What Actually Happens to Your Money After You Put It in the Bank?

Short answer: when you deposit $10,000, you gain a $10,000 claim on the bank. On the bank’s balance sheet, your deposit is a liability because the bank owes it to you. The bank manages that funding alongside its other liabilities and owns assets such as loans, securities, cash and balances at the Federal Reserve.

1. The same $10,000 looks different to you and the bank

Federal Reserve data on U.S. commercial banks reflects exactly this structure: loans, securities and cash-related items appear on the asset side, while deposits are a major liability and funding source.¹

2. Does a bank simply keep 10% and lend the other 90%?

You may have heard this explanation: deposit $1,000, the bank keeps $100 and lends $900.

That is not a good description of the current U.S. system. The Federal Reserve reduced required reserve ratios on net transaction accounts to 0% effective March 26, 2020. That eliminated reserve requirements for depository institutions under the current framework.²

That does not mean banks need no cash or can lend without constraint. Banks still manage liquidity and are subject to capital, liquidity, risk-management and supervisory requirements. The useful beginner version is:

3. Why can the bank pay you 4% and charge a borrower 7%?

One important source of bank earnings is the spread between what the bank earns on assets and what its funding costs. Loans and securities can generate interest income; deposits and other funding can require interest expense.

The actual economics are more complicated because banks also have operating costs, credit losses, capital needs, fees and many different funding sources. But this explains why a loan rate and a savings rate do not move one-for-one.

It also explains why checking what your cash earns matters. Two banks can value deposits differently and offer very different rates for a similar savings product.

4. If the bank owns long-term assets, how can you withdraw tomorrow?

Banks manage liquidity. Deposits are constantly arriving and leaving, loans are repaid, securities mature, and banks can obtain funding through multiple channels.

Normally, not every depositor asks for every dollar at the same time. A problem can develop when unusually large withdrawals arrive faster than the bank can raise cash without taking significant losses. That is one way to understand a bank run.

5. How can a “safe” Treasury security hurt a bank?

Credit risk and price risk are different. A long-term Treasury security has extremely low credit risk, but its market price can fall when interest rates rise.

If a bank bought a long-duration security when rates were low and later needed to sell it after rates rose, the sale price could be below the original purchase price. If the bank can hold a security to maturity, the economic situation is different than being forced to sell quickly to meet withdrawals.

This is the same interest-rate mechanism Terra explains in Bonds, explained and Individual bonds vs. bond funds.

6. What does FDIC insurance actually cover?

At an FDIC-insured bank, qualifying deposit accounts are generally insured up to $250,000 per depositor, per insured bank, per ownership category.³

Covered deposit products can include checking accounts, savings accounts, money-market deposit accounts and certificates of deposit. FDIC insurance is automatic for qualifying deposits at an FDIC-insured bank; you do not buy a separate policy.³

7. Three accounts do not necessarily create three $250,000 limits

Suppose one person has the following deposits at the same FDIC-insured bank, all in the same single-account ownership category:

The FDIC generally adds deposits in the same ownership category at the same insured bank together. In this simplified example, the total is $310,000, so $60,000 is above the standard $250,000 insurance amount for that category.³

Opening another savings account at the same bank in the same ownership category would not create another $250,000 limit. Different ownership categories can receive separate coverage when the FDIC’s requirements are satisfied, and deposits at separately chartered FDIC-insured banks are insured separately.

8. A bank money-market account is not a money-market mutual fund

The FDIC specifically does not insure mutual funds, stocks, bonds or U.S. Treasury securities. Those products may have other protections or forms of credit backing, but they are not FDIC-insured deposits.⁴

9. Where should your cash sit?

Instead of starting with the highest advertised yield, start with the job of the money.

1. Money needed immediately.Checking or highly liquid savings may be more useful than locking money to a maturity date.
2. Emergency savings.Access and stability usually matter more than maximizing every last basis point of yield.
3. Known-date money.CDs and Treasury bills may become useful comparisons when you know approximately when the cash will be needed.
4. Long-term money.If the money will not be needed for years or decades, the bigger question may be whether it should remain entirely in cash at all.

Primary sources

1. Federal Reserve — Assets and Liabilities of Commercial Banks in the United States (H.8). Current balance-sheet categories for commercial banks. Federal Reserve H.8
2. Federal Reserve — Reserve Requirements. Required reserve ratios on net transaction accounts were reduced to 0% effective March 26, 2020. Federal Reserve
3. FDIC — Understanding Deposit Insurance. Standard insurance amount, aggregation within ownership categories and basic coverage framework. FDIC
4. FDIC — Deposit Insurance at a Glance. Distinguishes insured deposit products from investments such as mutual funds, bonds and Treasury securities. FDIC
5. SEC Investor.gov — Money Market Funds. Explains money-market mutual funds as investment products rather than bank deposits. Investor.gov

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