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.
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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
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 banks really do with your money? ›
It doesn't remain locked away in the bank vault – instead, the money you deposit into a savings account is used by the bank to make loans to other people and businesses in your community so that they have the money to pay for big expenses like houses and cars, or even to operate a business.
How do banks make money with your money? ›
They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).
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.
Do banks own your money? ›
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.
What bank do millionaires keep their money? ›
1. JP Morgan Private Bank. “J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said.
Is your money really safe in the bank? ›
FDIC Insurance
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. You don't have to apply for FDIC insurance.
Why do I suddenly have more money in my bank account? ›
You may be missing money, or you may discover that you have extra money. A discrepancy could happen for many reasons. The bank may have made a deposit to the wrong account, for example. You may also find that you have withdrawals that have not been authorized, or perhaps the bank has made an error.
How do bankers make so much money? ›
Investment bankers make money through the fees charged to their clients. As discussed above, this includes underwriting fees for arranging the sale of securities and advisory fees for providing strategic guidance.
Do banks put money in life insurance? ›
Why Do Banks Purchase BOLI? BOLI offers banks a tax shelter and a way for them to fund benefit plans. Premiums paid into the fund, in addition to all capital appreciation, are tax free for the bank. Therefore, banks can use the BOLI system to fund employee benefits on a tax-free basis.
Depositing a big amount of cash that is $10,000 or more means your bank or credit union will report it to the federal government. The $10,000 threshold was created as part of the Bank Secrecy Act, passed by Congress in 1970, and adjusted with the Patriot Act in 2002.
What happens when you deposit over $10,000 in a check? ›
Banks have to report any deposits above $10,000 to the IRS on a form known as the Currency Transaction Report. Yes -- even if it's only $10,000.01. It's not just deposits, either. Banks are required to report any transaction of over $10,000, including withdrawals.
Can banks legally loan money? ›
A national bank may make, sell, purchase, participate in, or otherwise deal in loans and interests in loans that are not secured by liens on, or interests in, real estate, subject to such terms, conditions, and limitations prescribed by the Comptroller of the Currency and any other applicable Federal law.
Can banks refuse to give you your money? ›
Yes. Your bank may hold the funds according to its funds availability policy. Or it may have placed an exception hold on the deposit. If the bank has placed a hold on the deposit, the bank generally should provide you with […]
Can a bank deny you access to your money? ›
A bank account freeze means you can't take or transfer money out of the account. Bank accounts are typically frozen for suspected illegal activity, a creditor seeking payment, or by government request. A frozen account may also be a sign that you've been a victim of identity theft.
Can banks take your money without permission? ›
No, banks cannot legally take money from your account without permission. However, they can withdraw funds for specific reasons, like overdraft fees, unpaid loans or debts (under the right of offset), suspected fraudulent activity, or legal judgments.
Do banks touch your money? ›
Banks and building societies can take money from your current account to cover missed payments on other accounts you have with them. This is called the 'right of set off'. It can also be called: The 'right of offset'
Does the bank investigate your money? ›
Once a potential fraudulent transaction is flagged, banks deploy specialized investigation teams. These professionals, often with backgrounds in finance and cybersecurity, examine the electronic trails of transactions and apply account-based rules to trace the origin of the suspected fraud.
Is it smart to put all your money in a bank? ›
Keeping all of your money in one bank can be convenient. But it's important to consider whether you're getting the best rates on savings and paying the lowest fees for checking accounts. It's possible that you could get a better deal by keeping some of your money at a different bank.
