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How the bank works

Probably one of the biggest money makers in banks is interest on loans. Banks loan out money to businesses and individuals and then charge interest on those loans. But where does the bank get all these funds to loan out?

When you deposit money with a bank, you are loaning that money to the bank so that they can then loan it out to someone else. Usually in exchange you receive a small portion of the interest the bank receives from the person they lent your money to.

I have always wondered, what would happen if everyone tried to withdraw their funds from the bank at the same time?

Due to the fact that your money is likely out on loan, the banks would fail as they would not have enough money available to cover everyone’s balances. Large amounts of the banks assets are tied up in loans.

The lucky first few who tried to take their money out would be safe, however most others would loose all the funds in their bank accounts and all money transactions would stop because almost no one would have any money!

Something like this would be extremely unlikely, however it is interesting to consider!

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