How can unpaid loans push a bank into failure?

Answer: Loan losses can use up the bank’s cushion for absorbing losses

Loan losses can use up the bank’s cushion for absorbing losses ✓ — Unpaid loans can reduce the value of a bank’s assets while its obligations to depositors remain. If losses exceed its capital cushion, the bank becomes insolvent. A bank can also fail when it cannot obtain enough ready money to meet withdrawals; these are related but distinct problems.

Borrowers’ missed payments prevent the central bank from printing money — A borrower missing a payment does not disable central-bank money issuance. The loan loss is on the commercial bank’s balance sheet, not a mechanical limit on printing currency.

Every missed payment immediately cancels all deposits — One missed payment does not cancel customers’ deposits. Banks can absorb some losses; the problem becomes serious when losses overwhelm their capital or they cannot meet payments.