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Bank reserves refer to the amount of funds a financial institution must have on-hand at any given time. These reserves are a percentage of its total deposits set aside to fulfill withdrawal requests, and comply with regulations and can also provide a layer of trust for account holders.

Bank reserves act as assurance to depositors that there is always a certain amount of cash on deposit, so the scenario mentioned above doesn’t happen. No one wants to ever withdraw some cash and be left empty-handed. As a consumer with a bank account, it can be important to understand the role bank reserves play in the financial system and the economy.

What Are Bank Reserves?

Bank reserves are the minimum deposits held by a financial institution. The central bank of each country decides what these minimum amounts must be. For example, in the United States, the Federal Reserve determines all bank reserve requirements for U.S. financial institutions. In India, as you might guess, the Reserve Bank of India determines the bank reserves for that country’s financial institutions.

The bank reserve requirements are in place to ensure the financial institution has enough cash to meet financial obligations such as consumer withdrawals. It also ensures that financial institutions can weather historical market volatility (that is, economic ups and downs).

Bank reserve requirements are typically a percentage of the total bank deposit amounts determined by the Federal Reserve Board of Governors. Financial institutions can hold their cash reserves in a vault on their property, with the regional Federal Reserve Bank, or a combination of both. This way, the financial insulation will have enough accessible funds to support their operational needs while letting the remaining reserves earn interest at a Federal Reserve Bank.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

How Do Bank Reserves Work?

Bank reserves work to ensure that a certain amount of cash, or percentage of overall deposits, is kept in a financial institution’s vault.

Suppose you need to withdraw $5,000 to purchase a new car. You understand savings account withdrawal limits at your bank and the amount you need is within the guidelines, so you head to your local branch. When you arrive, you’re told they don’t have enough money in their vault to meet your request.

This is what life could be like without bank reserves. The thought of not being able to withdraw your own money might be upsetting, worrisome, and deeply inconvenient. To prevent this kind of situation is exactly why banks must have a certain percentage of cash on hand.

In addition to ensuring consumers have access to their money, bank reserves may also aid in keeping the economy functioning efficiently. For example, suppose a bank has $10 million in deposits, and the Federal Reserve requires 3% liquidity. In this case, the bank will need to keep $300,000 in its vault, but it can lend the remaining $9.7 million to other consumers via loans or mortgages. Consumers can use this money to buy homes and cars or even send their children to college. The interest on those loans is a way that the bank earns money and stays in business.

Bank reserves are vital in helping the economy control money supply, interest rates, and the implementation of what is known as monetary policy. When the reserve requirements change, it says a lot about the economy’s direction. For example, when reserve requirements are low, banks have more opportunity to lend since more capital is at their disposal. Thus, when the money supply is plentiful, interest rates decrease. Conversely, when reserve requirements are high, less money circulates, and interest rates rise.

During inflationary periods, the Federal Reserve may increase reserved requirements to ensure the economy doesn’t combust. Essentially, by decreasing the money supply and increasing interest rates, it can slow down the rate of investments.

Recommended: Understanding Fractional Reserve Banking

Types of Bank Reserves

There are two types of bank reserves: required reserves and excess reserves. The required reserves are the percentage of deposits the institution must have in cash holdings and deposit balances to abide by the regulations of the Federal Reserve. Excess reserves are the amount over the required reserve amount that the institution holds.

Excess reserves can provide a larger safety net for the financial institution and enhance liquidity. It can also contribute to a higher credit rating for institutions. On the other hand, excess reserves can also result in losing the opportunity to invest the funds to yield higher returns. In other words, since the extra money is sitting in cash, it will not generate the same returns it might yield by lending or investing in the market.

Recommended: What Is Quantitative Easing?

History of Bank Reserves

Reserve requirements first came about in 1863 during the passing of the National Bank Act. This act intended to create a national banking system and currency so money could flow easily throughout the country. At this time, banks had to hold at least 25% reserves of both loans and deposits. Bank reserves were necessary to ensure financial institutions had liquidity and money could continue circulating freely throughout the nation.

But despite the efforts to establish a robust banking system, banking troubles continued. After the panic of 1907, the government intervened, and in 1913, Congress passed the Federal Reserve Act to address banking turmoil. The central bank was created to balance competing interests and foster a healthy banking system.

Initially, the Federal Reserve acted as a last resort and a liquidity grantor when the banks faced trouble. During the 1920s, the Federal Reserve’s role expanded to playing a proactive role in the economy by influencing the credit conditions of the nation.

