Banks don't hold all customer deposits in a vault—they lend most of it out

A bank keeps only a fraction of the money customers deposit. The rest goes into loans, investments, and other uses. The amount a bank must keep on hand is set by the Federal Reserve and is called the reserve requirement. As of 2024, most banks must hold 10 percent of certain customer deposits in reserve; the exact percentage depends on the size of the bank and the type of account.

This is why your money is still there when you withdraw it, even though the bank has lent out most deposits to other customers. The bank counts on steady deposits coming in and withdrawals going out—a pattern that holds most of the time. When that pattern breaks, banks can face serious problems.

Key Takeaways

  • The Federal Reserve requires banks to hold 10 percent of most customer deposits in reserve; the rest can be lent or invested.
  • Banks rely on the assumption that not all customers will withdraw money at the same time, which is why reserve requirements exist.
  • If a bank cannot meet withdrawal requests because it has lent out too much, it can borrow from the Federal Reserve's discount window or sell assets quickly.
  • Your deposits are insured up to $250,000 per account type per bank by the FDIC, regardless of how much the bank holds in reserve.
  • A bank's reserve position is public information; you can see it in quarterly financial reports filed with banking regulators.

What the Federal Reserve requires banks to hold

The Federal Reserve sets reserve requirements as a tool to control how much money banks can lend into the economy. Currently, the requirement is 10 percent for most transaction accounts—checking accounts and money market accounts where customers can make unlimited withdrawals. Savings accounts and time deposits (like CDs) have lower or no reserve requirements.

The 10 percent figure is a minimum. Banks can and do hold more than the requirement, especially after economic shocks or when they are uncertain about future deposit flows. During the 2008 financial crisis and again during the COVID-19 pandemic, banks held significantly more cash than required.

Reserve requirements apply only to deposits held at the bank itself. Money you transfer out, investments the bank makes, and loans the bank issues all count against the bank's total assets but not against its reserve requirement in the same way.

How banks use the deposits you don't withdraw

When you deposit $1,000 in a checking account, the bank keeps roughly $100 in reserve and lends out or invests the remaining $900. That $900 might go to a mortgage borrower, a small business, a car buyer, or into securities the bank holds. The bank earns interest on these loans and investments, which is how it pays you interest on your deposit and covers its operating costs.

This system works because most people do not withdraw all their money at once. On any given day, some customers deposit money while others withdraw it. The bank's job is to predict these flows accurately enough that it always has enough cash on hand to meet withdrawal requests.

If a bank misjudges and runs short of cash, it can borrow from other banks overnight (the federal funds market), sell assets quickly, or borrow from the Federal Reserve's discount window—an emergency lending facility. These options exist precisely because banks are not required to hold 100 percent of deposits in cash.

What happens when a bank cannot meet withdrawal requests

A bank that cannot pay out customer withdrawals faces a bank run—a cascade of withdrawals as customers panic and try to get their money out before the bank fails. This is what happened to Silicon Valley Bank in March 2023: depositors lost confidence, withdrew funds rapidly, and the bank ran out of cash to pay them.

When a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in. The FDIC insures deposits up to $250,000 per depositor, per account type, per bank. If you have $100,000 in a checking account at a failed bank, you receive the full $100,000. If you have $300,000, you receive $250,000 and lose the rest—unless you have structured your accounts to fall under different FDIC categories (joint accounts, retirement accounts, and trust accounts each have separate $250,000 limits).

The FDIC does not insure investment accounts, brokerage accounts held at the bank, or money market funds. It insures only deposits—money you have placed in the bank for safekeeping or to earn interest.

How to know if a bank is holding enough reserves

Banks file quarterly financial reports called Call Reports with the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC). These reports are public and include the bank's total deposits, total reserves, and reserve ratio. You can search for a bank's Call Report on the FDIC's website or the Federal Reserve's website.

A bank's reserve ratio tells you what percentage of deposits it is holding in reserve. If a bank has $1 billion in deposits and $150 million in reserves, its reserve ratio is 15 percent—above the 10 percent minimum. A ratio below 10 percent would trigger regulatory action.

You do not need to monitor this yourself. Banking regulators do it constantly. If a bank's reserves fall too low or its financial condition deteriorates, regulators can force it to raise capital, restrict lending, or shut it down before it fails and harms depositors.

Why reserve requirements changed in 2020

In March 2020, the Federal Reserve eliminated reserve requirements for most banks, dropping the requirement from 10 percent to zero. This was a temporary measure to free up cash during the COVID-19 pandemic. Banks no longer had to hold a specific percentage of deposits in reserve, though they still had to hold enough to meet withdrawal requests and satisfy regulators.

The change did not mean banks stopped holding reserves. It meant the requirement was no longer a binding constraint. Banks continued to hold substantial reserves because they needed the cash to operate and because regulators still expected them to maintain adequate liquidity—the ability to pay out deposits on demand.

This change remains in effect. The Federal Reserve has not reinstated reserve requirements, though it continues to monitor bank reserves and can adjust policy if conditions change.

Frequently Asked Questions

If my bank only holds 10 percent of deposits, what happens to the other 90 percent?

The bank lends it out as mortgages, auto loans, and business loans, or invests it in securities. The bank earns interest on these loans and investments. If you withdraw your money, the bank uses incoming deposits or sells assets to pay you. The system assumes not all customers withdraw at the same time.

Is my money safe if the bank only holds 10 percent?

Yes, as long as the bank remains solvent. Your deposits are insured up to $250,000 by the FDIC, so even if the bank fails, you receive your money back (up to the limit). Banks are also required to maintain enough liquidity to meet withdrawal requests under normal conditions.

Can I ask my bank how much money it is holding?

You can look up your bank's reserve position in its quarterly Call Report, available on the FDIC or Federal Reserve website. You can also contact your bank directly, though they may not provide detailed reserve information to individual customers. The information is public but technical.

What if I have more than $250,000 at one bank?

Only $250,000 is insured per account type. If you have $300,000 in a checking account, $50,000 is uninsured. You can increase coverage by opening accounts in different categories—a joint account, a retirement account, and a trust account each have separate $250,000 limits at the same bank.

Did the elimination of reserve requirements in 2020 make banks less safe?

No. Banks still hold reserves because they need cash to operate and because regulators require them to maintain adequate liquidity. The change removed a specific percentage requirement but did not change the underlying need for banks to keep enough cash on hand to pay depositors.