Banking

How US banks make money and create it, how Federal Reserve decisions reach your savings and loan rates, which account to use for what, how deposit insurance really works (and when it doesn't), the payment rails and their fraud risks, and the consumer-protection rules that make a credit card safer than a debit card. Written for a US-based reader; other countries have their own insurers, limits and scam-refund rules. Budgeting and account structure are in money basics, borrowing in credit and debt, investment accounts in investing, and the economics of money and central banking in macroeconomics.

How banks make money

A bank borrows short (deposits, which you can withdraw any time) and lends long (mortgages, business loans), and earns the spread. That maturity mismatch is the business model and its main risk.

Worked: a bank with $1 billion of earning assets yielding 5.5% ($55 million) that pays 2.0% on $900 million of deposits and borrowing ($18 million) has $\text{NIM} = 37/1000 = 3.7\%$. Every 0.1 percentage point it avoids paying depositors is $0.9 million a year.

Interchange and the Durbin amendment: since 2011 the Fed's Regulation II caps debit interchange for issuers with $10 billion or more in assets. Credit cards and small-bank debit cards are uncapped. That is why generous debit rewards largely disappeared at big banks, and why many fintech debit cards are issued by small partner banks.

Money creation and reserves

The textbook "money multiplier" (banks lend out a fraction of deposits they receive) is not how modern banking works.

The Bank of England paper's point, paraphrased: the quantity of money depends ultimately on monetary policy (interest rates, or asset purchases in quantitative easing), not on a fixed multiple of reserves. Macro detail: macroeconomics.

The Fed and your rates

The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, the overnight rate at which banks lend reserves to each other. After a 25 basis point increase on 17 September 2026, the range is 3.75–4.00% (it had been cut to 3.50–3.75% in December 2025). Check the current range on the Fed's open market operations (opens in a new tab) page.

FDIC national averages on 21 September 2026 (weighted by deposits, so dominated by the largest banks): savings 0.37%, interest checking 0.07%, money market 0.63%, 12-month CD 1.73%, 60-month CD 1.38%. High-yield accounts at online banks and credit unions typically pay several times that, close to (usually a little below) the fed funds rate.

Worked: a $20,000 emergency fund earns about $74 a year at 0.37% and about $800 a year at 4.0%. Moving it is a one-afternoon job worth several hundred dollars a year, every year.

Account types

CD early-withdrawal penalties: federal rules only set a minimum (seven days' simple interest if you withdraw within six days of deposit); the bank sets the rest in the account agreement. Three to twelve months of interest is common. Worked: a $10,000 12-month CD at 4.2% with a three-month penalty costs $\text{penalty} = 10000 \times 0.042 \times 3/12 = 105$ dollars to break. "No-penalty" CDs trade a slightly lower rate for free exit.

I bonds, 2026: $10,000 per person (per Social Security number) per calendar year, electronic only through TreasuryDirect; paper I bonds via tax refunds ended on 1 January 2025. Bonds issued 1 May–31 October 2026 earn 4.26% (including a 0.90% fixed rate) for their first six months. Minimum $25. Interest is exempt from state and local tax and federal tax is deferred until redemption.

APR vs APY

APR (annual percentage rate) is the nominal yearly rate, not compounded. APY (annual percentage yield) is what you actually earn in a year once compounding is included. Deposit accounts must quote APY (Truth in Savings Act, Regulation DD); loans quote APR (Truth in Lending, Regulation Z).

$r$ is the APR as a decimal and $n$ the compounding periods per year.

Worked: $10,000 at 4.00% APR compounded daily earns $10000\left[(1 + 0.04/365)^{365} - 1\right] \approx 408.08$ dollars in a year, an APY of 4.081%. Going the other way, a 4.50% APY compounded daily needs an APR of $365\left[(1.045)^{1/365} - 1\right] \approx 4.402\%$.

• Compare savings accounts by APY. Compounding frequency barely matters at normal rates.
• Card APRs understate the true cost: a 22% APR compounding daily is about 24.6% a year.
• A loan's APR includes some fees (origination, points) in the rate, so it is a better comparison than the note rate alone.

Deposit insurance

FDIC insurance covers deposits at insured banks up to $250,000 per depositor, per insured bank, per account ownership category. It pays if the bank fails, usually within a few days of closing and often the next business day. No depositor has lost a penny of insured funds since the FDIC started in 1934. It does not cover stocks, bonds, mutual funds (including money market funds), crypto assets, annuities, life insurance, safe deposit box contents or Treasury securities (which are separately backed by the US government).

The trust rule simplification took effect on 1 April 2024: revocable and irrevocable trust deposits are now one category, coverage is (owners × beneficiaries × $250,000) with a cap of $1.25 million per owner, and most trust-document complexity was removed.