After the Great Depression, a landmark in the history of U.S. recessions and depressions, the Banking Act of 1935 was passed to reform the structure of the Federal Reserve once again. As part of this act, the Federal Open Market Committee (FOMC) was born to oversee all monetary policy.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How the 2008 Crisis Impacted Bank Reserves

Prior to the global financial crisis of 2008, financial institutions didn’t earn interest on excess reserves held at a Federal Reserve Bank. However, after October 2008, the Federal Reserve was granted the right to pay interest to banks with excess reserves. This encourages banks to keep more of their reserves. The Board of Governors establishes the interest on reserve balances (IORB rate). As of July 2024, the IORB was 5.4%.

Then, after the recession subsided in 2009, the Federal Reserve turned its attention to reform to avoid similar economic disasters in the future.

Recommended: Federal Reserve Interest Rates, Explained

How Much Money Do Banks Need to Keep in Reserve?

Reserve requirements vary depending on the size of the financial institution. As of July 2024, reserve requirements are 0%, where they’ve been since early 2020 and the onset of the COVID-19 pandemic.

Prior to this revision, banks with between $16.9 to $127.5 million in deposits were required to have 3% in reserves, whereas banks over this amount had to have at least 10% in bank reserves.

Recommended: Investing During a Recession

What Is Liquidity Cover Ratio (LCR)?

Bank reserve requirements aside, financial institutions want to ensure they have enough liquidity to satisfy the short-term financial obligations if an economic crisis occurs. This way, they know they will be able to weather a crisis and not face complete bankruptcy. Therefore, financial institutions use the Liquidity Coverage Ratio (LCR) to prevent financial devastation resulting from a crisis.

The LCR helps financial institutions decide how much money they should have based on their assets and liabilities. To calculate the LCR, banks use the following formula:

(Liquid Assets / Total Cash Outflows) X 100 = LCR

Liquid assets can include cash and liquid assets that convert to cash within five business days. Cash flows include interbank loans, deposits, and 90-day maturity bonds.

The minimum LCR should be 100% or 1:1, though this can be hard to achieve. If the LCR is noticeably lower than this amount, the bank may have liquidity concerns and put the bank’s assets at risk.

The Takeaway

Financial institutions must have a certain amount of cash on hand, referred to as bank reserves. These assets are usually kept in a vault on the bank’s property or with a regional Federal Reserve Bank. These cash reserves ensure financial institutions can support consumer withdrawals and withstand a financial crisis.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Are bank reserves assets or liabilities?

Bank reserves are considered an asset since they’re an item the bank owns. Other bank assets can include loans and securities.

How are bank reserves calculated?

Bank reserve requirements are calculated as a percentage of the institution’s deposits. So, if the reserve requirement is 3% for banks with $10 million in deposits, the bank would have to hold $300,000 in its reserves.

Where do banks keep their reserves?

Financial institutions usually keep a certain amount of their cash reserves in a vault to meet operational needs. The remaining amount may be kept at Federal Reserve Banks so the balance can generate interest.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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You may think of a bank as simply a safe place to put your money. But banks do a lot more than accept deposits. They also extend loans, facilitate payments, exchange currency, set monetary policy, and provide a range of other financial services to individuals, businesses, and governments. Here are key things to know about banks, including how they work, how they make money, and the different products and services they offer.

What Is a Bank?

By definition, a bank is an institution that accepts deposits in checking and savings accounts and makes loans. In serving both functions, banks act as intermediaries between depositors (who essentially lend money to the bank) and borrowers (to whom the bank lends money). The money the bank pays to depositors and charges on loans is called interest.

Banks also offer a range of other financial products and services, including:

•   Credit cards

•   Investment accounts

•   Wealth management services

•   Individual retirement accounts (IRAs)

•   High-yield savings accounts

•   Certificates of deposit (CDs)

•   Money market accounts

•   Currency exchange

•   Safe deposit boxes

Banks also facilitate payments — from employers to employees, buyers to sellers, and taxpayers to the government — and play a major role in the nation’s economy. There are also many different types of banks, including retail banks, corporate banks, and central banks.

How Do Banks Make Money?

Banks typically generate revenue through a variety of channels. These include:

•   Interest on loans: Banks lend money to individuals and businesses at higher interest rates than what they pay on deposits, earning the interest rate spread.

