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
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.
What do banks 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).
Why does the bank ask what you're doing with your money? ›
It enables us to realize what financial transactions are standard for the customer, and which transactions may be considered non-standard – aiming to prevent the potential financial crime and the loss of customer funds.
Do banks gamble with 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.
What do banks make most of their money from? ›
Interest income is the primary way that most commercial banks make money. As mentioned earlier, it is completed by taking money from depositors who do not need their money now.
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 is the safest place to keep money? ›
Here are some low-risk options.
- Checking accounts. If you put your savings in a checking account, you'll be able to get to it easily. ...
- Savings accounts. ...
- Money market accounts. ...
- Certificates of deposit. ...
- Fixed rate annuities. ...
- Series I and EE savings bonds. ...
- Treasury securities. ...
- Municipal bonds.
This will include asking you questions about the purpose of your cash withdrawal, and in some cases, for supporting documentation such as an invoice. This helps us validate the withdrawal as genuine and protect you against fraud and scams.
Why you should not keep all your money in a checking account? ›
Maintaining higher balances in checking can put you at a disadvantage if you're not earning any interest on your money. If you have more than two months' of expenses in a basic checking account, you might consider shifting some of that over to savings.
Can bank tellers see your balance? ›
Can bank tellers see your account balance? Bank tellers can see your account balance, including money coming in and going out. However, they cannot see what specifically you spent your money on.
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
What is the safest bank to put your money in? ›
JPMorgan Chase, the financial institution that owns Chase Bank, topped our experts' list because it's designated as the world's most systemically important bank on the 2023 G-SIB list. This designation means it has the highest loss absorbency requirements of any bank, providing more protection against financial crisis.
Can a bank take your money? ›
Generally, a bank may take money from your deposit account to make a payment on a separate debt that you owe to the bank, such as a car loan, if you are not paying that loan on time and the terms of your contract(s) with the bank allow it. This is called the right of offset.
Do banks make money when you use your debit card? ›
The second is payments. So every time you swipe your debit card, you're issuing bank is making money and their other payment services they provide. And the third leg are fees. So overdraft fees, account fees, wire fees, et cetera.
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.
What is a bank's biggest expense? ›
The biggest expense item for a bank is the interest expense. Usually, the amount of deposit amount increases due to policies of the bank and the interest expense would also increase. In this competitive scenario if the interest rate is increased it attracts more customers then the bank expenses increase further.
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. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
How much cash should you keep in the bank? ›
Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
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. You don't have to apply for FDIC insurance.
Do banks make money holding your money? ›
They don't pay you interest on your deposits
The biggest way banks make money is by minimizing the interest they pay you on your deposits. In banking jargon, this is known as maximizing their “net interest margin” – but it's just a fancy way of saying they're making money on your money and not passing it along to you.
