How we’re different
How most banks work
Almost every bank in the United States operates under a system known as “fractional reserve banking”. This means the bank takes your deposits and lends out ~90-95% of them to make loans like mortgages, car loans, and other lines of credit.
Banks make a profit by earning higher interest rates on their loans than what they pay out on the deposits. The riskier the loan they issue, the higher the interest rate they can earn - if that loan is paid back (e.g., subprime mortgages). As a result, banks are incentivized to take risks with your money in search of higher profits.
When banks make these riskier loans, and those loans begin to default - as happened in the run up to the 2008 Global Financial Crisis - banks can become insolvent. This means they no longer have the capital to return your deposits.
Even when banks don’t take excessive risks, they can still be vulnerable. If a large number of depositors want to withdraw their money at the same time, this can create a “run” on the bank: the bank does not have enough cash on hand to meet its obligations, and must be bailed out in one way or another.
You deposit your money at the bank
The bank lends out ~90-95% of your deposits
The bank earns a higher interest rate on the loans it gives out than it pays to you, making profits
~5-10% of deposits are held ‘in reserve’ to support daily withdrawals and other transactions