The Washington Post published (Washington Post) reports what banks do with the money they deposit, using the journey of a $100 bill through the US financial system.
The report began the $100 journey by saying that for the bank your money is not just a measure of money to save, but a loan that the bank can use to make more money.
When your money, whether cash or check, goes into the bank it is immediately run through the financial system, and as your money enters the bank as a single sum it is quickly segmented.
Large banks must have sufficient cash reserves to fund 30 days of withdrawals and payments (Getty Images)
cash reserve
A small amount is set aside as a cash reserve, either in the vaults of the bank, in other banks, or in the Federal Reserve. Historically, banks were required to keep a small stash of cash, usually between 3% and 10% of their deposits, on hand.
The Federal Reserve rescinded these requirements early in the COVID-19 pandemic, though it still requires banks to have a certain amount of money readily available to keep their operations running. For example, large banks must have Enough to fund 30 days of withdrawals and payments.
Some of your money is loaned to companies, usually in the form of small business loans. Companies pay interest to the bank, which is one way banks make money.
Steady stream of income for the bank
Part of the $100 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 usually last 5, 10, 15 or even 30 years, ensuring a steady flow of income to the bank.
Also, banks hide deposits in government bonds and interest-bearing securities, because they are considered stable investments with predictable returns.
But in the past year, the Federal Reserve has raised interest rates rapidly, and those old long-term bonds have become less valuable because the new bonds pay more interest. As a result, banks have been sitting on a pile of devalued government bonds and loans. This isn’t usually a big deal if the bank can wait until the bond’s term expires to pay it off.
Silicon Valley bank collapsed when depositors withdrew $42 billion in 24 hours (Shutterstock)
Dangerous bets
Banks sometimes place riskier bets, for example by investing in the stock market. This can be profitable when the stock is doing well, but it can get the bank into trouble if the market falters.
And when you come back to get your money, the bank will usually turn to its reserves to pay you back. These reserves can include cash on hand and money stored in the Federal Reserve.
But in some rare cases, the bank may not have enough cash to cover the withdrawal. This may happen if customers decide to refund a huge amount of money at the same time. In this case, the bank sells short-term securities, such as Treasury bills and bonds, to get cash quickly, but that sale is made at a loss.
Although the bank may be able to bear these losses on a small scale, things can get out of control in extreme cases. This is what happened earlier this year with Silicon Valley Bank, when depositors got $42 billion in 24 hours, and the bank had to sell its bonds at a loss of $1.8 billion, which was enough to bring down the institution.
2023-07-13 07:06:11
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