Why would banks and exchanges need to pause withdrawals if they’re in financial trouble?
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To understand this, you have to understand *fractional reserve banking*.
When you deposit money at the bank, they don’t just keep it. They invest it. Specifically, by loaning it out to other bank customers as home mortgages, business loans, lines of credit, etc. Those people who borrow the money pay the bank interest. That’s how they make money. The bank then keeps some fraction of their total deposits on hand in cash, so when people want to withdraw their money or close their accounts they can do so. Thus, *fractional reserve*- a fraction of the money is kept in reserve, the rest is invested.
This generally works quite well.
There’s two things that can go wrong though.
The first is if a lot of people want to take all their money out at once. The first handful will get money, but once that reserve is gone, the bank has no more money to give out. It can borrow from other banks or from the government, but that costs the bank money because then *they* are paying interest.
The second and much bigger problem is if a lot of the people who borrowed the money default on their loans- that means they can’t pay them back. The banks knows a few will default and plans for it. But if a lot of people do, then suddenly much that money that’s supposedly invested and earning interest is actually just *gone*. Once again, the bank can borrow money to pay to people who withdraw, but the bank is then paying interest, and it’s not making money.
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So the answer to the question– if a lot of the places where they invested your money are defaulting, or a lot of people are withdrawing at once, or both, they may pause withdrawals until they actually have the money to give those withdrawals.
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