If you make a deposit, the bank can lend out 90% of it while keeping 10% in reserve (thus 10% fractional reserve banking). This is a problem because both the person receiving the loan and the depositor expect to be able to have the money.
Normally this isn’t a problem because rarely do all depositors collect more than 10% of what has been deposited at the bank therefore the bank can always pay the depositors when they want to make a withdrawal. If however all depositors came in and demanded their money, the bank would only be able to pay 10% of them or pay all of them 10% of what the they’re asking.
The FDIC insures that $100,000 per account (which is enough for most people) will be insured if the bank can’t pay its depositors. Of course this money has to come from somewhere.
Generally this won’t happen because the bank will rarely have depositors demanding all their money, but it has happened before. The federal reserve is the lender of last resort in this process.
With 100% reserve banking, the bank would never be able to loan out money without the consent of a depositor. In this case the bank would still give out loans but the depositor would have to know that he may not be able to access a certain amount of his money at any given time until the loan is paid back. Essentially the bank would be acting as a middle man which would receive interest on loans and give a little to the depositor.
Basically that’s how it would work. I’m not an expert on the subject but that’s the general idea.
You bet.
This is a problem because both the person receiving the loan and the depositor expect to be able to have the money.
And they both do.
If however all depositors came in and demanded their money, the bank would only be able to pay 10% of them or pay all of them 10% of what the they’re asking.
Wasn't that a cool scene in "It's a Wonderful Life"?
The FDIC insures that $100,000 per account (which is enough for most people) will be insured if the bank can’t pay its depositors.
You bet.
With 100% reserve banking, the bank would never be able to loan out money without the consent of a depositor.
Don't you think most people realize how banks make money?
In this case the bank would still give out loans but the depositor would have to know that he may not be able to access a certain amount of his money at any given time until the loan is paid back.
I'd bet the paperwork you sign when you open a bank account says your money may not be instantly available.
Essentially the bank would be acting as a middle man which would receive interest on loans and give a little to the depositor.
So there'd be no change.
Basically that’s how it would work.
Basically that’s how it does work.