The following example shows how a bank can become insolvent due to a bank run.
Customers can request cash withdrawals, or can ask the banks to make a transfer on their behalf to other banks.
Banks hold a small amount of physical cash, relative to their total deposits, so this can quickly run out.
What happens when a bank runs out of money in real life?
A bank run happens when large groups of customers withdraw their money from banks simultaneously based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and ultimately end up defaulting.
Can you lose your money in a bank?
Banks go under when they are no longer able to meet their obligations. The bank might lose too much on investments, or the bank may be unable to provide cash when depositors demand it (see below). Ultimately failures happen because banks don’t just keep your money in vaults.
How do banks fail?
A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. As such, the bank is unable to fulfill the demands of all of its depositors on time.