bank

[parijas]

how can a bank go bankrupt

[BenDToy]

In very simple terms, as with any business, if the amount of money they owe to other people exceeds the amount they have, or are due to receive, then they are technically bankrupt. This usually comes to a head when they are unable to pay someone who takes some sort of legal action to recover money they are owed. I don't know what you believe makes a bank different to other types of business, other than the fact that people who have money "in" a major clearing bank have some protection and would not lose their money in the event that it did go bankrupt.

[DOB]

The bank has a ratio (set by the Central Bank) of the amount of money they can lend compared to the amount of money they hold on deposit. This ratio determines how much money the bank can "create" via loans etc. An example with the ration of 4:1 should explain: Suppose Mr Accountant deposits �100 in the bank and the bank must keep �20 (20%) of this on deposit at all times. Then the bank needs a plumber and this costs them �80. Mr Plumber deposits the �80 in his account, of which the bank can distribute �64 (80% of �80). Then they need to pay an electrician and so on. If everybody deposits their money into the bank, it can be shown that the bank will eventually hold �500 in deposits all of which stem from the original �100 deposit made by Mr Accountant. Then the banks nightmare occurs when there is no confidence in the market/bank/anything and everybody rushed to withdraw their money. The banks owes �500 but only has �100 in their vault. They go bankrupt. The banking system is based on the assumption that not everybody will want to withdraw their money at the same time.

[Philtaz]

Ask Nick Leeson, I'm sure he could enlighten you!