I’m not sure how this is hard to understand.
People deposit money and they take money out. That’s the banks sole job. They have to ensure that people have money to do their business.
But banks have found, in doing business, that they don’t need 100% of deposits sitting in a vault, in case customers need. They have found that, normal day to day transactions, they only need a fraction of the money.
If a bank can’t pay out, because they have a surge in customers wanting their money, they have to close until they have refilled their vaults to continue to do business. They will either borrow from the Feds or another bank to do that. However, when that is no longer an option, they close.
I’m only pointing out that one of the reasons for bank runs is because the banks have chosen to leave less in the vault than what they are able to cover because of a surge of customers wanting their money.
Fractional Reserve Banking: What It Is and How It Works
How much reserve is a bank lending institution required to have on hand?
What Is Fractional Reserve Banking?
Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies’ financial systems use fractional reserve banking.
On March 26, 2020, the Federal Reserve reduced reserve requirements for all depositary institutions to zero. Instead, banks are now paid a specific interest rate on their reserve balance to encourage holding reserves.
https://www.investopedia.com/terms/f/fractionalreservebanking.asp
People deposit money and they take money out. That’s the banks sole job. They have to ensure that people have money to do their business.
That might have been the case to the folks on "Little House on the Prairie," but banking is FAR more than this. Banks are also in the business of lending, not just storing money in a vault. Banks would charge a fee instead of paying interest if their sole job was to hold deposits.
But for the sake of this discussion, let's leave aside the lending side of the business.
In order to pay interest to depositors, a bank has to take those deposited funds and do something with them. What exactly is a bank supposed to do with your money in order to pay you a 2% to 5% return on your savings accounts and certificates of deposit? They do two things: (1) they lend money at higher interest rates than they pay you; and (2) they invest in stable, "safe" investment vehicles such as government bonds.
It's no more complicated than that. And keep in mind that your "bank run" involving thousands of people running to the local branch to withdraw their $5,000 cash is not even an issue for the bank. The bigger problem is the corporate customer that keeps an average of $10 million in the bank and needs $500,000 every two weeks to meet its regular payroll. All of the CURRENT problems you are reading about in the banking industry are all tied to the complexities of managing the cash flows of these deposit-withdrawal cycles while generating enough revenue to pay the bank's costs of doing business.
I’m only pointing out that one of the reasons for bank runs is because the banks have chosen to leave less in the vault than what they are able to cover because of a surge of customers wanting their money.
You've just described the basic business model for fractional reserve banking, which has been the standard practice in banking for as long as either of us have been alive.
Brings to mind the movie "It's a Wonderful Life" with Jimmy Stewart. His uncle Billy mishandles a large sum of money running the bank, and depositors demand their savings be withdrawn. Stewart explains to customers that their money is tied up in their neighbors' loans for remodeling, businesses etc., and could they accept only a portion of their accounts. Banks just don't have a lot of money laying around in their vault.