From another thread, It Is Now Mathematically Impossible To Pay Off The U.S. National Debt: An interesting few minutes, but what has always puzzled me is when they talk about a run on a bank: I don't get how a bank "calls in its loans". Doesn't a person buying a house or a car (or a business buying equipment) borrow money at terms? Meaning I borrow $100,000 to buy a house and I agree to pay back $1000 a month principal and interest until it's repaid. If a bank called me up and said "Hey you still owe us $90k on your house, uh, we need it by tomorrow" well I would tell them to pound sand. We made an agreement that I pay back a little bit each month, and the bank can't demand early payment. So what does it mean when a bank "calls in loans"?
revolving loans and lines of credit to businesses can be called. home and car loans normally cant unless you miss payments or fail to carry insurance.
When the depositors are certainly calling in THEIR loans, the bank has to scramble for cash or else it becomes insolvent, regardless if it still has AAA mortgages on its books. So a bank will try to call in any loan it can, try to get any money back as soon as possible, ruining businesses sure, but saving themselves (if they're lucky).
Also commercial & construction loans, which are usually the most disasterous call-ins because once it happens, there is no way for the developer to recoup.
Vehn is correct. If you examine most any contract of payments over time, usually there is a clause that says something like "and if you, big dummy and payer of this note, miss a payment then the remainder of the note becomes due right then." It might have a little more legaleese than I have included here. The reason they do that is because if you miss a payment, all you legally owe is that payment (plus late fees, interest etc). So they have to haul your butt to court to get a few hundred to a couple large for one missed payment. Then next month when you miss again, they have to start all over. Rinse and repeat every month for the 25 years left in the mortgage. So they put that clause in to allow foreclosure or eviction or repossession or some other method of seizing the underlying asset(s). But just because they can do it doesn't mean they will. Clearly if you just accidently missed a payment and are going to pony up the late fee and be back on track, then it's worthwhile to them to let it slide. But if they have a pile of deadbeats and trouble lies down the road, it might be time to start moving on some of the slackers. So they "call in the loans". Not just DQ loans, but lines, cards, revolving debt of all sorts including complex commercial structures.
Don't forget inter-bank loans which are deadly. Fractional reserve banking ensures that a $1 inter-bank loan that is called in is actually exponentially more that is being called in on the economy. Especially if the inter-bank loan was then loaned again to a different bank as another inter-bank loan.