Worked: a married couple at one bank with a single account each, a joint account, an IRA each and a payable-on-death account naming their three children can be insured for:

single accounts        2 x 250,000             =   500,000
joint account          2 co-owners x 250,000   =   500,000
IRAs                   2 x 250,000             =   500,000
POD (trust) account    2 owners x 3 benef.
                       x 250,000               = 1,500,000
                                                 ---------
                                         total   3,000,000

Check your own set-up with the FDIC's EDIE estimator (opens in a new tab).

What SIPC does not do: it does not protect against the value of your investments falling, being sold worthless or unsuitable securities, bad advice, commodity futures, most foreign-exchange trades, unregistered investment contracts including many crypto assets, or fixed annuities and other investments not registered with the SEC. It restores missing assets when a broker fails; it is not investment insurance. Many large brokers add "excess SIPC" cover from private insurers.

Fintechs, neobanks and pass-through insurance

Most "neobanks" and payment apps are not banks. They are technology companies that hold customer money at a partner bank, sometimes through a middleware company (banking-as-a-service, BaaS). FDIC insurance protects you only against the partner bank failing, and only if pass-through conditions are met:

• the money is actually deposited at an FDIC-insured bank;
• the bank's account records show it is held in a custodial capacity for customers ("for benefit of", FBO); and
• the records (the bank's or the fintech's) identify each customer and how much each owns.

If the fintech or middleware company fails, or its ledger doesn't match the bank's, FDIC insurance does not apply. That is what happened with Synapse:

Lessons:

• "FDIC insured" on a fintech's website means "our partner bank is FDIC insured". Find out which bank, and whether your money is held there in an FBO account in your name.
• Holding balances in a payment app (Venmo, Cash App, PayPal) is holding a claim on that company unless the terms say the balance is swept to a bank with pass-through coverage. Move money out to a bank account promptly.
• Treat a fintech as a front end, not a vault. Keep the emergency fund at a bank or credit union directly.

Banks vs credit unions vs online banks

A common set-up: checking at a big bank or credit union (branches, cash, wires) plus savings at an online bank (rate), plus a brokerage for anything long-term.

Payment rails

How money actually moves. Reversibility is the key column: the faster and more final a payment, the more attractive it is to scammers.

Routing and account numbers

The ABA routing number (nine digits) identifies the bank; it is public. The account number identifies your account. Together they let anyone send you money, and also pull money by ACH debit or forge a check.

Some banks issue separate or tokenized account numbers for bill pay; use them where offered. Review ACH debits on each statement: unauthorised ones must be reported within 60 days of the statement.

Debit vs credit: consumer protection

Card networks' "zero liability" policies often go further than the law for both card types, but they are voluntary and have conditions.

Conclusion: use a credit card for purchases (paid in full every month), keep the debit card for ATMs, and never let a debit card number sit on file with a merchant if a credit card will do. The protections are better and the money at risk is the bank's, not yours.

Overdraft and NSF fees

Status in 2026:

• The CFPB finalized an overdraft rule in December 2024 for banks with more than $10 billion in assets (a $5 benchmark fee, a cost-based fee, or treating overdraft as credit under Regulation Z). Congress overturned it with a Congressional Review Act resolution, signed on 9 May 2025, and the CRA bars the CFPB from reissuing a substantially similar rule without new authority.
• Market pressure did more: several large banks dropped or cut overdraft fees and many dropped NSF fees from 2021–22 onwards. Fees vary widely, so compare fee schedules.

Practical: opt out of debit overdraft coverage (a declined card beats a fee), turn on low-balance alerts, link a savings account for overdraft transfers, and keep a checking cushion.

Scams and account security

Authorized push payment (APP) scams trick you into sending the money yourself: by wire, Zelle, RTP/FedNow, crypto or gift cards. Because you authorized the payment, Regulation E's unauthorised-transfer protections generally do not apply.

Zelle: since June 2023, the network's rules have required participating banks to reimburse certain imposter scams (someone posing as a bank, government agency or similar). Purchase scams and most other authorized payments are generally not reimbursed. The CFPB sued Zelle's operator and three banks in December 2024 and dropped the case in March 2025; New York's attorney general filed a similar suit in 2025, which a state court allowed to proceed in July 2026. Rules elsewhere differ: the UK, for example, has required most APP scam victims to be reimbursed since October 2024.

Protect your accounts:

• Never move money because someone called, texted or emailed you. Hang up and call the number on your card. Your bank will never ask you to transfer money to "protect" it or to read out a one-time code.
• Use app-based two-factor authentication or passkeys rather than SMS where offered; set a carrier port-out PIN against SIM swaps.
• Turn on alerts for every transaction, large transfer, new payee, login from a new device and password change.
• Confirm wiring instructions by phone using a number you found independently, never one in the email.
• Pay strangers only by credit card; use Zelle and P2P only with people you know.
• Freeze your credit at all three bureaus (free); see insurance and estate for identity-theft protection and credit and debt for credit reports.
• Report fraud to your bank at once (the Regulation E clock starts when you learn of it), then to ReportFraud.ftc.gov (opens in a new tab) and, for internet crime, the FBI's IC3.

