How does a modern bank collapse? And is it sudden or is there warning? Seems sudden in the news, but I struggle to understand how a bank can lose billions of dollars suddenly, where does it go?
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A bank doesn’t just leave all the money people deposited with them sitting in a vault; they try to keep just enough cash on hand to handle the people who want to make a withdrawal on any given day, but they invest the rest into things like loans, bonds, and stocks.
This normally works out, since most people leave the majority of their money in their account, but if a bunch of people suddenly try to withdraw their savings all at once you are suddenly faced with a bank run. Tons of depositors want their money in cash, *now*, but most of the bank’s assets are tied up in an investment which will take days, months or even years to cash out.
In the US at least, the bad experiences of the Great Depression lead to the FDIC, which insures bank accounts so depositors get their money back in a fairly timely fashion while the Federal Government works through the process of turning the failed bank’s assets into cash.
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