I have been reading Adults in the Room, and something I don’t understand is how Greece declaring bankruptcy would have caused the Trillion Euro of periphery loans of the German and French national banks to suddenly go bad and result in the collapse of said banks/economies in the eurozone.
In: Economics
Banks make money by loaning money I have deposited at a higher interest rate than they are paying me. This means that at any given time they actually do not have all the money that is on deposit actually on hand. It is loaned out to other people.
If I have money in a bank that I know has loans out that are going to get restructured or even completely not paid back I’m probably going to want to pull my money out. Everybody that has money in the bank will probably want their money back.
Since banks are not required to have all the money that has been deposited on hand this will cause a problem. In that case they will be forced to call in their loans so they can pay their depositors. That will lead to companies choosing to go to other banks for their money needs. Essentially ending the bank’s ability to do business.
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