Fractional Reserve Banking and Insolvency
You bet if it was so simple. This is when financial acumen comes into its true form. The bank would never ever want to go insolvent. What it does is, take insurance against the borrower defaulting.  Remember the financial crisis of 2008 which was the outcome of borrowers defaulting. The banks had created derivatives based on the loans distributed. CDO, CDS are some of the simple derivatives banks sell to cover their backs in case of defaults. There are derivatives using these derivatives as underlyings which they then sold it across to other buyers including other banks. Google for Fabrice Tourre and you would realise how much deep the banks go to save themselves from defaulters. If everything fails then go to the government for help. That was what happened when the US government doled out $600 billion to save the financial sector. It certainly is possible for a run on the bank to drive it into insolvency.  And yes, if the bank makes some bad loans, it can magnify the problem. Generally, this does not happen, though.  Remember that banks usually have lots of customers, and people are depositing money and making mortgage payments every day, so there is usually enough on-hand to cover average banking withdrawl activity, regardless of any bad loans they have outstanding. Banks have lots of historical data to know what the average withdrawl demands are for a given day.  They also have risk models to predict the likelihood of their loans going into default.  A bank will generally use this information to strike a healthy balance between profit-making activity (e.g. issuing loans), and satisfying its account holders. In the event of a major withdrawl demand, there are some protections in place to guard against insolvency. There are regulations that specify a Reserve Requirement.  The bank must keep a certain amount of money on hand, so they can't take huge risks by loaning out too much money all at once.  Regulators can tweak this requirement over time to reflect the current economic situation. If a bank does run into trouble, it can take out a short-term loan.  Either from another bank, or from the central bank (e.g. the US Federal Reserve).  Banks don't want to pay interest on loans any more than you do, so if they are regularly borrowing money, they will adjust thier cash reserves accordingly. If all else fails and the bank can't meet its obligations (e.g. the Fed loan fell through), the bank has an insurance policy to make sure the account holders get paid.  In the US, this is what the FDIC is for.  Worst case, the bank goes under, but your money is safe. These protections have worked pretty well for many decades.  However, during the recent financial crisis, all three of these protections were under heavy strain.  So, one of the things banking regulators did was to put the major banks through stress tests to make sure they could handle several bad financial events without collapsing.  These tests showed that some banks didn't have enough money in reserve.  (Not long after, banks started to increase fees and credit card rates to raise this additional capital.) Keep in mind that if banks were unable to use the deposited money (loan it out, invest it, etc), the current financial landscape would change considerably. A bank is insolvent when it can no longer meet its short-term obligations.  In this example, the bank is insolvent when depositors withdraw more cash than the bank can pay out. In this case, it's probably something in the range of $600-700k, because the bank can borrow money from other banks using assets as collateral. In the US, we manage this risk in a few ways. First, FDIC insurance provides a level of assurance that in a worst-case scenario, most depositors will have access to their money guaranteed by the government. This prevents bank panics and reduces the demand for cash. The risk that remains is the risk that you brought up in your scenario -- bad debt or investments that are valued inappropriately. We mitigate this risk by giving the Federal Reserve and in some instances the US Treasure the ability to provide nearly unlimited capital to get over short/mid-term issues brought on by the market. In cases of long-term, structural issues with the bank balance sheets, regulators like the FDIC, Federal Reserve and others have the ability to assume control of the bank and sell off its assets to other, stronger institutions. The current financial regime has its genesis in the bank panics of the 1890's, when the shift from an agricultural based economy (where no capital is available until the crops come in!) to an industrial economy revealed the weakness of the unregulated model where ad hoc groups of banks backed each other up. Good banks were being destroyed by panics until a trusted third party (JP Morgan) stepped in, committed capital and make personal guarantees. "Your question points out how most fractional reserve banks are only a couple of defaults away from insolvency. The problem arises because of the terms around the depositors' money.  When a customer deposits money into a bank they are loaning their money to the bank (and the bank takes ownership of the money).  Deposit and savings account are considered ""on-demand"" accounts where the customer is told they can retrieve their money at any time.  This is a strange type of loan, is it not?  No other loan works this way.  There are always terms around loans - how often the borrower will make payments, when will the borrower pay back the loan, what is the total time frame of the loan, etc..  The bank runs into problems because the time frame on the money they borrowed (i.e. deposits) does not match the time frame on the money they are lending."
