If you have $100 and you lend $300 $200 of those were bad loans and you don't get anything paid back, Isn't it a free ride? How banks lose? Am I missing something. Where's the catch?
The catch is here: if you have $100 and reserve requirement is 10% then you can lend $90 then, if the $90 that was lent is deposited back in your bank, you can lend $81 more (etc. but two levels is enough for this example). that's how $100 initial deposit turned into $90+$81=$171 but the total amount of deposits is $100+$90=$190. If bank loses those $171, how is it going to repay the $190 when demanded?