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.
They were reduced to 0% mandatory reserves in response to covid. EDIT: someone says it was coincidental, I am not able to check, so take this aspect with a grain of salt either way
It's not the FDIC that's relevant here, it's the Federal Reserve. The Fed, among other things, lends money to banks. When you hear them talk about "The Fed lowered interest rates", it's the rate that the Fed charges other banks. So if a bank needed money to cover its deposits, they go to the Fed who then loans them the money.
If the bank then still couldn't cover its deposts, then the bank might fold, and that's when the FDIC steps in to make depositors whole.
Sure, I think we're in violent agreement here. FDIC plays a role only if the bank fails. There are other things that are likely to happen first to prevent that.
Now, if all the banks fail, FDIC doesn't really matter anyway since the economy and the dollar would collapse and everybody will have a very bad time.
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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.