When you deposit money at a bank, you expect the bank to give it back to you. There are two things you might worry about, two sets of risks that might prevent the bank from giving you back your money. One, which we talk about a lot around here, and which is pretty central to the history and theory of banking and bank regulation, is that the bank might lose the money. Banks do not generally just keep your money in the vault. They use it to make loans, so there is risk: The loans might default, or depositors might all demand their money back at once when the bank does not have a lot of ready cash.
These kinds of risk are very well understood, there is an extensive literature about them, they’re in It’s a Wonderful Life, and bank capital and liquidity regulation and prudential supervision are designed to minimize the risk that a bank will lose your money by investing it poorly. And if things do go wrong, there is an extensive system of government backstops — the Federal Reserve as a lender of last resort, the Federal Deposit Insurance Corporation’s guarantee of bank deposits, etc. — to make sure that depositors will get their money anyway.