"You've touched on a very abstract concept that exist partly due to fractional-reserves and directly due to currency having no base (ex. not backed by gold), money can and does just pop into existence. To answer your question, we have to understand that the criminal is irrelevant. ""Can't a cyber criminal increase/decrease a bank's holdings just by changing a number in a computerized ledger book?"" The bank wouldn't need the cyber criminal's aid, they could change their own holdings. They have their own computers after all. Money's value is derived from trust. A bank that would change its own books would be black-balled. Similarly, a bank that un/consciously allows a cyber criminal change their holdings would lose trust. If this was a small transaction, they bank bottom line is unaffected. If these scandal is large enough to affect a bank's bottom line, the difference would be noticeable and raise suspicion." "A bank is a technology that allows society to consume now at the expense of later.  Think about it this way: to consume later at the expense of now, all you have to do is save your stuff. If you want to eat pizza in a year, you can buy a bunch of pizza now, freeze it, then eat it a year later.  Or you can hide money under your mattress now, and buy pizza a year later from now.  But what if you want to eat pizza now, but you don't have the money to buy it? Well, you're stuck. There's no time travel: you can't go into the future and get resources from your future self to buy the pizza now with!  Well, you could go to your wealthy friend who has a lot of pizza, and say, hey, if you give me pizza/money now, I will pay you back with more later! Except then your ability to get pizza/money depends on the whims of some really wealthy people who may not like you. And what if your wealthy friend really wants to keep all of his pizza? There is nothing you can do to get it now.  A bank is an entity that can provide the resources/purchasing power for you to get your pizza now *without anyone in the economy eating less now as a result*.   It does this via what is known as ""Fractional Reserve Banking,"" which is pretty simple. I borrow $100 from person A, keep $10 in reserve, then lend the remaining $90 to person B, who deposits it back into his bank. I keep $9 of person B's deposit in reserve, then lend $89 to person C, who deposits it in the bank, and so on and so forth. The total amount of purchasing power I can create is $1000 out of the initial $100 I borrowed from person A. As long as all my depositors don't all try to get their money out at once, society can essentially ""cheat time"" by pretending there is $1000 in existence when in reality there is only $100. Thus I have increased the purchasing power of the economy now at the expense of later (when the loans have to be repaid), and no one has to stop consuming now for me to do it!  Note that this is not the typical academic answer. Neoclassical economists will say that banks are ""mere intermediaries"" between savers and borrowers.   They are wrong. Banks provide the ability to consume now at the expense of later *even if no one in society is saving now*. That means when there is lots of lending going on, that we have an economic boom. But when there is little to no lending going on, and people are paying back their debts, we don't have as much (if any) growth." "&gt; We've been deficit spending for generations and we're trillions in the hole, and that's the psychological issue hanging over our heads.  Let's unpack that a bit. What does ""trillions in the hole"" actually mean for the *issuer* of the dollar? It means that the issuer at various points has to redeem its own interest-bearing dollars (treasuries) for its own non-interest bearing dollars (reserves/notes/coins). That's not a hole. That's moving a balance from the savings account to the checking account at the same bank.  You don't think of your savings account balance as the bank being ""in the hole"" for checking account balances. You implicitly understand that the bank simply marks down the number in one account and marks up the number in the other and you don't fret that the bank might ""run out"" of checking account balances.  Treasuries have this same relationship to reserves. Not similar, not analogous to but the same. Treasury securities are literally interest-bearing accounts at the federal reserve. Reserves are literally demand accounts at the federal reserve. When a treasury matures, a treasury securities account is marked down, a reserve account is marked up. When a treasury is issued, a treasury securities account is marked up and a reserve account is marked down.  What you're thinking of as trillions ""in the hole"" is just trillions in a savings account balance.  That's what it means to have ""debt"" in a currency that you are the *issuer* of and why foreign-denominated debt is fundamentally different.  &gt;so we can design a system that will keep inflation low while we dump money into the economy  We already have that. There's no inflation monster under the bed. If there's an inflation problem it's that we're so paranoid about it we're not putting *enough* money into the economy and so inflicting unnecessary misery on ourselves.  &gt; the issue in my mind with dumping money while the debt situation is such a concern, is that speculators could sh*t the bed and devalue our currency  There's nothing a speculator can do vs a sovereign currency that the issuing central bank can't offset. So if you are a sovereign and the issuing central bank is within and beneath your authority, you have the last word and there's no such thing as bond vigilantes.  