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Macro economics

Money multiplier and bank runs

How bank lending turns a little central bank money into a lot of deposits, and why that needs trust

Money figures as on 30 September 2026 (RBI); deposit insurance as published by DICGC, May 2026

Verified 16 October 2026

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For training and education only. Not investment advice.

Trainer notes

Ask the room: if everyone with an account at one bank asked for their money tomorrow, could the bank pay? Most will say no and feel uneasy. This deck explains why that is normal, and what stands behind it.

Banks keep only a small part of deposits as cash. That works while depositors do not all want it at once.

Lending lets each rupee of central bank money support several rupees of bank deposits. The same design leaves a bank exposed if trust breaks and withdrawals rush in.

Trainer notes

This is called fractional reserve banking. It is not a flaw that someone forgot to fix: it is how deposit-taking and lending work together. The safety nets on slide 8 exist because of it.

Four terms, with India's numbers

  • M0

    Reserve money

    Money issued by RBI: currency in circulation plus banks' deposits with RBI. ₹52.78 lakh crore on 30 Sep 2026.

  • M3

    Broad money

    Currency with the public plus bank deposits (savings, current, fixed). ₹337.66 lakh crore on 30 Sep 2026.

  • 3%

    CRR

    Cash reserve ratio: the share of deposits a bank keeps as cash with RBI. 3.00% on 2 Oct 2026; 3.75% a year earlier.

  • Run

    Bank run

    Many depositors withdraw at once because they fear the bank cannot pay. The fear itself can make it true.

Sources: RBI Weekly Statistical Supplement, 9 Oct 2026 (Money Stock; Reserve Money; Ratios and Rates).

Trainer notes

M3 also includes 'other' deposits with RBI, a small item, and reserve money includes them too. CRR is set as a share of a bank's net demand and time liabilities, which for our purposes means deposits.

The textbook multiplier

THE SET-UP (ASSUMED)

Someone deposits ₹1,000 in Bank A.

Every bank keeps 20% of each deposit as reserves and lends the rest. Every loan is spent and the money is deposited in another bank.

  1. Round 1: Bank A keeps ₹200 and lends ₹800.
  2. Round 2: the ₹800 lands in Bank B, which keeps ₹160 and lends ₹640.
  3. Each round is 80% of the one before: 1,000 + 800 + 640 + 512 + … adds up to 1,000 ÷ 0.20 = ₹5,000 of deposits.
  4. Of that, ₹1,000 sits as reserves (20% of 5,000) and ₹4,000 has been lent.

Result: Textbook ceiling: deposits = first deposit ÷ reserve ratio. At 20% that is 5 times; at 25%, 4 times.

Illustration with assumed figures. Real banking works differently: see the next slide.

Trainer notes

The sum is a geometric series: 1,000 × (1 + 0.8 + 0.8² + …) = 1,000 ÷ (1 − 0.8) = 5,000. Check at 25%: 1,000 ÷ 0.25 = 4,000. The model assumes nobody keeps any cash and banks always lend the maximum.

The textbook and the real world

The textbook model

  • Savers deposit first; banks then lend those deposits out.
  • Reserves cap lending, so the multiplier is fixed at 1 ÷ reserve ratio.
  • With India's 3% CRR, that would be 1 ÷ 0.03 = about 33.

The Bank of England's account

  • When a bank makes a loan, it creates a matching deposit for the borrower.
  • Lending is limited by profitability, capital rules, borrower demand and interest rates.
  • In India, M3 ÷ M0 was 6.4 on 30 September 2026.

Take-away: The textbook story is a useful start. It overstates how mechanically reserves drive lending.

Sources: Bank of England, 'Money creation in the modern economy', Quarterly Bulletin 2014 Q1; RBI Weekly Statistical Supplement, 9 Oct 2026.

