What do banks typically do with deposits?
When you take your money to the bank, what the bank does is they’ll take about 10% of that and they keep it aside for capital. And then they take the other 90% and they lend it out. So they’ll do mortgages, commercial loans, personal loans, and they make money off that. And they make more than they pay you in interest, and that’s how banks actually make money.
How are bank depositors protected?
In Canada we have CDIC, and what that does is they will insure your deposits up to $100,000. So if a bank fails, which doesn’t really happen in Canada, but if a bank did fail, and you had $200,000 in the bank, $100,000 would be guaranteed by the government. And the other $100,000 you would be an unsecured creditor to a bank. In the US, it’s FDIC, and their limit is $250,000. So anything above $250,000, you’d be an unsecured creditor of a bank.
In the end, what happened to depositors impacted by the U.S. regional banking crisis in 2023?
Well, FDIC covered up to $250,000 of their deposits. But many of the depositors were actually companies, so they had more than $250,000 in the bank. And the government decided that they didn’t want to have a further run on regional banks. And so the government stepped up and said, “We will reimburse the depositors right up to the full amount that they had in those regional banks, even above the Federal Deposit Insurance amount of $250,000.”
Now, you shouldn’t bank on that because the government doesn’t have to do that. So really if you want security and safety of your money, and you have more than $250,000 that you’re trying to keep liquid, then you’re better to buy a short-term government bond because that is the actual obligation of the government.