Although your money is held in a bank and is essentially ‘on demand’ constantly, banks do not hold enough money to pay out everyone who holds money with them if they all wanted to withdraw all their money at the same time. This is because banks will keep a small portion of your money and loan out the rest. They charge interest on these loans which is how they make money. So, technically your savings could be forming part of several different loans without your knowledge.
In 2007 people holding their money with British bank Northern Rock panicked and there was a ‘run’ on the bank. People went to the bank to withdraw all their money in person, as was their right, because they didn’t trust that the bank wouldn’t lose it due to its poor investment and loaning decisions that had exposed it to toxic debt.
It is important to realise that on the bank’s balance sheet, they view deposits – including your deposit – as a liability and the loans they have made to others as their assets. If enough people default on their loans, this may affect the ability for the bank to return your deposit. Historically, in times of crisis, the government has stepped in to bail out banks and ,up to a certain limit, covers your individual savings. This is currently £85,000, under the financial services compensation scheme.
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