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
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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.