@SuMastodon @AustenAllred Because if you have a demand deposit which is a material percentage of the total liabilities of the bank they both are incapable of putting that much money to work very quickly and, if they do, you can singlehandedly cause a bank run on any given Tuesday.
@SuMastodon @AustenAllred "What's a demand deposit?"
I'm glad you asked, Internets. One of the fundamental sources of value in banking is maturity transformation: "borrow short and lend long." The loans of a bank generally have long time scales (e.g. 30 year mortgage) but deposits have much shorter ones.
I'm glad you asked, Internets. One of the fundamental sources of value in banking is maturity transformation: "borrow short and lend long." The loans of a bank generally have long time scales (e.g. 30 year mortgage) but deposits have much shorter ones.
@SuMastodon @AustenAllred Some deposits are fixed-term, like CDs. The money might be (theoretically, for the case of CDs) locked up for 6 months or a year.
Others are "demand" deposits. You get the money ~immediately "on demand", at your own option, w/o paying a penalty.
Others are "demand" deposits. You get the money ~immediately "on demand", at your own option, w/o paying a penalty.
@SuMastodon @AustenAllred Banks have to carefully manage their mix of funding sources such that the ratio of demand deposits is reasonable and such that the diversity of sources of demand deposits is spread out, such that a single event doesn't cause them to have a liquidity crisis.
