Part 4/11:
This unbalanced leverage enables more borrowing and economic activity but relies heavily on the trust that depositors won’t all withdraw their money simultaneously. If everyone asks for their money back at once, the bank may run into liquidity issues.
Most banks diversify their holdings, lending a small portion of deposits and investing in "safe" assets like government bonds. During the COVID-19 pandemic, interest rates were held near zero, encouraging banks to buy low-yield treasuries, which later plummeted when the Fed raised rates—a perfect storm that created unrealized losses.