What actually happens to your money when you deposit it in a bank?

It stops being your money in the physical sense and becomes a debt the bank owes you. Your balance is an entry in the bank's ledger recording what it must repay on demand — not a box of your notes sitting in a vault.

The bank puts the funds to work. Most of it is lent out — mortgages, business loans, credit cards — and some is held as liquid reserves and government securities to meet withdrawals. The bank profits on the net interest margin: the difference between what it pays you and what it charges borrowers.

Lending creates deposits. When a bank issues a mortgage it does not hand over someone else's savings; it credits the borrower's account, creating a new deposit. This is the mechanism by which most money in a modern economy comes into existence, and it is constrained by capital requirements and regulation rather than by a fixed stock of cash.

Why this matters to you:

Only a small fraction of deposits exists as physical cash, which is why a bank cannot repay every customer simultaneously. That is the structural reason bank runs are dangerous and why deposit guarantee schemes exist.

Deposit protection covers balances up to a limit per person per authorised institution if the bank fails — £85,000 under the UK's FSCS, $250,000 under the US FDIC, with equivalents elsewhere. Two brands sharing one banking licence usually share one limit, which catches people out.

Your money is a claim, not a bailment. In a failure you are a creditor, protected up to the scheme limit.

This also explains poor savings rates: banks pay only what they need to attract deposits, and when they can fund themselves cheaply elsewhere, they pay less.