•   Fees: Banks may charge fees for various services, including account maintenance, overdrafts, wire transfers, and out-of-network ATM usage.

•   Investment income: Banks may invest in securities, bonds, and other financial instruments, earning returns on these investments.

•   Interchange fees: When customers use their debit or credit cards, banks earn fees from merchants processing the transactions.

A Brief History of Banks

The concept of banking dates back to ancient civilizations, when temples were used as safe places to store valuable items and grain, and priests would lend these resources to local farmers and merchants. The temples were also responsible for keeping records of these transactions, laying the groundwork for bookkeeping.

The first modern banks emerged in Renaissance Italy, with institutions like the Medici Bank setting the standard for banking operations. Over centuries, banks evolved, expanding their products and services and adopting technological advancements to meet the growing demands of consumers and businesses. Today, banks are integral to the global economy.

Modern Bank Products for Consumers

Modern banks offer a variety of products tailored to meet the financial needs of consumers. Common banking products include:

Loans

Banks provide various types of consumer loans, such as mortgages, personal loans, and auto loans. These loans help individuals finance large purchases and manage their cash flow.

Savings and Checking Accounts

Savings and checking accounts are fundamental banking products. A savings account is designed to hold cash you don’t need right away and allow you to earn interest and grow your money over time.

Checking accounts are set up to offer easy access to funds for everyday transactions. They come with checks and typically a debit card that can be used for purchases or to withdraw funds at an ATM. Checking accounts generally earn little or no interest, though some banks now offer high-yield checking accounts.

Mortgages

Banks offer mortgage loans to help individuals purchase homes. These long-term loans typically come with fixed or variable interest rates and generally require you to use the property being purchased as collateral for the loan. Mortgage terms are typically 15, 20, or 30 years.

Investing Accounts

Many banks offer investment accounts, including IRAs and taxable brokerage accounts. These accounts enable customers to invest in stocks, bonds, mutual funds, and other financial instruments designed for long-term growth.

Credit Cards

Credit cards provide consumers with a revolving line of credit, allowing them to make purchases and pay for them over time. Banks earn interest and fees from credit card users, making it a significant revenue source.

Certificates of Deposit (CDs)

CDs are time deposits that offer a fixed interest rate for a specified term. You agree to leave your money in the account for a set period of time (which generally range from three months to five years). In return, these accounts typically pay a higher interest rate than a standard savings account.

Money Market Accounts

A money market account is a hybrid account that offers competitive interest on your balance, along with the conveniences of a checking account, such as a debit card and checks. However, you may be limited to a certain number of withdrawals per month. Some money market accounts also have minimum balance requirements.

Useful Bank Features

In addition to products, banks offer various services to help customers manage their money. Here are some features you may want to look out for when exploring different bank options.

Customer Support

Banks typically offer customer support through various channels, including phone, email, online chat, and in-person assistance. Whether you need assistance with your checking account or help choose between two banking products, a customer service rep can generally point you in the right direction.

Credit Score Checkers

Many banks offer tools that allow customers to monitor their credit scores for free. This service allows you to stay informed about your credit health and, if necessary, take steps to build your scores. Having strong credit can help you unlock credit cards, mortgages, and other types of loans with attractive rates and terms.

ATMs

Whether you open an account at a traditional brick-and-mortar institution or an online-only bank, you’ll typically have access to a wide network of fee-free automated teller machines (ATMs). This allows you to withdraw cash or make deposits without needing to visit a branch during business hours.

Online/Mobile Banking

Online banking and mobile banking apps allow you to monitor your accounts, transfer money, pay bills, and deposit checks from your computer or mobile device.

Financial Planning Tools

Many banks offer financial planning tools that help customers budget, save, and invest wisely. These tools can include calculators, goal-setting features, and personalized financial advice.

Bank Regulations

While banks are typically privately owned entities that must answer to their shareholders, banking is a highly regulated industry. Regulatory bodies, such as the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), oversee banks’ operations, ensuring they adhere to laws and maintain sufficient capital reserves. This is to minimize disruptions and ensure the U.S. banking system runs smoothly.

The majority of U.S. banks are also insured by the FDIC. This covers deposit accounts up to $250,000 per insured bank, per depositor. Co-owners of joint accounts at the same bank are typically each insured up to $250,000. The agency’s BankFind site can help you identify FDIC-insured banks throughout the country.

Types of Banks

There are several different types of banks, each serving different purposes and customer bases. The large global banks often operate separate arms or divisions for each of these categories.

