Why would banks and exchanges need to pause withdrawals if they’re in financial trouble?
In: 101
Because banks generally don’t hold enough assets to cover all of the deposits, entirely because it’s more lucrative to loan that money out. If too many people try to withdraw their deposits, the bank becomes insolvent and people’s money disappears. The only way to prevent a complete collapse of the bank is to stop people from withdrawing money, but this doesn’t exactly inspire the confidence needed to deposit money in said bank.
In most real banks, the bank deposits are ensured up to a certain amount by the local government, and the banks are forced to keep a certain fraction of their deposits on hand to handle bank runs.
In banks that deal in products not ensured by local governments (i.e. crypto), there are no such rules, so the “banks” can loan out far more than they actually have on hand, because no one’s going to stop them.
But this obviously becomes a problem in the event of a bank run.
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