One of the many shocking discoveries of adulthood is that banks only have a fraction of the amount deposited with them on hand at any one time. As a child, you might have pictured huge vaults filled to the brim with everyone’s money, but in fact, when you deposit an amount with a bank, they will generally only keep about 10% (this amount is mandated by the reserve ratio) and loan out the rest. The loans are assets that the bank earns revenue from, while deposits are a liability that they owe customers. The most common way a bank fails is when their assets are less than their liabilities, and they are unable to pay depositors and creditors.
There are two main ways this could happen. Both are unlikely, but as we’ve just witnessed…
