What banks do with your money

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.

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.”