Most of the money banks hold is tied up in loans which can make it difficult to respond to the public's demand for cash in the event of a financial panic.
The lending capacity of a bank is limited by their customers deposits. So, in order to lend out more, a bank must secure new deposits by attracting more customers. Thus, without deposits, there would be no loans as deposits create loans.
So like this most of the money which banks hold is tied up in loans, this in turn makes it difficult for banks to give loans and respond to the public's demand for cash when in financial panic.
Hence, when most of the money banks hold is tied up in loans it creates difficulty.
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