When you deposit money, most people imagine it sitting safely in a vault. The reality is almost the opposite — and understanding what banks do with your money is essential for understanding how the financial system works.
Banks are financial intermediaries. Their core business: borrow money from depositors at a low interest rate, and lend it to borrowers at a higher rate. The difference — the net interest margin — is their primary income source.
When your salary arrives in your current account, the bank puts most of it to work: lending it to mortgage borrowers, businesses, and personal loan applicants. The bank earns interest on these loans, pays you a smaller amount on your deposits (if any), and pockets the difference.
This works because not all depositors need their money at the same time. On a typical day, only a small fraction of customers make withdrawals. Banks rely on this predictability to keep only a fraction of total deposits as cash reserves — and lend out the rest. This is fractional reserve banking.
The risk is obvious: if many depositors demand their money simultaneously — a bank run — even a healthy bank can fail because it cannot liquidate its loan portfolio fast enough. This is why deposit insurance exists (in the UK, the FSCS protects up to £85,000 per person per bank) and why central banks act as lenders of last resort.
Beyond lending, banks also invest deposits in government bonds and other safe securities, provide payment services (transfers, direct debits, card payments), and generate fee income from various financial products.
Your deposit is not sitting idle. It is funding the mortgages, car loans, and business investments of other people — with your money protected by insurance and systemic safeguards.