Retail Banks

Retail banks focus on individual consumers, rather than businesses or other banks. They provide personal banking services, such as checking and savings accounts, personal loans, mortgages, auto loans, short-term loans like overdraft protection, and credit cards. They may also offer access to investment products, such as mutual funds and IRAs.

While some retail banks offer in-person services through brick-and-mortar locations, others operate exclusively online. Due to lower overhead costs, online banks tend to offer higher yields on savings accounts and charge lower (or no) fees.

Recommended: What Is Neobanking and How Does it Work?

Corporate Banks

Corporate banks (also known as commercial banks) cater to large businesses and corporations. They also serve government agencies and institutions like colleges and universities. Along with business checking and savings accounts, these banks offer business loans and lines of credit, letters of credit, payment processing, foreign exchange transactions, and more for their clients.

Investment Banks

Investment banks serve as intermediaries in large, complex financial transactions. They specialize in initial public offerings (IPOs), raising capital, facilitating mergers and acquisitions, and providing advisory services to corporations and governments. Unlike retail banks, they do not take deposits from or provide loans to the general public.

Central Banks

Central banks manage a nation’s monetary policy, regulate the banking industry, and act as a lender of last resort. The central bank in the U.S. is the Federal Reserve (a.k.a, “the Fed”). The Fed sets the federal funds rates, which impacts everything from the annual percentage yields (APYs) you earn on savings accounts to the interest rates you pay on credit card balances and loans. Unlike the banks types listed above, central banks do not deal directly with the public.

Pros and Cons of Banks

Retail and commercial banks offer myriad benefits, but they also have some downsides. Here’s a look at how the pros and cons stack up.

Pros	Cons
Safe and secure	Potential fees for various services
Easy access to funds	Lower interest rates on deposits
Wide range of services	Potentially complex fee structures
Highly regulated	Potential for poor customer service

Pros

•   Safety: Banks provide a secure place to store money, reducing the risk of theft or loss. Deposits in most banks are federally insured (up to certain limits), which means that even if the bank were to fail, customers will still recover their funds, up to the insured limit.

•   Convenient access to funds: Banks offer easy access to funds through a network of branches, ATMs, and digital banking platforms.

•   One-stop shop: Banks provide a variety of financial services beyond basic checking and savings accounts, allowing you to manage all aspects of your finances under one roof.

•   Regulatory protection: Banks are heavily regulated by government agencies. These regulations protect consumers from fraud, ensure the safety of deposits, and promote ethical banking practices.

Cons

•   Fees: Banks often charge fees for their services, including fees for account maintenance, overdrafts, and wire transfers.

•   Low interest rates: Many banks offer relatively low interest rates on savings accounts and other deposit accounts. These rates often fail to keep pace with inflation, which can diminish the purchasing power of your savings over time.

•   Complex fee structures: The complexity of bank fees can create confusion for customers and result in unexpected expenses.

•   Potential for poor customer service: Large banks may offer impersonal or poor customer service due to their size and scale.

Banks vs Credit Unions

While banks and credit unions offer similar financial services, there are key differences between them. Here’s a closer look:

Ownership

Banks,typically, are owned by shareholders and operate for profit. Credit unions, by contrast, are owned by their members and operate on a not-for-profit basis. The main goal of a credit union is to benefit its members.

Fees and Interest Rates

Credit unions often offer lower fees and better interest rates on loans and savings accounts compared to traditional banks, as they are not driven by maximizing profits.

Membership

Banks are open to the general public. Credit unions require membership, which may be based on specific criteria such as employment, geographic location, or affiliation with a particular organization.

Customer Service

Credit unions tend to provide more personalized customer service due to their smaller size and member-focused approach. While small banks can also offer personalized customer service, larger banks may lack the personal touch.

Getting Started Banking With SoFi

A bank is an excellent resource to help manage your money. You can deposit funds for safekeeping, manage everyday spending, and invest for the future. Understanding the products, services, and perks offered by different banks can help you find the institution for your needs.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How do banks make money?

Banks primarily make money by lending out deposits at higher interest rates than they pay to depositors, earning the interest rate spread. They also earn money from the fees they charge for account maintenance, overdrafts, and transactions. Additionally, banks may invest in securities and earn returns.

Why do they call it a bank?

The term “bank” is thought to originate from the Italian word “banca,” which means bench or counter. In medieval times, moneylenders conducted their business on benches in marketplaces, and the term evolved to represent financial institutions.

