Saving something from your pocket money is a simple way to buy your favorite comic book or game. But saving your pocket money was a bit of a task. You grew up with those small money containers in which you used to save your money, and with time, it got converted into the amount kept in bank accounts. You might wonder how much money do banks hold because they give out cash to people withdrawing from ATMs and pay-in slips. Today, let’s find out how much money can a bank hold.
1. What is a Bank?
A bank is a financial institution that accepts, lends, and deposits money from the public. It is responsible for business and is considered a money lender. The banking business model works on utilizing customer deposits to offer loans and after doing some profitable calculations, the interest is paid to the customers. This financial institution is a lawful organization working in almost every country of the world. The basic function of a bank is to store money but how much money do banks hold will be explained in the later parts of the article. (See Who invented money?)
2. How did the term Bank Originate?
This article will give you a brief idea about banks and the answer to how much money do banks hold. But before that, you should know a little bit about its origin. To trace the birth of the term bank, we went into the pages of history and discovered it has a Germanic origin. Although some records also mention that the term bank was derived from the French word Banqui and the Italian word Banca. (Also read Origin of Dollar Sign)
3. When did Banking System Start?
- People were not aware of the term banking before 1640. The pieces of evidence discovered by archeologists have proved that people have been aware of the concept of banking since the Babylonian age. This practice included the exchange of grain and later included exchanging or lending money.
- The banking system started during the Renaissance period in Italy. Also during that time, the money or coins that were lent, exchanged, or kept by moneylenders were available on benches in the markets.
- With the invention of banknotes in the 17th and 18th centuries and the establishment of the banking system, people learned to keep their gold, valuables, and money safe in the bank vault. The bank charged a certain sum of money for the services of depositing or lending.
Many evidence showed this practice was carried on in ancient Rome, Greece, India, and China. There were no banks during that time. Still, do you know, how much money do banks hold if they were operating at that time? (Also read Value of Buck Dollar)
4. Where is the Oldest Bank located?
In Italy, the Medici Bank was established in 1397 by an Italian banker, Giovanni Medici. It was the most famous bank during those time. The Banca Monte Dei Paschi di Siena is the oldest known bank set up in 1472 with headquarters in Siena, Italy, and is still operating. (Also read How Much Would A Shilling Or A Pound Cost In Today’s Us Money?)
5. What is a Central and Commercial bank?
Definition and details about Central bank and Commercial bank are given below.
- Every country has one Central Bank, which is the head of all the country’s financial institutions. It is the banker’s bank and regulates the country’s currency flow.
- The central bank has a monopoly on issuing currency. It lays down rules and regulations on which other banks in the country have to work. For example, the Reserve Bank of India (RBI) is the Central Bank of India, and the Federal Reserve System is the Central Bank of the United States of America.
- Commercial banks are financial institutions offering banking services to the public. How much money do banks hold is for these commercial banks according to the instructions of their central bank. Every commercial bank is answerable to the Central Bank.
- Commercial banks can accept deposits and grant loans to citizens. People open savings accounts at a commercial bank. Axis Bank, Atlantic Southern Bank, Bnc National Bank Branch, etc. are some examples of commercial banks of the world. (Also read Why Do You Have To Pay Taxes?)
6. What are Reserves?
Every bank is required to keep enough cash to meet the requirements of the Central Bank of the country. These amounts are the minimum cash that a bank can have in hand. This is the cash kept in the bank’s vault to meet day-to-day cash withdrawal. The money is up to 10% of the total bank deposits, and every commercial bank is required to maintain its various types of bank accounts.
As per the instructions mentioned in the Basel Accord, a bank must have ready cash in its vault to meet at least 30 days’ requirement of cash outflows and withdrawals by the customers. How much money do banks hold depends on the percentage of these reserves set by the Central bank? (Also read What happens when a country has too much debt?)
7. What are LCR, CRR, and SLR?
Definition and details about Liquidity Coverage Ratio (LCR), Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR) are given below.
- Liquidity Coverage Ratio (LCR) is the percentage of high-level assets a bank is required to keep in its vault as per the instructions of Basel Accord and Federal Bank. It is a set of regulations developed by the Basel Committee on Banking Supervision (BCBS).
- Cash Reserve Ratio (CRR) is the minimum amount of deposits which is 3 percent to 15 percent of the deposits that a commercial bank has to keep with the Central bank for security purposes. Although this deposit is with the central bank, the central bank provides no interest.
- Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits or liquid assets that a commercial bank has to maintain in the form of cash, government securities, or gold. Depending upon the size of the bank, they have to keep ready cash in their vault. (See How much money is in the world?)
8. How Much Money Can a Bank Hold?
Banks can not lend all of the money deposited by customers as it is not allowed. There comes the concept of reserves, which is discussed in the above points. Since banks can make at least a nominal interest on these deposits, most banks deposit the majority of their funds with their Central Bank. Banks only tend to keep a certain amount of cash in the vault to meet their transaction needs.
- You might think banks keep lots of money in their vault. But this might give you a shock that banks do not have their vault full of cash. Small-scale banks can keep up to $50000 and the large-scale bank has $200000 as reserves in their vault for handling transactions.
- Small banks in the US that have less than $15.5 million in transaction accounts don’t have a minimum reserve requirement. Banks that have $15.5 million to $115.1 million in transaction accounts must hold 3% in reserve. Large banks which have more than $115.1 million in transaction accounts must hold 10% in reserve and will be assessed on the excess amount. (See Where do Banks put their Money?)
9. What are the facilities of Banks?
Every commercial bank offers several financial and banking services to citizens and business houses of the country.
- They accept deposits in different types of accounts maintained in their bank by the account holders. Banks grant loans on behalf of some security or mortgage and charge interest on the amount they give out as loans.
- Banks also provide overdraft facilities to the current account holders. In this facility, the account holder can withdraw an amount more than that is in his account, interest charged on the excess amount withdrawn.
- Similarly, the bank provides a credit facility and charges interest on the amount used, and the principal amount is paid in installments or in a lump sum by the account holder. Banks also act as their customer’s agents and collect cheques on their behalf.
- Banks provide discounts on bills and locker facilities to customers to keep their valuables safe. For the locker service, they charge a service amount from the customer. Now the question this, how much money do banks hold and how are reserves important? Let’s unfold these topics in the next segments. (Also read How Much is 1 Crore INR in USD?)