All fractional reserve banks are inherently insolvent.
If a fractional reserve bank accepts a $1 deposit, that bank has $1 in assets to pay the claim that the depositor has on the money. In short the depositor has a claim against the bank for $1 and the bank has $1 in assets to pay that liability.
However banks get in trouble by then lending that $1 asset out to another person, meaning that if the original depositor shows up to withdraw his money it is gone, having been lent out to a borrower.
Banks normally don't get caught for this fraud because they are usually large enough that only a part of their depositors want their money at any given time. Also, they can get the government to bail them out when they screw up.
Banks should not be lending money, they should be safeguarding their depositors money. If a person wants to earn interest they can buy bonds or engage in private moneylending.
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All fractional reserve banks are inherently insolvent.
If a fractional reserve bank accepts a $1 deposit, that bank has $1 in assets to pay the claim that the depositor has on the money. In short the depositor has a claim against the bank for $1 and the bank has $1 in assets to pay that liability.
However banks get in trouble by then lending that $1 asset out to another person, meaning that if the original depositor shows up to withdraw his money it is gone, having been lent out to a borrower.
Banks normally don't get caught for this fraud because they are usually large enough that only a part of their depositors want their money at any given time. Also, they can get the government to bail them out when they screw up.
Banks should not be lending money, they should be safeguarding their depositors money. If a person wants to earn interest they can buy bonds or engage in private moneylending.
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