What is a bank, simply put?

Simply put, a bank is a financial institution that accepts deposits and makes loans. Banks also play a key role in a nation’s economy, facilitating the management and movement of money for individuals, businesses, and governments.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Although you may have never heard the term before, core deposits are a basic concept in retail banking. When customers (probably just like you) deposit funds in a checking, savings, or money market account, financial institutions consider this money to be core deposits. Financial institutions then use core deposits to loan money to other consumers and generate profits through interest-bearing investments. So, generally speaking, growing core deposits helps institutions better leverage these funds and earn profits.

Though this may sound like technical knowledge, the truth is that understanding how core deposits work and why they are important can help you better navigate your banking life.

What Is a Core Deposit?

Simply put, core deposits are a stable source of capital for financial institutions like banks and credit unions. It’s money that consumers deposit and that the bank then turns around and uses elsewhere. For instance, those funds could be part of a loan. Core deposits usually include individual savings accounts, business savings accounts, and money market accounts.

In addition, financial institutions may offer incentives to encourage consumers to deposit money in a specific account to increase their core deposits. Building their capital with core deposits can have an array of advantages for a financial institution, including boosting revenue.

How To Calculate Core Deposits

Given that core deposits can reflect a bank’s health, it may be valuable at times to figure out how much a financial institution has. This may be a bit technical for a typical layperson, but here is the technique.

•   To calculate core deposits, one can look at the balance sheet or deposit footnotes that consist of checking, savings, and money market deposits. Ideally, it’s best to leave out particular broker or certificate deposits since both deposit accounts tend to follow rates and involve higher costs for the financial institution. Banks that are oversaturated with deposits like this may have liquidity issues and struggle to fund their loan portfolio.

•   The next step: Compare the number of core deposits to overall deposits to find the ratio of core deposits.

◦   Banks with 85% to 90% core deposit ratios are considered to be solid financial institutions.

◦   Additionally, banks should generally have a substantial percentage of non-interest-bearing deposits, consisting of about 30% of total deposits. That ratio of 30% or higher also indicates that a financial institution is in good health.

Recommended: When Will Direct Deposit Hit My Account?

Methods for Increasing Core Deposits

The success of a financial institution relies on the growth of its core deposits. For this reason, financial institutions continually look for ways to attract and retain their customer base and increase those deposits. It’s critical to success.

Here are some strategies financial institutions implement to grow their core deposits.

Cultivating Relationships

Banks can boost core deposits by cultivating relationships with their current customers. After a consumer puts their money in the institution (whether by setting up the direct deposit process, electronically, or with a teller or ATM), they are now a client. The bank or credit union can focus on nurturing that relationship, so the consumer uses the bank for all of their banking needs. Perhaps they will move a savings or business account that they keep elsewhere to this bank.

What’s more, if the customer feels valued, they will likely share their experience with friends and family (you may have done this in your own banking life, for instance). This good word of mouth can lead to the growth of core deposits and strengthen the financial organization.

There are a variety of ways to cultivate better customer relationships. With account holders who bank at brick-and-mortar institutions, one technique is to enhance interactions with the staff. For example, a teller or bank representative might suggest personalized products to meet a client’s needs, such as one of the different kinds of deposit accounts. Online banks can also glean their customers’ needs and create tailored offers with incentives, like a cash bonus or additional services (say, budgeting help).

Another initiative might be to reach out to high net worth clients to personalize the relationship, knowing that these individuals are likely to have cash to deposit. Banks that pay attention to their customer’s needs and make an effort to add special touches can improve customer satisfaction, increasing core deposits.

Recommended: How to Deposit Cash at an ATM

Bolstered Online Services

In today’s world of digital financial management, enhancing online services can encourage more customers to deposit funds at a financial institution and potentially do so in larger amounts. Having the latest bells and whistles, such as seamless spending and saving tracking and the most advanced biometric security measures, can be a big plus.

This can be an especially good tactic for smaller financial institutions. Community banks may struggle with growing core deposits. If an institution like this has limited capital, enhancing online services can be an important avenue to pump up those core deposits. Improved online banking services may well cost a fraction of what it does to bolster a physical bank branch. Creating digital services can also help the bank reach more consumers. While a bank branch may generate between 75 and 100 new accounts per month, a digital branch could help increase this number by hundreds.

