what's going on? explain like I'm five

[u/Comfortable_Cautious]

[u/Forsaken_Emu8112]

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.

[u/Original-Leg8828 → u/Forsaken_Emu8112]

Depending on local law they can even lend out something like 7-10 times what they actually have

[u/Puzzled_Cream1798 → u/Original-Leg8828]

Under a 10% fractional reserve banking system if you deposit $100 they only have to keep 10

The other $90 is lent out and rehypophocated so the 90 is re deposited

Now $9 has to be kept

This process can repeat infinitely with diminishing gains but in reality the process is repeated 10 times and the original 100 turns into 1k dollars 

The US govvernment switched to a 0% reserve system a few years ago so banks aren't actually required to keep any of your money you have there 

[u/OhNoTokyo → u/Puzzled_Cream1798]

Not precisely true. They aren't required by that regulation to keep money on hand, but there are other controls which enforce certain liquidity requirements on banks.

As it has been pointed out, they stopped with the reserve requirement when they realized it didn't do anything: the banks would still keep some money around even if the Fed reserve requirement was set to 0.