How Does Bank Failure - Liquidity Crisis (Bank Run) & Insolvency Work?

A bank is like a piggy bank, it holds your money and gives you money when you need it.

Banks take your money and lend it to others, like when your friend borrows money from you to buy ice cream. But if too many people want their money back at the same time, that’s called a bank run, or liquidity crisis, it's like everyone coming to your piggy bank at once asking for their coins.

Imagine you have 10 friends who each give you $5 to keep in your piggy bank. You use $20 of that money to buy ice cream for your class. Now, if all 10 friends come and ask for their $5 back at once, you only have $10 left, not enough to give everyone what they want. That’s a liquidity crisis, the bank has enough money overall, but it doesn’t have enough right now.

If the piggy bank runs out of coins and can't get more, that's called insolvency, like if your friend borrowed all your coins and didn’t pay you back. Now, even if you wait a bit, you can't give anyone their money because you're broke.

Sometimes banks borrow from other banks or the government to fix the problem, it’s like asking your parents for more coins when your piggy bank is empty. A bank is like a piggy bank, it holds your money and gives you money when you need it.

Banks take your money and lend it to others, like when your friend borrows money from you to buy ice cream. But if too many people want their money back at the same time, that’s called a bank run, or liquidity crisis, it's like everyone coming to your piggy bank at once asking for their coins.