Why Do Banks & Credit Unions Discourage Customers From Withdrawing Their Funds?
Millions of U.S. residents hold accounts with credit unions and savings banks. These accounts take many forms including checking and savings accounts into which they deposit money. Many banks encourage this practice, as it provides the banks a source of funds for which to make loans. In some cases to preserve this access to capital, banks may discourage customers from withdrawing money from their accounts either permanently or for a short period of time.
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Business Model
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The business model for banks and credit unions is generally the same. Banks and credit unions collect money from customers who offer it to the bank to hold for security and to allow it collect interest. The bank then loans this money out or, in some cases, invests it in assets. In order for this business model to work properly the bank must have enough money to lend out and to invest.
Customer Funds
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Customer funds form the life blood of any bank. These are the funds that the bank to use to make financial transactions that will hopefully provide it a profit. In a sense, customers are like investors in a bank. Instead of making a direct investment, customers are essentially lending their money to the bank for a short period of time. The bank will then re-lend this money at a higher rate of return allowing it to make a profit.
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Runs on the Bank
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When a bank is in danger of failing clients worried about whether their money will be lost will often choose to withdraw money from the bank. This may hasten the bank's demise and serves as an illustration of the problems when a bank is undercapitalized. The failing bank will need its customers' money to make profitable investments and loans. Just like a patient with a bad wound, the bank will die if it keeps bleeding money taken out by account holders.
Considerations
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Instead of discouraging customers from withdrawing money from their accounts, many banks will instead encourage customers to save money by offering incentives. For example, most savings accounts allow the person who is saving money in them to draw the payment of a rate of interest. Generally, banks will not place overt penalties on withdrawals, as this may inhibit clients from taking money to them in the first place when they are opening a checking account.
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