More than 9 out of 10 Americans have bank accounts. You put money in and take it out when you need it. But what happens in between?
To the bank, your money isn’t just a pot of funds for safekeeping. It’s a loan that the bank can use to make more money.
Follow this $100 bill’s journey from your wallet, through the plumbing of the banking system and back.
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When your money goes into the bank, it’s immediately put to work through the U.S. financial system. This is true whether it’s cash, a check or something else, like a direct deposit from your job. While it enters the bank as one amount, it soon gets broken up.
A small amount is set aside as cash reserves, either in the bank’s vaults, at other banks or at the Federal Reserve. Banks have historically been required to keep a small stash of cash, typically between 3 and 10 percent of their deposits, on hand. The Federal Reserve Board did away with those requirements early in the pandemic, though it still mandates that banks have a certain amount of money readily available to keep their operations running. Large banks, for example, must have enough to fund 30 days’ worth of withdrawals and payments.
Some of your money is loaned to businesses, typically in the form of small business loans. Businesses pay interest to the bank, which is one of the ways banks make money.
Part of your $100 bill also makes its way to other people, in the form of mortgages, car loans and personal loans. The bank charges interest on those loans. They typically last five, 10, 15, even 30 years, ensuring a steady flow of income to the bank.
Banks also stash deposits in government bonds and securities that pay interest. These are considered stable investments with predictable returns.
But in the last year, the Federal Reserve has rapidly raised interest rates. Those older, long-term bonds have become less valuable because new bonds pay more interest. As a result, banks have been sitting on a pile of government bonds and loans that have lost value. This isn’t normally a big deal if the bank can wait until the bond’s term is up to cash out.
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Banks sometimes make riskier bets, for example by investing in the stock market. This can be lucrative when stocks are doing well. But it can leave the bank in hot water if the market sours.
When you come back to get your money, the bank typically reaches into its reserves to pay you back. These reserves can include cash on hand and money stashed at the Federal Reserve.
But in some rare occasions, the bank might not have enough cash to cover your withdrawal. This might happen if you’re taking out a huge amount of money at the same time as many other people are making big withdrawals all at once. In that case, the bank sells short-term securities, like treasuries and bonds, to quickly get cash. But it has to do so at a loss. Even though the bank may be able to stomach those losses on a small scale, things can spiral out of control in extreme cases. This is what happened earlier this year at Silicon Valley Bank, for instance, when depositors took out $42 billion in 24 hours. The bank had to sell its bonds at a $1.8 billion loss, which was enough to sink the institution.
[These companies were affected by the Silicon Valley Bank crash]
Most of the time, that isn’t what happens. The bank gives you your money, which you then spend and put back into the economy. “Banks are the middle men in our financial system,” said Mayra Rodriguez Valladares, a banking industry expert and financial risk adviser at MRV Associates. “They take deposits, which can be very, very short term, and use them to lend for the longer term.”
About this story
Reporting by Abha Bhattarai. Design and development by Talia Trackim. Illustrations and animation by Martin Tognola for The Washington Post.
Editing by Jennifer Liberto and Karly Domb Sadof. Design editing by Betty Chavarria. Copy editing by Greta Forslund.
FAQs
Only a small portion of your deposits at a bank are actually held as cash. The rest of your money (the majority of the bank's assets) is invested by the bank into vehicles such as consumer or business loans, government bonds and credit cards. Borrowers have to pay the bank back with interest.
What do banks actually do with your money? ›
Although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money).
What do banks do with the money not held in reserve and why? ›
Banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation. Thus, banks normally minimize their excess reserves, lending the money to clients rather than holding it in their vaults.
How do banks create money explain and justify your answer? ›
Banks create capital by creating loans (assets) and destroying bank liabilities, which occurs when loans are repaid. This process increases bank equity, enabling banks to create commercial bank deposit liabilities (money) for their own use. In this way, banks create and manage their own capital levels.
Do banks gamble your money? ›
When banks hold your deposits they can, along with each funds, gamble with it through investments in financial instruments such as derivatives in securities. They do this in order to make superior returns.
Where is the safest place to keep money? ›
Where Is the Safest Place To Keep Cash? Deposit accounts—like savings accounts, CDs, MMAs, and checking accounts—are a safe place to keep money because consumer deposits are insured for up to $250,000, either by the FDIC or NCUA.
Should I take my money out of the bank? ›
Should I pull my money out of my bank? It doesn't make sense to take all your money out of a bank, said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF. But make sure your bank is insured by the FDIC, which most large banks are.
Who owns the money in your bank account? ›
At the moment of deposit, the funds become the property of the depository bank. Thus, as a depositor, you are in essence a creditor of the bank.
Why not to leave money in the bank? ›
You don't want to keep your money at the bank because: It just degrades in value due to inflation. Your money isn't “working” for you. You can invest your money into growth assets rather then it sitting there.
Is your money safe in a bank? ›
Most deposits in banks are insured dollar-for-dollar by the Federal Deposit Insurance Corp. This insurance covers your principal and any interest you're owed through the date of your bank's default up to $250,000 in combined total balances.
If a bank doesn't have enough cash to meet the reserve requirement, it borrows from other banks or from the Fed's discount window. The interest banks charge each other to borrow is called the federal funds rate, and it's the basis for many other interest rates in the economy.
How do banks create money from a $1 000 deposit? ›
Every time a dollar is deposited into a bank account, a bank's total reserves increases. The bank will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply. This is how banks “create” money and increase the money supply.
Do banks create money out of thin air? ›
This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower's future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise.
How much cash can you keep at home legally in the US? ›
While it is legal to keep as much as money as you want at home, the standard limit for cash that is covered under a standard home insurance policy is $200, according to the American Property Casualty Insurance Association.
Where is the safest place to put your money during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Where is the best place to park your money? ›
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk. Learn how they compare in terms of yield, liquidity, and guarantees.
Do banks actually keep your money? ›
When you deposit money into a bank, the bank doesn't keep all of it in cash reserves. Instead, they lend it to other parties to earn interest and make a profit.
Is money in the bank actually yours? ›
At the moment of deposit, the funds become the property of the depository bank. Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
What do banks do with the money that is deposited there? ›
Banks use the major portion of deposits to extend loans. These loans are then recovered with an interest. Banks charge a higher interest for credit than deposits. Hence, the amount they receive is greater than the amount that they lend.
What would happen if everyone withdrew their money from the bank? ›
However, if many depositors withdraw all at once, the bank itself (as opposed to individual investors) may run short of liquidity, and depositors will rush to withdraw their money, forcing the bank to liquidate many of its assets at a loss, and eventually to fail.
