Unveil the Mystery: Where Do Banks Keep Their Money?

Florence Desiata

Banks are financial institutions that receive deposits and offer loans. They also provide other services like currency exchanges, retirement accounts, and safety deposit boxes. 

Many banks exist for different purposes. There are commercial banks, investment banks, and loan associations. With all the money banks manage daily, where do they keep it? Continue reading to know more. 

Where Does the Bank Keep Their Money?

Banks keep the money in two places: the Federal Reserve and a vault. These are the most secure and profitable options for depository institutions. 

Federal Reserve

The Federal Reserve is the central bank of the United States. It is a financial institution that oversees a country’s currency, monetary policies, and economic activities. 

A bank stores customer deposits in regional Federal Reserve banks to earn interest. The Federal Reserve pays them interest at a specific rate for reserve balances. The current interest on reserve balance (IORB) rate is at 4.6%. 


Banks keep cash in vaults for quick withdrawals. A bank vault is also where they store pieces of jewelry, documents, and other valuables. 

It is one of the safest places to put money in with its armored walls and complex locks. For more security, some banks even added alarms and anti-theft mechanisms. 

The majority of the deposits a bank receives go to the Federal Reserve. A bank keeps a fraction of the funds in the vault based on the reserve ratio. It is the minimum amount established by the Federal Deposit Insurance Corporation. 

For 2023, the designated reserve ratio is 2%. If a bank’s total deposit is $100 million, they can hold $2 million cash in their vaults and store the rest in Federal Reserve.  

1 Ways Banks Generate Money

Customers legally own the money kept in the Federal Reserve or vaults. The question is, “how does a bank make its funds to run as a business?”

A bank earns money through three different types of income: (a) interest income, (b) capital market income, and (c) fee-based income. 

Interest Income

An interest income refers to the money gained from the interest borrowers pay. It is the primary source of income for a lot of commercial banks. 

If someone gets a loan, they pay a percentage as interest. A study by Bankrate revealed that a personal loan has an average interest rate of 10.71%. 

Capital Markets Income 

Another way a bank earns money is through capital markets services, known as capital markets income

A capital market is a place where banks, investors, and businesses gather. It is a financial market that connects a business that needs capital and investments to prospective suppliers like banks and investors. 

Banks provide services in a capital market like underwriting, merger & acquisition advisory, and sales and trading. Each service comes with different fees.

However, it is the most erratic type of income for a bank. It fluctuates depending on the capital market activity. Since the capital market relies on the economic situation, activities may slow down during a recession. 

Fee-based Income

Banks charge different fees for their services. That is also how they earn a profit – through fee-based income. 

This type of income does not fluctuate as mandated fees usually remain unchanging for a long time. Here are some products and services that a bank charges fees for: 

  • Credit card fees
  • Custodian fees
  • Overdraft fees
  • Mutual fund revenue
  • Checking and savings accounts
  • Investment management fees

Home vs. Credit Union vs. Bank: Where To Put Your Money

Money is a liquid asset that can be stored anywhere. You can deposit it in a bank or keep it at home – the choice is yours. 

Here are some things you should know before deciding where to put your money:


In this technological era, some people still prefer to do things traditionally. A survey by American Express revealed that 29% of 1,820 individuals choose to keep their savings as cash. 

Saving your funds at home gives you a sense of security and control. Your money is also accessible since you don’t have to go to the bank or an ATM. Fees are out of sight, too. 

However, it comes with many risks – like theft. Your money does not earn interest either. It will lose value when inflation happens. When accidents and natural disasters occur, funds kept at home can be destroyed and lose value. 

Financial experts recommend keeping cash equivalent to 3-6 months’ worth of expenses only as your emergency fund. 

Credit Union

A credit union is a non-profit financial institution that offers the same services as commercial banks. You have to meet the eligibility requirements to be a member. Compared to banks, it also has fewer branches and ATMs.

Putting your money in a credit union is still beneficial. It pays high-interest rates when you deposit but charges low interest when you borrow. 

Credit unions even provide ways to help members achieve financial literacy (i.e., seminars and articles). You are also excused from paying taxes if you’re part of a federally-chartered credit union. 


Banks have been accepting deposits since the 16th-17th century. Since then, different financial services have emerged. 

Opening a savings account is one easy way to keep your money. It even comes with multiple perks. 

A savings account is convenient since you can use it for online banking and wire transfer. Your money acquires interest as it stays in your account. Best of all, your funds are insured by up to $250,000 if your bank is part of the Federal Deposit Insurance Corporation. 

This option still has some downsides. It requires a minimum balance and sometimes monthly maintenance fees. You also have to pay withdrawal fees. Your account comes with federal limits for withdrawals, too. 

The Bottom Line 

Knowing where banks keep your money can give you a sense of security. They are placed in guarded facilities to ensure safekeeping. 

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