What does a bank actually do with my money?Easy

It does not keep it. Your balance is a loan you made to the bank, and the bank lent it to somebody else for far longer than you agreed to lend it.

3 min read · 598 words

The short answer: it lends it. The balance on your statement is not money sitting in a drawer with your name on it — it is a promise from the bank to give you that amount whenever you ask. The actual money went out the door as somebody's mortgage.

So my money is not "in" the bank?

Not in the way the word suggests. When you deposit, you become a lender to the bank and the bank becomes your borrower. Your balance is its liability. On the other side of its balance sheet are the things it did with the money: loans, mortgages, government bonds.

This is not a trick and it is not hidden. It is what a bank is. A business that took deposits and left them untouched would have to charge you for storage, and nobody would lend anything to anybody.

Then how can everybody get their money back?

Not everybody at once, and that is the honest answer. The bank has lent for years and promised to repay on demand, so the two sides of it do not match in time. Normally that is fine: some people withdraw, others deposit, and the total is stable enough to lend against.

It stops being fine when a large share of depositors want out at the same time. The loans cannot be called back in an afternoon, so the bank has to sell assets fast or borrow — and if it cannot do either quickly enough, it fails while still being owed more than it owes. That is a liquidity failure rather than a solvency one, and it is the specific fragility banking has.

What stops that from happening constantly?

• Deposit guarantee schemes. Up to a statutory limit per person per bank, your deposit is guaranteed even if the bank fails — €100,000 in the EU, £85,000 in the UK, $250,000 under the US FDIC. Below that limit there is no reason to join a queue, which is exactly the point.
• Liquidity rules. Banks must hold a buffer of assets that can be sold or pledged quickly, sized against an assumed outflow.
• A central bank that lends. Against collateral, to a bank it believes is solvent but short of cash. See central banking.
• Capital. A cushion of the shareholders' money that absorbs losses before any depositor is touched.

Where does the bank's profit come from?

Mostly from the gap between what it pays you and what it earns on the lending — plus fees. That gap is why a current account paying nothing is far more valuable to a bank than a savings account bought with a headline rate: same money, very different cost.

It is also why the rate on your account moves slowly when policy rates rise. Nothing forces a bank to pass a rate change on to depositors, and competition for balances is what actually decides it. Deposits and payments is the seat where that is priced.

Does this apply to money at a broker too?

Partly, and the difference matters. Shares held for you at a broker are yours and segregated — the broker is a caretaker. Uninvested cash at a broker is usually placed on deposit at a bank, and there it is a deposit like any other, with the same guarantee limit and the same queue. What happens if my broker fails takes that apart.

The one sentence to take away

A deposit is a loan you made, repayable on demand, funding loans that are not. Everything else about bank regulation is an attempt to make that arrangement survivable.