The Banker’s Dilemma: Safety? or Profits?

• Bankers constantly face a decision: how much of their deposits should they loan out?

• In other words, how small should the reserves be as a fraction of the total deposits.

• If reserves are too small, then the risk increases that an unusual increase in withdrawals will create a bank failure.

• If reserves are too large, then fewer loans can be made and less interest (profits) can be collected from those loans.