Is My Money Safe in a Bank?

Money in a bank account is not a sum set aside in your name. The bank owes it to you: a deposit is the bank's debt, and a depositor is one of its creditors. Whether the money is safe is therefore two questions about the bank, not one.

The first is solvency: are the bank's assets worth more than everything it owes, so that every creditor could in the end be paid? The second is liquidity: can it pay you today, when the assets that would pay you are loans running for years? A bank can fail on either. This page takes them in turn, on a bank constructed for this page — the same one the other pages in this order use, whose funding Where Banks Get Their Money sets out — and then turns to deposit insurance, the layer underneath all the others.

Banks expect to lose some loans every year, and they price for it. The constructed bank's US$8.0bn of loans cost it US$32m in credit losses in the year — 0.40% of the book — and that charge is paid out of the year's income before the shareholders see a profit:

Expected losses are a cost of doing business, like salaries. The year's credit losses could have been five times larger before the bank made a loss at all, and no depositor would have noticed. Behind the year's income stand the provisions already set aside: US$100m, of which US$60m is held against the US$120m of loans that have stopped performing and US$40m against the rest of the book. Provision Coverage Ratio reads that number, and What Happens Inside a Bank When a Loan Goes Bad follows the money from arrears to write-off.

Unexpected losses — a recession, the collapse of one industry, a fraud — go past the year's income and into capital: the money that loses before the bank's creditors do. The constructed bank holds it in two layers, measured against US$6.0bn of risk-weighted assets:

Common equity is the shareholders' money less what would count for nothing in a failure — the intangible assets — and the dividend already declared: US$1.0bn on the balance sheet, US$780m that counts. The subordinated bonds belong to investors who agreed, for a higher rate, to be repaid after depositors and other creditors. With the provisions, they mean an eighth of the whole loan book could be lost before a loss reached anyone ranking alongside a depositor. A real bank would not be left to run that far: its supervisor steps in long before the capital is gone, which is the subject of Who Regulates Banks.

Next come the bank's other creditors: the holders of US$1.38bn of senior bonds and the lenders of US$0.5bn of short-term money. Whether they lose before depositors or alongside them is a matter for each country's insolvency law. In the United States, for example, a 1993 law ranks domestic deposits, insured and uninsured, ahead of a failed bank's general creditors. Where deposits carry that preference, the senior creditors' US$1.88bn is one more layer in front of the depositor; where they do not, depositors and senior creditors share what the bank's assets fetch.

A bank can be solvent and still unable to pay everyone who asks on the same day, because its assets are loans. That is what the constructed bank's US$1.5bn of liquid assets are for: US$0.3bn of reserves at the central bank, usable the same day, and US$1.2bn of government and other high-grade bonds that can be sold, or borrowed against, within days. Suppose a tenth of the money that can be withdrawn on demand leaves in a single week:

Every withdrawal is paid. No loan has been sold and no depositor has lost a cent; the bank has used its buffer, which is what the buffer is for. The Basel Committee's liquidity standard says as much: in a stress it is entirely appropriate for a bank to draw on its liquid assets, even below the usual minimum. What the week has cost is income and room. The bank must rebuild the buffer, usually by paying more for deposits or wholesale money, and a second week like it would leave little to sell.

The danger in a run is the fire sale. A bank forced to sell loans in a hurry sells them cheap, and a cash problem becomes a capital problem. Central banks exist partly to prevent that. New Zealand's Reserve Bank runs a standing overnight facility through which a bank can borrow cash against a broad range of collateral, priced above the official cash rate. More generally, a central bank acting as lender of last resort lends to a bank that is solvent but short of cash. A bank whose losses have used up its capital is a different problem, with a different process.

A RUN STARTS, SIGNAL OR NOISE → · WORK IT · LIQUIDITY COVERAGE →

Every layer so far belongs to the bank: its income, its shareholders, its other lenders. Deposit insurance sits outside it. If a covered bank fails, the scheme compensates each eligible depositor up to a limit.

New Zealand's Depositor Compensation Scheme came into effect on 1 July 2025, under the Deposit Takers Act 2023. The Reserve Bank manages and administers it, and levies on the industry fund it. If a licensed deposit taker fails — a bank, credit union, building society or finance company that takes retail deposits and is supervised by the Reserve Bank — the scheme compensates each depositor up to NZ$100,000 for money in DCS-protected accounts: transaction, savings, notice and term deposit accounts. It covers individuals, businesses and trusts, and it applies automatically.

The limit counts the depositor and the deposit taker, not the account. A term deposit and a transaction account at the same deposit taker share one NZ$100,000; money at a second deposit taker has a limit of its own. A joint account is divided between its holders, and each has their own limit. The Reserve Bank publishes the list of deposit takers that offer protected deposits, and each of them must list its protected products on its website.

Other places run the same idea at their own limits, each in its own currency:

The details differ more than the headlines. In Australia and the United Kingdom, brands that operate under one banking licence are treated as one bank, so a depositor with accounts under two of those brands has one limit, not two.

Deposit insurance covers deposits, when the institution holding them fails. It does not cover everything a bank sells, or every way to lose money. In New Zealand the scheme does not cover bonds and other tradable products, KiwiSaver and other superannuation schemes that are managed investment schemes, or foreign currency accounts, and it does not cover money lost to scams, fraud or hacking. Some depositors, government agencies among them, are not eligible at all.

The American list is similar in kind: the FDIC does not insure investment products even when an insured bank sells them — shares, bonds, mutual funds, annuities, life insurance, crypto assets — or the contents of a safe deposit box. And no scheme covers the part of a deposit above its limit. That part remains a claim on the failed bank; Australia's regulator, for one, says a depositor may recover some or all of it in the liquidation, depending on what the bank's assets fetch.

Read in order, the layers show how much has to go wrong before a deposit is touched: the year's income, the provisions, the shareholders, the subordinated lenders and, in some countries, the senior creditors all stand in front of it, and the insurance scheme stands behind it, up to its limit. What none of them can do is make a deposit anything other than a loan to a bank.