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| Pat - Not trying to smart with you, but you do not understand the concept of fractional banking. That is why you cannot understand why a bank would ever fail.
Fractional is not referring to your money deposited in the bank. If you deposit $100 dollars into a bank, it does not have $1,000 to lend out. It owes you $100 and may or may not be paying you interest on the $100 depending on the type of account and/or contractual relationship you established with the bank. Instead of the $1,000 dollars you proposed that the bank has to lend, it merely has your $100 dollars to lend out.
The reserve you are referring to is the bank's EQUITY, not deposits (which is a Liability). EQUITY is what a bank has in Assets (Loans, Securities, Bank Building, Cash, etc) - less what it owes in Liabilities (you, the depositor of $100 and many others along with other borrowings it may have from the Federal Home Loan Bank and other Banks including the Federal Reserve Bank). Normally, a bank does not want to rely too much on borrowings other than Depositors like you b/c it can cause a Liquidity problem in an economic downturn. As I have defined EQUITY in this paragraph, the bank must retain an 8% capital ratio. The average bank in Iowa keeps an extra cushion beyond the 8% b/c it does not come under extra duress from the FDIC who is requiring them to maintain the 8%.....so they keep and extra EQUITY cushion on hand. Average Equity in Iowa is 10%.
So, the fractional banking system is predicated upon EQUITY of approximately 10% that a bank has hand, not your deposit which is a liability to the bank. If a bank has 10% in Equity which equals $10 Million, it likely have $90 million in Deposits from guys like you who put $100 (or larger amounts) into the bank at a time. It can then lend out that money to people like you as well. So, if the bank has EQUITY of $10 Million it could conceivably have a Loan portfolio as large as $90 million or so based on that equity, not your deposit.
Moreover, if the bank sustains a loss of $5 Million, its EQUITY has just been reduced from $10 Million to $5 Million and its EQUITY position is now down to the 5% area. If that is the case, the next Safety and Soundness Exam performed on the bank will likely be its last as it is not maintaining the 8% minimum capital ratio. That is why banks go under.
I can explain money creation as well, but I have to go for now.
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Banking, one more time....
