Final answer:
Banks do not keep all deposits on hand as they lend out these funds to earn profits through interest. Storing all deposits physically is impractical and financially unwise. Banks rely on fractional reserve banking and are regulated to maintain minimum reserves to manage the demands of depositors.
Step-by-step explanation:
Given the danger of bank runs, why do banks not keep the majority of deposits on hand to meet the demands of depositors? The primary reason is that banks make their money by issuing loans and charging interest. The business model of banks relies on using deposited funds to create loans which, in turn, generate profits from the interest charged. Hence, the more money that a bank keeps in its vaults, the less it has available to lend out and to make a profit from. This practice of lending out deposits is known as fractional reserve banking.
It's important to note that keeping all deposits on hand in physical form is not viable for banks. While banks do keep a certain amount of cash on hand to accommodate day-to-day transactions, they are not able to store all deposited funds due to practical limitations. Furthermore, storing large amounts of physical cash would not be financially beneficial for the bank or its customers since it would not be earning interest.
In the event of a bank run, where many depositors attempt to withdraw their funds simultaneously due to fear or uncertainty about the bank's stability, a bank with a robust lending portfolio may struggle to immediately return all deposits. To minimize this risk, banks are regulated and are required to keep a minimum reserve amount based on their deposits and also typically have access to central bank funds to manage temporary shortfalls.