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<div class="NTForums_Quote">Posted By WendyNC on 08/28/2008 04:48 PM A bank fails when, at any given time, it cannot meet the demands of its depositors to exercise their rights of withdrawal and/or its obligations to pay its creditors. Most commonly in the present century, it's a combination of the two, with one feeding off the other and causing a cascade-type failure. To keep it really simple, I'll describe what happened in the Jimmy Stewart movie, It's A Wonderful Life. The Building and Loan (an old type of state chartered institution) received deposits from local people. It deposited its those funds in The Bank (nationally chartered), along with some of the founders' money (B&L money). The Bank was able to make bigger investments than B&L and paid interest to B&L. B&L made mortgages in the community for little local projects that The Bank couldn't be bothered with. The B&L paid interest to its depositors and everybody was happy. The B&L also kept some of B&L's money in its own vault (its reserves). As a matter of cash flow, the B&L also regularly borrowed and repaid money from and to The Bank. When the deposit that Uncle Billy was supposed to make at The Bank was stolen, cash flow at the B&L was disrupted because, as I recall the movie, part of that deposit was for a payment that was due from the B&L to the bank. Therefore, The Bank accelerated the revolving loan to B&L and declared it all due at once, froze the funds of B&L on deposit with The Bank, and wouldn't lend the B&L any more money. [Even if the loan business isn't part of the movie plot, pretend that it's so for this scenario] Word got out that the B&L was in trouble and suddenly people started showing up at the B&L wanting to withdraw their money at a far higher rate than usual. This is what's called a "run on the bank," meaning that the depositors are literally hurrying there to withdraw their deposits. Now, the B&L kept enough money in the vault (its reserves) to handle the usual and customary withdrawals on any given day, plus a little bit, but if for some reason withdrawals were higher than usual, normally someone would just go to The Bank and get extra cash to cover that day. However, on this day, remember that The Bank had frozen any assets of the B&L on deposit at The Bank because of the missed payment and wouldn't lend any more cash either. At the point where the B&L's reserves were exhausted, it was considered to have "failed." Prior to the establishment of the FDIC, if a bank failed, unpaid depositors were out of luck. Now, the government will pay up to $100,000 per insured deposit. If you Google "bank failure" there's lot of reading available about how that works. </div>

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