In contrast, if you take on sovereign obligations denominated in currencies where the issuing central bank sits outside your authority as is the case when you borrow/peg to foreign currency or enter a monetary union like the euro, you become just another currency user. Here, your government actually is kinda like a household and can go broke *in that foreign currency*.  Consider how that perspective sheds light on the ""mystery"" of why some countries actually experience a debt crisis and others don't. Why contrary to all the scaremongering, someplace like Japan for example can have 200% debt:GDP *and* near zero interest rates *and* no sovereign debt crisis. It's because Japan issues the yen, *sets* the interest rate on the yen and can't run out of yen.  People who don't understand this are what gave the [widowmaker](http://www.businessinsider.com/hedge-funds-feeling-confident-about-the-widowmaker-trade-in-japan-2012-12) its name. :) Time after time they line up to place bets on japanese government bond crisis, they're always wrong and always will be." "Technically there could be a true cash fund, but the issue is it would need to have some sort of cost associated with it, which would mean it would have negative yield or would charge a fee.  In some cases, this might be preferable to having it invested in ""cash equivalents,"" which as you note are not cash.  It is important to note that there is nothing, even cash or physical precious metals, that is considered zero risk.  They all just have different risks associated with them, that may be an issue under certain circumstances.  In severe deflation, cash is king, and all non-cash asset classes and debt could go down in value.  Under severe inflation, cash can become worthless. One respondent mentioned an alternative of stopping contributing to a 401k and depositing money in a bank, but that is not the same as cash either.  In recent decades, people have been led to believe that depositing your money in the bank means you hold that in cash at the bank.  That is untrue.  They hold your deposit on their books and proceed to invest/loan that money, but those investments can turn sour in an economic and financial downturn.  The same financial professionals would then remind you that, while this is true, there is the Federal Deposit Insurance Corporation (FDIC) that will make you whole should the bank go under.  Unfortunately, if enough banks went under due to lack of reserves, the FDIC may be unable to make depositors whole for lack of reserves.  In fact, they were nearing this during the last financial crisis.  The sad thing is that the financial industry is bias against offering what you said, because they make money by using your money.  Fractional reserve banking.  You are essentially holding IOUs from your bank when you have money on deposit with them. Getting back to the original question; you could do some searching and see if there is an institution that would act as a cash depository for physical cash in your IRA.  There are IRA-approved ways of holding physical precious metals, which isn't all too different of a concept from holding physical cash. 401k plans are chosen by your company and often have very limited options available, meaning it'd be unlikely you could ever hold physical cash or physical precious metals in your 401k." Exactly, accounting for fat tails would already hugely improve the models. Something like a fractal distribution as argued by Taleb and Mandelbrot would be a step in the right direction.  Sadly using those models would undoubtedly identify (correctly) that banks have much more value at risk than they now estimate, so that basically it won't happen, because it would be costly for the bank. Safe deposit boxes are rented out to customers, and their content is not bank's property. Money deposits are not being taken by the creditors if a bank goes bankrupt, for the same reason - its not bank's money, it belongs to the depositors. However, frequently banks go bankrupt because they do not have enough cash at hand to pay back the depositors. In this case, unless insured (up to $250K in the US, EUR100K in EU), some or all of the deposits may not be immediately (or even at all) available. Depositors become creditors of the bank in the bankruptcy proceedings. Safe deposit box, however, is rented to the customer, and the content is not removed by the bank to be used elsewhere, as happens with monetary deposits. So even if the bank is bankrupt and doesn't have enough money to cover the monetary deposits, the content of the safe deposit boxes doesn't magically disappear, and the owner can get it back. The access to the deposit box itself may be limited due to the bankruptcy, but the content will remain there waiting for its owners. In the United States, when a bank goes bankrupt, FDIC takes over it and its assets. Safe deposit box rental contract is an asset. It is taken over by the FDIC and will be sold to a buyer (usually as a part of the whole branch where the box is located), who will continue operating/servicing it. Doesnt mean that equity or even debt holders wouldn't lose their investment.  Those money and banking texts are presently useless post GFC given the incredible moral hazard and how all of the traditional bankruptcy rules were ignored. In the case you mentioned, where a private company owners will take debt with the purpose of  buying out other owners, is this done through a share repurchases program (I understand private companies issue them, even though it's rare)? Thank you for the insights.