Complex Systems with Patrick McKenzie (patio11) Your bank balance isn’t in the bank, and other alchemy
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Apr 9, 2026 A deep read on why bank deposits are bank liabilities, not vaults of cash. An explanation of how banks hide risk under a veneer of certainty through capital waterfalls. Contemporary breakdowns like SVB and Voyager show how deposit-like instruments can suddenly fail. A look at regulatory responses, ACH plumbing risks, and why stablecoins keep running into the same fragile design problems.
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Why Deposits Are Money Not Stored Bills
- Bank deposits are liabilities that create money because society treats them as universally interchangeable no-questions instruments.
- Patrick McKenzie traces this to a century of regulation, insurance, and standardization from the 1830s–1933 to eliminate bank-specific exchange rates.
The Capital Waterfall That Makes Deposits Seem Safe
- Banks mix risky assets and then put them under a capital waterfall so deposits sit senior and appear riskless.
- That engineering works only with careful capital sizing and historically required deposit insurance after repeated crises.
Information Insensitivity Is What Makes Money Useful
- Deposits are information insensitive whereas loans/mortgages are information sensitive, which allows deposits to circulate without counterparties evaluating underlying assets.
- Patrick references Holmstrom and notes this information insensitivity is central to money's utility.