The S&L crisis is not much different from the bank failures that happened in the late 70’s and early 80’s. Banks, even though they can CREATE money, can also become over-extended. When, like the case of Continental Illinois in 1980 (I think), a bank gets over aggressive in it’s lending policies, especially when the borrowers are unstable foreign governments, the banks reserves can become depleted very quickly. It’s called a bank run. What happens is that news travels telling of a major default in some outstanding obligation and large depositors get nervous and remove their deposits. In the modern world these large depositors are often instutional investors like insurance companies or hedge funds. With the combination of a massive loan default and a major drawn down of reserves, banks CAN, but are rarely permitted to fail.
In a world where banks were required to live up to a 100% reserve requirement, these catastrophies would be impossible. It is PRECISELY the business models that banks operate on, using a small fraction of assets to underwrite exponentially larger loan portfolios that allow this to happen.
Explain how they create money. If I deposit $1000 in the bank, how much money can they loan out based strictly on my deposit?