Trainer notes

33,766,475 ÷ 5,278,142 = 6.40 (₹ crore, 30 Sep 2026). Part of the gap is that people hold cash: currency with the public was 12.5% of M3. Banks also hold government securities for SLR. The Bank of England calls the money multiplier 'not an accurate description' of how money is created; we teach the textbook first so that the difference makes sense.

How a bank run unfolds

  1. Doubt appears

    News of losses, a failed fund-raising or a rumour makes depositors ask whether the bank can pay.

  2. Withdrawals speed up

    Each depositor gains by leaving before others do. Large, uninsured depositors tend to move first.

  3. Assets are sold fast

    Loans are slow to turn into cash. Securities sold in a hurry may fetch less than the bank paid, locking in losses.

  4. Failure or rescue

    The regulator closes the bank, arranges a merger, restricts withdrawals or provides support.

Take-away: A run can push a bank that would otherwise survive into failure, because it must sell assets at a loss.

Trainer notes

The logic is a self-fulfilling fear: if I think others will withdraw, my best move is to withdraw too. Deposit insurance and central bank lending exist to break that logic. The next slide is a documented case.

The 2023 case: Silicon Valley Bank

  • 94%

    Mostly uninsured

    Share of its deposits that were uninsured at end-2022. Uninsured deposits led the run.

  • $40bn+

    One day's withdrawals

    Lost on 9 March 2023, with over $100 billion more expected next day: together about 85% of its deposits.

  • 12 Mar

    Authorities stepped in

    The US Treasury, Fed and FDIC said all depositors would be protected, with no losses to taxpayers.

Take-away: The bank failed on 10 March 2023. The Fed's review says social media fuelled 'unprecedented' withdrawals.

Sources: Federal Reserve Board, Review of the Supervision and Regulation of Silicon Valley Bank, 28 Apr 2023; joint statement by Treasury, Fed and FDIC, 12 Mar 2023.

Trainer notes

The bank's group had about $212 billion in total assets. By the review's comparison, a large US bank that failed in 2008 lost about $10 billion over 8 days. The bank had announced a $1.8 billion after-tax loss on securities sales on 8 March 2023; withdrawals began the next day. The same joint statement covered a second US bank closed on 12 March 2023.

India's safety net

  • ₹5L

    Insurance cover

    DICGC insures up to ₹5 lakh per depositor per bank, principal and interest together. Raised from ₹1 lakh on 4 Feb 2020.

  • 97.5

    Fully covered

    97.5% of deposit accounts were fully covered on 30 Sep 2025. By value, 41.1% of eligible deposits were insured.

  • 90

    Days to pay

    Since 1 Sep 2021: within 90 days of RBI withdrawal limits, insured sums go to depositors who consent.

  • 30

    Days of stress

    Commercial banks (not RRBs, payments banks) must hold liquid assets for 30 days of net stress outflows (LCR).

Take-away: From 1 April 2026, banks assume retail deposits reachable online leave faster.

Sources: RBI press release, 4 Feb 2020; DICGC newsletter 'Safety Net', Oct 2025-Mar 2026; DICGC (Amendment) Act 2021, s.18A; RBI circulars of 17 Apr 2020 and 21 Apr 2025.

Trainer notes

Deposits held in different banks, or in different capacities (for example personally and as a partner of a firm), are insured separately; accounts in all branches of one bank are added together. Deposits of governments and of other banks are not covered. Bank deposit insurance does not apply to mutual fund units, which are not deposits. The April 2026 change adds 2.5 percentage points to the run-off rates for such retail deposits (7.5% and 12.5% instead of 5% and 10%).

Where things stand

Latest published figures. Money data change every fortnight.

M3 ÷ M0
6.4Broad money per rupee of reserve money, 30 September 2026.
CASH RESERVE RATIO
3.00%Kept as cash with RBI, week to 2 Oct 2026. A year earlier: 3.75%.
INSURANCE COVER (₹)
5 lakhPer depositor per bank, unchanged since 4 February 2020.
M3 GROWTH
16.9%Year to 30 Sep 2026. Reserve money grew 8.7% over the same year.

