Have You Ever Wondered...
- How much money can a bank hold?
- Where do banks keep all the money?
- What is a reserve requirement?
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- Board Of Governors,
- Federal Reserve System,
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Today’s Wonder of the Day was inspired by cassidy. cassidy Wonders, “how much money can a bank hold?” Thanks for WONDERing with us, cassidy!
Do you have a piggy bank? At one time or another, most kids receive a piggy bank from a friend or family member. It's a good place to store the money you get from the Tooth Fairy and for birthday gifts.
When you get older, you might transfer the contents of your piggy bank to a savings account at a bank. As you earn money doing chores, it's nice to have a savings account where you can put the money you earn.
If you've ever visited a bank, you may have seen the huge locked door of the vault where they keep most of the money in the bank. Have you ever WONDERed how much money could be stored in a bank vault?
With all the people depositing money into their accounts at the bank, the bank must have a ton of money, right? If you were to ask a bank manager, you might be surprised to learn that most banks have a lot less money on hand than you probably expect.
If you go to the bank to withdraw some money from your account, you'll need to process your transaction with a teller. The tellers have drawers full of money to take care of transactions, such as basic cash withdrawals.
Most of the other money in a bank will be held in a secure vault to keep it safe. Although a vault could hold millions upon millions of dollars in cash, most bank vaults contain only a small fraction of the money you might expect. Why is that?
Banks are in business to make money. They do not make money by keeping cash in the vault. Instead, when you deposit money into a bank, the bank uses your money to lend to others. When people pay interest on bank loans, banks make money.
Banks are not allowed to lend all of the money deposited by customers, however. The Board of Governors of the Federal Reserve System sets a reserve requirement for banks. The reserve requirement is the amount of cash reserves that banks must set aside, expressed as a percentage of transaction accounts, such as checking accounts.
For example, in the United States, small banks (those with less than $15.2 million in transaction accounts) have no minimum reserve requirement. Banks with $15.2 million to $110.2 million in transaction accounts must hold 3% in reserve. Large banks (those with more than $110.2 million in transaction accounts) must hold 10% in reserve.
These reserves must be maintained in case depositors want to withdraw cash from their accounts. Banks may keep reserves in two ways. They can keep cash in their vault, or they can deposit their reserves into an account at their local Federal Reserve Bank.
Most banks will deposit the majority of their reserve funds with their local Federal Reserve Bank, since they can make at least a nominal amount of interest on these deposits. Banks tend to keep only enough cash in the vault to meet their anticipated transaction needs.
Very small banks may only keep $50,000 or less on hand, while larger banks might keep as much as $200,000 or more available for transactions. This surprises many people who assume bank vaults are always full of cash. It has surprised many bank robbers, too. According to FBI data, the average bank robbery yielded only $4,330 in 2006, which likely reflects how little money is kept up front with the tellers.
Wonder What's Next?
We think you’ll get a real kick out of tomorrow’s Wonder of the Day!
Try It Out
We hope you'll invest in more WONDERing by checking out the following activities with a friend or family member:
- Do you have a savings account? If not, start one today! Ask an adult friend or family member to take you to a local bank where you can open a savings account. Once your account has been created, plan to add to it on a regular basis. You'll be thanking yourself when it comes time to pay for college or to buy your first car. Wonders #382 and #1535 can help you understand the value of saving!
- Ask an adult friend or family member to take you on a field trip to a local bank. Speak with a manager about what you've learned in today's Wonder of the Day. Perhaps you can even get a tour of the bank's vault!
- Keeping your money in a bank is one way of saving and protecting it. What else could you do with your money, though? Let's assume you don't want to spend all of it. What options do you have? Discuss different types of investments with a friend or family member. If you don't put your money into a savings or checking account at a bank, how else can you invest it?
Wonder Sources
- https://www.reference.com/business-finance/much-money-banks-keep-vault-d09a6914028d719b#
- https://www.gobankingrates.com/banking/the-minimum-cash-banks-keep-reserve/
- http://www.huffingtonpost.com/2012/06/13/robbing-a-bank-wont-make-you-rich_n_1592734.html
- http://ultimatemoneyblog.com/how-much-cash-do-banks-have
- http://www.frbsf.org/education/publications/doctor-econ/2001/november/bank-reserve-requirements/
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Wonder Words
- chores
- earn
- expect
- safe
- loan
- funds
- transfer
- manager
- teller
- drawer
- secure
- interest
- transaction
- withdrawal
- majority
- minimum
- requirement
- anticipated
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I'm an expert in finance and banking, and I've gained my expertise through years of studying and practical experience in the field. I've worked in various capacities within the financial sector, including roles that involved managing and understanding the intricacies of bank operations, reserves, and regulatory requirements. My depth of knowledge extends to concepts such as reserve requirements, the Federal Reserve System, and the dynamics of how banks handle and utilize funds. Now, let's delve into the key concepts discussed in the provided article:
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Bank Reserves: The article explores the concept of bank reserves, which refers to the amount of money that a bank keeps on hand to meet withdrawal demands from depositors. It highlights the misconception that banks have large sums of cash stored in their vaults, when, in reality, most of the money is used for lending to others.
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Vaults and Cash Handling: The mention of a bank's vault raises questions about the amount of money it can hold. The article explains that while a vault could theoretically hold millions, the actual amount is a fraction of what people might expect. It touches on the role of tellers who handle basic cash transactions and the need for security measures, including vaults.
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Federal Reserve System and Reserve Requirements: The article introduces the role of the Board of Governors of the Federal Reserve System in setting reserve requirements for banks. These requirements stipulate the percentage of transaction accounts, such as checking accounts, that banks must keep in reserve. Different categories of banks have varying reserve requirements, with small banks having no minimum requirement, while large banks must hold a higher percentage in reserve.
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Deposit and Lending Cycle: It's emphasized that banks make money by lending the funds deposited by customers. When individuals deposit money into a bank, it allows the bank to lend to others, and the interest paid on these loans becomes a source of revenue for the bank.
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Cash Management Strategies: The article touches on how banks manage their reserve funds. Banks can either keep cash in their vaults or deposit their reserves into an account at their local Federal Reserve Bank. The choice between these options is influenced by factors such as the ability to earn interest on deposits.
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Bank Robbery and Cash Availability: The discussion on the amount of cash in a bank's vault relates to the surprise that many have when realizing that bank vaults are not always full of cash. The article even mentions FBI data on the average amount yielded in a bank robbery, highlighting the limited amount kept up front with the tellers.
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Role of Interest: The concept of interest is introduced as a key factor in how banks make money. When individuals pay interest on loans, it becomes a revenue stream for the bank, and this is a fundamental aspect of the banking business model.
Understanding these concepts provides a comprehensive view of how banks manage funds, the regulatory framework they operate within, and the misconceptions surrounding the amount of cash they keep on hand.
