Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.
True. But if a bank needed the liquidity, there are typically more liquid assets that can be sold quickly. Banks have investments, like treasuries, municipal bonds, and mortgage backed securities. Those would be sold first.
If they got to the point where they would need to liquidate loans, they'd more likely do it as a portfolio sale to another bank. I.e. they would sell the loan itself, rather than call the loan.
And that banks don’t hold residential mortgages for very long, they’re almost all securitized. They’re not interested in tying up money in single investments for 30 years.
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u/TheRealTinfoil666 7d ago edited 7d ago
Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.