It's pretty similar. The bank has some cash on hand, and the rest sits in less liquid assets (like loans).
The fund has some cash around, and the rest sits in less liquid assets, too.
The fund has some cash around, and the rest sits in less liquid assets, too.
That model is far too simplistic. And for most intents and purposes, especially when talking about bank runs, it fails rather badly.
I'll give the following explanation. Its going to sound like a huge scam, a ponzi scheme, a hugely irrational method, but in actual fact it makes a lot of sense for reasons that I'm not intelligent enough to put into words. But, its a rather elegant way of controlling the money supply.
So....
Imagine that I start a bank called Humber Necks Bank. We start with 0 customers.
Then Adam comes in and deposits $400.
The Ben comes in and asks for a loan of $200. We give him half of the money we got from Adam. Ben deposits this $200 in the bank.
The Charlie comes in and asks for a loan of $100. We give him half of the money we got from Ben. Charlie deposits this $100 in the bank.
The David comes in and asks for a loan of $50. We give him half of the money we got from Charlie. David deposits this $50 in the bank.
Then all of a sudden Adam, Ben, Charlie and David want to buy a bunch of in-game items on Pokemon go.
Adam will come in and ask for $400, Ben will come in and ask for $200, Charlie will come in and ask for $100, and David will come in and ask for $50.
That's a huge problem, because all I actually have is $400 (that Adam originally deposited).
(And in practice, what you describe would apply only if we used eg gold as money. In a fiat currency system banks are even weirder.)
As an aside: there's strong pressure to cover losses from money market funds. (Usually on the sponsors of the fund, but I think there was a government bailout recently?) Even though those funds don't have a formal guarantee. But they are supposed to be liquid.
"A money market fund is said to "break the buck" when its NAV falls below $1.00 per share. In the nearly 40-year history of money market mutual funds, this has happened on only two occasions—in 1994, when a fund lost approximately four cents on the dollar, and in September 2008, when the NAVs of money market funds issued by The Reserve Fund fell below $1.00.
Typically, there has been an expectation that when a money market fund reaches a point where it might break the buck, the investment management firm that sponsors the fund will take action to infuse the fund with cash so that the fund can maintain a stable NAV of $1.00 per share. Most money market funds in the U.S. are sponsored by large financial institutions that may provide assistance in the case of instability."