Deposits are the most vital part of our banking system, ensuring that banks are stable and able to operate. They ensure that banks remain stable, liquid, and able to provide the services that are critical to both individuals and the broader economy. When you make a deposit, it's easy to imagine that your money simply sits in an account, untouched, waiting for the day you decide to withdraw it. However, the reality is more complex. Deposited funds are constantly in motion, flowing through a variety of financial channels that help keep both the bank and the economy running smoothly.
Banks need to maintain a healthy supply of deposits at all times to be considered safe and secure. These deposits come from a range of sources, primarily individuals and businesses (core deposits), and there are limits on how much banks can rely on certain types of deposits, known as non-core deposits. Core deposits are especially important and positively impact the overall health of the bank because it means the bank has a strong base of actual depositors that are choosing to place money there. Banks always need and want core deposits because this reflects positively on their liquidity, and influences their safety and soundness.
It’s important to understand how banks operate and use deposits, so that you understand how valuable your cash actually is to banks and the banking system as a whole. Banks make a significant portion of their money via loan interest - traditionally up to 65%. These loans, whether they are mortgages, business loans, or personal loans, are funded by the deposits that customers place in the bank. This process allows the bank to create a profit by charging borrowers a higher interest rate than they pay to depositors.
In simpler terms, when you deposit money into a bank, that cash doesn’t just sit there waiting for you to withdraw it. Instead, it is pooled with other deposits and used to fund loans for other customers. These loans provide the bank interest income, and in return the bank shares a portion of that interest back to the depositor. The difference between what the bank earns and what is paid to the depositor is known as the “spread” and is a key part of how banks remain profitable.
The importance of deposits goes beyond the internal workings of a bank. Deposits—especially those held in community banks—have a direct impact on the local economy. When a community bank holds deposits, those funds are then reinvested back into the community in the form of small business loans, home mortgages, and other financial products. This cycle of deposit and reinvestment supports the financial health and development of the community
By choosing to deposit your money in a community bank, you're not just safeguarding your own funds. You're also contributing to the broader economic growth of your community, helping to create jobs, support local businesses, and make homeownership more accessible.
Learn how Ampersand can help your organization with deposit management strategies. Contact Ampersand to get started.
