What Does the Bank Do With Your Money?

Banks play a central role within the financial system. They are intermediaries that facilitate the flow of funds throughout the economy. When individuals and businesses deposit money into a bank, these funds do not remain idle. Instead, banks actively circulate and manage these deposits to support various economic activities. This process contributes significantly to economic growth and stability.

Safeguarding Your Funds

Banks protect funds entrusted to them by depositors. In the United States, deposit protection is largely provided through federal insurance. The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that insures deposits at member banks. This insurance protects depositors from financial loss in the unlikely event of a bank failure.

The standard insurance amount provided by the FDIC is up to $250,000 per depositor, per insured bank, for each ownership category. This coverage applies to various types of deposit accounts, including checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. It also extends to official items issued by banks, such as cashier’s checks. FDIC insurance is automatically provided when an account is opened at an insured institution.

Beyond federal insurance, banks implement security measures to protect customer information and assets. Cybersecurity protocols defend against digital threats. These include data encryption, multi-factor authentication, and continuous monitoring of networks for suspicious activities. Banks conduct regular security audits and maintain incident response plans. Employee training on cybersecurity awareness strengthens these defenses. Physical security measures, such as secure vaults and surveillance systems, contribute to the protection of funds.

Funding Loans and Investments

Banks use customer deposits to fund loans and make investments, core activities that drive their revenue and support economic expansion. This process involves lending money to individuals, businesses, and other entities. Banks earn income from the interest charged on these loans, which is typically higher than the interest they pay to depositors. This difference is known as the net interest margin.

Banks originate various loans to meet diverse financial needs. Individuals can access mortgages for home purchases, auto loans for vehicles, and personal loans for various expenses. Banks also extend credit through credit card lending, providing revolving lines of credit to consumers. These activities enable individuals to make purchases and manage finances.

For businesses, banks provide financing through various structures. Term loans offer capital repaid over a fixed period, often used for equipment purchases or facility expansions. Lines of credit provide flexible access to funds up to an approved limit, suitable for managing working capital or addressing short-term needs. Banks participate in Small Business Administration (SBA) loan programs, which include government guarantees that encourage lending to small businesses. Commercial real estate loans facilitate the acquisition or development of business properties.

Banks also invest a portion of their assets, often in relatively low-risk securities, to manage liquidity and generate additional income. Government bonds, such as Treasury bonds, notes, and bills, are common investment vehicles. These investments provide a stable return and contribute to the bank’s overall financial health. Banks continue to hold reserves for liquidity management and to meet daily operational demands. These reserves ensure that banks can fulfill withdrawal requests and manage their payment obligations effectively.

Enabling Payments and Transfers

Banks facilitate money movement, providing services that make deposited funds accessible for daily life and commerce. Checking accounts form the foundation for transactional services. They allow individuals and businesses to conduct frequent transactions, write checks, and manage their finances.

Debit cards link to checking accounts, enabling customers to make purchases and withdraw cash from ATMs. Online and mobile banking offer convenient digital access to accounts around the clock. Through these channels, users can check account balances, review transaction history, transfer funds between accounts, and pay bills electronically. Mobile check deposit allows customers to deposit checks by taking a picture with their smartphone.

For larger or time-sensitive movements of money, banks offer wire transfers. These electronic transfers move money between financial institutions, often on the same business day for domestic transactions. Wire transfers require specific recipient details, including bank name, account number, and routing information, for secure delivery. While banks typically charge a fee for wire transfers, they provide a reliable method for sending funds domestically and internationally. Automated bill payments and person-to-person (P2P) transfers streamline financial management, allowing for scheduled payments and instant transfers to others using various digital platforms.