Bank failures

Banks fail every few years in the US, usually quietly: the FDIC arranges a sale to another bank over a weekend and insured depositors notice nothing but a new logo.

Silicon Valley Bank (closed 10 March 2023) was different. It had grown on deposits from tech firms that were, in the Federal Reserve's review, "largely uninsured", and invested them in long-dated securities that lost value as rates rose. When losses became public, depositors ran. Signature Bank closed on 12 March, First Republic on 1 May. On 12 March 2023 the Treasury, Fed and FDIC invoked a systemic risk exception so that all depositors of SVB and Signature were made whole; shareholders and unsecured bondholders were not protected, and the cost was recovered from banks through a special assessment.

Lessons for depositors:

• Stay within insurance limits. The systemic risk exception was discretionary; don't count on it.
• Above $250,000: use several ownership categories, several banks, a bank that offers deposit-placement networks (which spread large deposits across many banks), brokered CDs across banks, or Treasury bills.
• A run now takes hours, not days, because withdrawals are one tap away. Know how you would pay rent if one account were frozen for a week: keep a second account at an unrelated institution.
• Insured deposits at a failed bank are safe; access is usually restored within a business day or two.

Choosing a bank

CHOOSING A BANK OR CREDIT UNION
[ ] FDIC- or NCUA-insured? Verify at fdic.gov BankFind or
    ncua.gov Research a Credit Union (not the app's word)
[ ] If a fintech: which partner bank holds the money, and is
    it in an FBO account in your name?
[ ] Checking: no monthly fee (or an easy waiver), no minimum
[ ] Overdraft: can you opt out? NSF fees? Linked-savings
    transfer?
[ ] Savings APY vs the best online banks (compare APY)
[ ] ATM network or ATM fee refunds; cash deposit options
[ ] Wire fees, same-day and instant transfer availability
[ ] Security: app-based 2FA or passkeys, alerts, card lock
[ ] Zelle / instant payment limits and scam policy
[ ] Customer service you can reach by phone, quickly
[ ] Early account closure fees; bonus clawback terms
[ ] Joint account and payable-on-death (POD) beneficiary
    options
 
ACCOUNT STRUCTURE (see money-basics for the diagram)
  Checking (bills hub)  <- pay lands here, autopays go out
  HYSA #1  emergency fund     (different bank from checking)
  HYSA #2  sinking funds      (or buckets inside HYSA #1)
  Credit card for spending, autopay statement balance
  Brokerage / IRA for long-term money

References

• FDIC: Deposit insurance at a glance (opens in a new tab): $250,000 per depositor, bank and ownership category; the April 2024 trust rules; what is not insured
• FDIC: Deposit insurance FAQs (opens in a new tab): payout timing, prepaid cards and pass-through coverage
• FDIC: EDIE, Electronic Deposit Insurance Estimator (opens in a new tab): check coverage for your own accounts
• FDIC: National rates and rate caps (opens in a new tab): national average deposit rates
• NCUA: Share insurance coverage (opens in a new tab): credit union deposit insurance
• SIPC: What SIPC protects (opens in a new tab): $500,000 including $250,000 cash, and the exclusions
• Federal Reserve: Reserve requirements (opens in a new tab): ratios cut to zero effective 26 March 2020
• Federal Reserve: Open market operations (opens in a new tab): history of the federal funds target range
• McLeay, Radia and Thomas (2014), Money creation in the modern economy (opens in a new tab), Bank of England Quarterly Bulletin 2014 Q1
• TreasuryDirect: I bonds (opens in a new tab): current rate, $10,000 electronic limit, holding period and penalty
• CFPB: Unauthorized transactions and Regulation E (opens in a new tab): debit liability tiers
• FTC: Lost or stolen credit, ATM and debit cards (opens in a new tab): credit vs debit liability limits
• CFPB enforcement: Synapse Financial Technologies (opens in a new tab): the 2025 complaint and judgment
• Congressional Research Service: Congress repeals CFPB's overdraft rule (opens in a new tab): the 2025 Congressional Review Act resolution
• Board of Governors of the Federal Reserve: Review of the supervision and regulation of Silicon Valley Bank (April 2023) (opens in a new tab): why SVB failed
• Federal Reserve: Joint statement by Treasury, Federal Reserve and FDIC, 12 March 2023 (opens in a new tab): the systemic risk exception
• The Clearing House: First new core payments system in more than 40 years (2017) (opens in a new tab): RTP launch
• Federal Reserve Financial Services: FedNow raises transaction limit to $10 million (opens in a new tab)
• Nacha: Same Day ACH per-payment limit to increase to $10 million (opens in a new tab): effective 17 September 2027
• ReportFraud.ftc.gov (opens in a new tab): report scams to the Federal Trade Commission
• Macroeconomics: money and banking: the economy-wide view of banks and the Fed