Sources: RBI Weekly Statistical Supplement, 9 Oct 2026 (Money Stock; Reserve Money; Ratios and Rates); RBI press release, 4 Feb 2020.

Trainer notes

Broad money can grow faster than reserve money when bank lending and deposits grow faster than currency and bank reserves. DICGC's Deposit Insurance Fund was ₹2,61,823 crore on 31 March 2026, up 14.4% in a year; banks pay its premium, not depositors. DICGC moved from a flat premium to a risk-based premium from 1 April 2026. In 2025-26 it settled ₹1,988 crore of claims, all from cooperative banks.

If you learnt this from older material

The older picture

  • Deposits are insured up to ₹1 lakh.
  • Banks lend out savers' deposits (textbook view).
  • Runs are queues at the branch.

What holds now

  • Up to ₹5 lakh since 4 Feb 2020; within 90 days if withdrawals are restricted (from 1 Sep 2021).
  • Lending creates deposits (Bank of England); reserves do not cap it.
  • A US bank lost over $40 billion in a day in 2023; RBI now assumes faster digital outflows.

Take-away: The idea is old. The cover, the speed of runs and the rules have all changed.

Sources: RBI press release, 4 Feb 2020; Bank of England, Quarterly Bulletin 2014 Q1; Federal Reserve review, 28 Apr 2023; RBI circular, 21 Apr 2025.

Trainer notes

Older training material was written before the 2020 increase in cover, before the 2021 amendment on interim payment and before the 2023 runs in the US. The 90-day payment came with the 2021 amendment to the DICGC Act.

Four things people get wrong

  • Misconception'The bank lends out my cash.'

    What is trueA new loan creates a new deposit for the borrower. Your deposit stays your claim on the bank, not the borrower's.

  • Misconception'A 3% CRR means money grows 33 times.'

    What is trueThat is the textbook ceiling. In India M3 was about 6.4 times reserve money on 30 September 2026.

  • Misconception'All my bank deposits are insured.'

    What is trueUp to ₹5 lakh per depositor per bank, with interest. Same-capacity accounts at all its branches are added together.

  • Misconception'Only a badly run bank faces a run.'

    What is trueFear can spread faster than facts. Forced sales of assets can turn a cash shortage into losses.

Trainer notes

On the third point: the cover is per bank, so deposits in two different banks are insured separately. Say what the rule is; do not suggest how a client should split money between banks.

Check yourself

  1. Question 1: In the textbook model, a ₹2,000 deposit enters a system where every bank keeps 25% as reserves. What is the most deposits can grow to, and how much is lent?

  2. Question 2: A depositor holds ₹4 lakh in savings and a ₹3 lakh fixed deposit, both in her own name, at two branches of one bank. How much does DICGC insure?

  3. Question 3: Why did withdrawals from Silicon Valley Bank in 2023 move so fast?

Sources and disclaimer

Sources for the figures in this explainer

  • M3, reserve money, currency with the public and CRR: RBI Weekly Statistical Supplement, 9 Oct 2026 (data to 30 Sep and 2 Oct 2026).
  • Money creation: Bank of England, 'Money creation in the modern economy', Quarterly Bulletin 2014 Q1.
  • Silicon Valley Bank: Federal Reserve Board review, 28 Apr 2023; Treasury, Federal Reserve and FDIC joint statement, 12 Mar 2023.
  • Cover of ₹5 lakh from 4 Feb 2020: RBI press release 2019-2020/1878. Coverage ratios, fund and claims: DICGC newsletter 'Safety Net', Oct 2025-Mar 2026; DICGC information booklet.
  • 90-day interim payment: Economic Survey 2021-22. LCR: RBI circulars of 17 Apr 2020 and 21 Apr 2025 (effective 1 Apr 2026).
  • The deposit chain on slide 4 and the quiz figures are invented for illustration.

This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).

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