Bank failures: it's all about liquidity

Although banks create deposits when they lend, they can nevertheless run out of money.

The job of banks is to make illiquid things liquid. When a bank lends, it creates new liquidity for the borrower, accepting in return an illiquid asset such as real estate or an intangible asset such as a credit score. This process of making illiquid things liquid is what we mean when we say “banks create deposits when they lend”.

The deposit created as…