Understanding how banks manage their clients' money allows you to better assess the safety of savings and consciously choose financial institutions. Banks play a key role in the economy, acting as an intermediary between depositors and borrowers. However, their operating model involves risks, especially in crisis situations.
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It is difficult to imagine a situation where banks will keep all the funds deposited by customers in cash. According to NBP data, at the end of 2024, there was over PLN 2.352 trillion in bank accounts and deposits in Poland. Of this, over PLN 1.5 trillion were demand deposits, i.e. funds that the customer can withdraw practically immediately.
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It is worth remembering what a deposit actually is. Although its definition is broad, in simple terms it can be said that it is any amount of money deposited into the bank. This applies to regular current accounts and deposits or savings accounts. Deposits can be fixed-term (with a set withdrawal date) or perpetual (available on demand).
How banks use money from deposits – step by step explanation
Only a small portion of the funds deposited in a bank are actually held as cash. The rest of the money (which constitutes the majority of the bank's assets) is invested.
Banks have many instruments and options at their disposal, such as consumer or business loans and government bonds. Borrowers must repay the loans to the bank with interest. This process by which banks distribute deposits in the form of loans is called financial intermediation.
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Most of the deposits go to consumer loans, corporate loans or investments in treasury bonds. Banks make money on the difference between the interest rates on loans and the interest paid to customers. They also invest part of their funds in corporate securities, interbank loans and reserves at the central bank.
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As Bankrate.com explains, banks make money on the difference between the interest rates on loans and the interest paid to customers. For example, a client deposits PLN 500 into a savings account with an annual rate of return of 4%. After a year, the customer will receive PLN 20, which is paid by the bank.
At the same time, the bank can borrow PLN 400 from the pool paid by the client in the form of a personal loan with an annual interest rate of 10%. The bank earns PLN 40 per year on this loan. Since he has already paid the client PLN 20 in interest, he keeps the remaining PLN 20 as profit, which is used to pay dividends to shareholders.
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Banks also make money on the difference between the interest rates on loans and the interest paid to customers. They take advantage of the difference between low interest rates on customer deposits and higher profits from borrowing these funds (loans) or investing them, e.g. in treasury bonds. This so-called the interest margin in Poland is on average about 4 percent, which allows banks to generate billions of dollars in profits from Poles' savings.
In addition, banks also invest some of their funds in corporate securities, interbank loans and reserves at the central bank.
