The bank originates a mortgage to someone. It uses (some of) your $10k to give cash to the customer getting the mortgage, and the customer then uses that cash to buy the house.
For whatever reason, a bank run happens, i.e. everyone comes to make a withdrawal all at once
You try to withdraw your $10,000. The problem is that everyone wants cash, not shares of houses, but the bank only has so much cash.
The bank is good for your $10k, but not on the timeframe you want it. The bank is _illiquid_, but _insolvent_.
The bank will try and sell it's mortgages to someone else for the money, but if it tries to do this all at once it will likely end up selling them at prices that are below par. In that case the bank might end up with less assets than liabilities; this makes the bank _insolvent_.
In a deposit insurance scheme, the government takes over the bank, pays out to customers, and services the loans. The government can do this because it can easily create liquidity. Generally in recent history the government still makes a profit when it reduces an illiquid bank
The bank originates a mortgage to someone. It uses (some of) your $10k to give cash to the customer getting the mortgage, and the customer then uses that cash to buy the house.
For whatever reason, a bank run happens, i.e. everyone comes to make a withdrawal all at once
You try to withdraw your $10,000. The problem is that everyone wants cash, not shares of houses, but the bank only has so much cash.
The bank is good for your $10k, but not on the timeframe you want it. The bank is _illiquid_, but _insolvent_.
The bank will try and sell it's mortgages to someone else for the money, but if it tries to do this all at once it will likely end up selling them at prices that are below par. In that case the bank might end up with less assets than liabilities; this makes the bank _insolvent_.
In a deposit insurance scheme, the government takes over the bank, pays out to customers, and services the loans. The government can do this because it can easily create liquidity. Generally in recent history the government still makes a profit when it reduces an illiquid bank