I understand why banks cannot pay people back in the moment, but wouldn’t they still owe their depositors their money when they eventually DO get the money back presumably once the recession is over?
This is all assuming the bank does not permanently go bankrupt of course. I understand that some banks may just never recover and close their doors for good.
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>I understand why banks cannot pay people back in the moment, but wouldn’t they still owe their depositors their money when they eventually DO get the money back presumably once the recession is over?
Only if the bank survives. If it doesn’t, then the depositors are fucked unless their deposits are insured.
The logic of a bank run is the fear that the bank is on the verge of bankruptcy, so you need to withdraw your money before that happens. They were greatly diminished in the US by the creation of the FDIC, which guarantees a payout for depositors if a bank is insolvent.
The bank literally does not have the money – that’s the problem.
If everyone tries to take their money back at the same time, the bank is absolutely fucked, because they don’t have the money.
“[Fractional Reserve Banking](https://www.investopedia.com/terms/f/fractionalreservebanking.asp)” is the main culprit here.
Basically, when you put $10 in your bank account, the bank now has $100 to give out to people.
They give out more money than they have – with the idea being that as long as people don’t all try to get their money back at once, they can keep robbing peter to pay paul, and make fat bank off the interest/fees.
When that stops happening, and people all try to take their money out at once – you get a bank run, the bank literally can’t give you your money because they don’t have it.
>I understand why banks cannot pay people back in the moment, but wouldn’t they still owe their depositors their money when they eventually DO get the money back presumably once the recession is over?
Only if the bank survives. If it doesn’t, then the depositors are fucked unless their deposits are insured.
The logic of a bank run is the fear that the bank is on the verge of bankruptcy, so you need to withdraw your money before that happens. They were greatly diminished in the US by the creation of the FDIC, which guarantees a payout for depositors if a bank is insolvent.
The bank literally does not have the money – that’s the problem.
If everyone tries to take their money back at the same time, the bank is absolutely fucked, because they don’t have the money.
“[Fractional Reserve Banking](https://www.investopedia.com/terms/f/fractionalreservebanking.asp)” is the main culprit here.
Basically, when you put $10 in your bank account, the bank now has $100 to give out to people.
They give out more money than they have – with the idea being that as long as people don’t all try to get their money back at once, they can keep robbing peter to pay paul, and make fat bank off the interest/fees.
When that stops happening, and people all try to take their money out at once – you get a bank run, the bank literally can’t give you your money because they don’t have it.
You are assuming that the money is actually there to give back.
Banks lend out and invest the money that you deposit with them. If they lend your money to some other guy and that guy goes bankrupt, they will not be able to give that money back.
Normally they put your money to use in so many different ways and have so many different depositors that a few bad investments don’t hurt as much. If enough of the economy suffers, things may be different though.
To avoid that sort of thing many countries have laws that restrict how much risk banks can take with your money and they also have rules that any deposits in banks up to a certain amount are insured or guaranteed by the government.
In the US the FDIC guarantees any deposit under $250,000. So normal people will not be affected even if the bank goes bankrupt. The US government will cover the losses though FDIC if necessary.
So unless you are both rich and have your complete lifesaving in a single account at a bank you will be fine unless the US government itself collapses.
You are assuming that the money is actually there to give back.
Banks lend out and invest the money that you deposit with them. If they lend your money to some other guy and that guy goes bankrupt, they will not be able to give that money back.
Normally they put your money to use in so many different ways and have so many different depositors that a few bad investments don’t hurt as much. If enough of the economy suffers, things may be different though.
To avoid that sort of thing many countries have laws that restrict how much risk banks can take with your money and they also have rules that any deposits in banks up to a certain amount are insured or guaranteed by the government.
In the US the FDIC guarantees any deposit under $250,000. So normal people will not be affected even if the bank goes bankrupt. The US government will cover the losses though FDIC if necessary.
So unless you are both rich and have your complete lifesaving in a single account at a bank you will be fine unless the US government itself collapses.
It’s perfectly possible for a bank to go belly up and simply not have any money to pay back, the bank gets liquidated and most of your money will be gone. As for insolvent bank recovering, how? Their debts go nowhere and they have no money to continue doing business.
Of course, in developed countries there are fallbacks, usually central bank insures deposits to some limit, so if a bank in unable to pay, central bank does, it essentially comes out of taxpayers pocket. Or the bank is bailed out to the same effect. There are also significant checks to make sure such an event wouldn’t happen to begin with and bank failures have gotten rarer, but that doesn’t mean they can’t happen at all.
It’s perfectly possible for a bank to go belly up and simply not have any money to pay back, the bank gets liquidated and most of your money will be gone. As for insolvent bank recovering, how? Their debts go nowhere and they have no money to continue doing business.
Of course, in developed countries there are fallbacks, usually central bank insures deposits to some limit, so if a bank in unable to pay, central bank does, it essentially comes out of taxpayers pocket. Or the bank is bailed out to the same effect. There are also significant checks to make sure such an event wouldn’t happen to begin with and bank failures have gotten rarer, but that doesn’t mean they can’t happen at all.
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