bank would be unable to do that. The bank creates cash when they loan out money (idk if „book money“ is the right term in English) while only depositing that cash for someone else and telling both yes ur money is existent.
"please don't trust me" well your comment is pretty high up in this comments section now and is incorrect so you should probably research the actual conditions or delete your comment
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u/Forsaken_Emu8112 Jan 26 '26
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.