When opening a new account, many consumers choose to compare options online first. Even if a bank has competitive rates and has conveniently located branches, prospective account holders may choose competing banks if they rank higher on search engines. For this reason, creating an online presence and digital services that are as strong as possible can grow the number of deposits.

Offer Tailored Services

Financial institutions that offer tailored services to particular industries or specialized banking products can attract consumers who value these services. For example, banks can identify niches or target audiences in their community that provide the most deposit advantages. If they are doing business in an area known for an abundance of hospitals, a niche bank might develop more banking products and services that meet the needs of healthcare professionals (say, ways to pay off student loans faster). They can mold an incentive strategy around the industry to attract more customers and core deposits.

Recommended: Understanding Funds Availability Rules

Banking and the FDIC

A financial institution must strike a balance between core deposits being available for consumers to withdraw funds and their cash being used to make loans and otherwise generate revenue. (After all, one of the ways a bank makes money is based on charging a higher interest rate on loans than is paid on deposits.)

There are governmental guidelines for this: All financial institutions must have bank reserves, a percentage of deposits they must hold and have available as cash. In the past, this figure has ranged between 3% and 10%. But as of 2020 and the COVID-19 crisis, this requirement was lowered to 0% to stimulate the economy. So, since banks are not required to set aside any deposits, if all of the depositors requested total withdrawals from their accounts, the bank wouldn’t have enough money to fulfill this request.

That’s where the Federal Deposit Insurance Corporation (FDIC) comes in and can insure core deposits. Here’s how much does the FDIC insure: up to $250,000 per depositor, per account ownership category, per insured institution. So even in the very unlikely event that a bank were to fail, consumers will have this amount covered.

The Takeaway

Core deposits — the funds put in checking, savings, and money market accounts — help banks make money and offer loans to consumers. Growing core deposits is vital to an institution’s success, and this goal can be achieved in a variety of ways, including offering more personalized services and more online banking capabilities.

If you are interested in accessing state-of-the-art benefits of digital banking, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What is the difference between core deposits and purchased deposits?

Core deposits are typically stable bank deposits, such as those in checking accounts and time deposits. Purchased deposits are rate-sensitive funding sources that banks use. These purchased deposits are more volatile and, as rates change, more likely to be withdrawn or swapped out.

What is a non-core deposit?

Non-core deposits are certificates of deposit or money market accounts that have a specified rate of interest over their term.

How much does FDIC cover?

The FDIC covers up to $250,000 per depositor, per account ownership category, per insured institution in the very unlikely event of a bank failure.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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There’s a saying that you have to spend money to make money. But what if you can’t get the money you need for a significant purchase, such as a car or a house?

Accessing credit can be challenging for borrowers who haven’t established a credit history or have mismanaged debt in the past. One option to consider: credit-builder loans.

This financial product is designed to help people with limited or poor credit histories access a modest loan amount and increase their credit scores by repaying it over time. A credit-builder loan doesn’t require a credit score for borrowers to qualify. And it provides an opportunity to restore your credit through affordable loan payments.

Here’s a closer look at this type of loan.

How Does a Credit-Builder Loan Work?

Credit-building loans use monthly repayments to help credit-challenged borrowers build credit. In other words, it’s a personal loan to build credit. Here’s a breakdown of how they work.

First, the primary purpose of a credit-builder loan is for borrowers to demonstrate responsible borrowing behavior over time. As a result, this loan type doesn’t give the borrower a large sum to immediately use, as with a traditional loan.

Instead of providing an upfront lump sum to the borrower, a credit-builder loan requires the lender to deposit the loan amount in an interest-bearing account. The borrower can’t access the funds until they pay off the loan through monthly installments. These loans range from amounts of $300 to $1,000.

Remember, credit-builder loans usually have an interest rate and fees. Therefore, your monthly payment will incorporate the principal, loan origination fees, and interest. The lender might return some of the interest to you at the end of the loan, but every lender differs on the specifics. Therefore, it’s vital to carefully read the terms and conditions of the loan agreement to understand the loan’s total cost and the perks.

The credit-building loan term typically ranges from 6 months to 2 years. Once the loan matures and you’ve made all the required payments, you’ll receive the amount (minus any interest or fees per the loan terms) in the collateral account.

Lastly, building credit takes time, so patience and consistency are key. Improving your credit through this loan can open up opportunities for future loans, credit cards, and other financial products. However, only some financial institutions offer credit-builder loans, so you may need to shop around to find one.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

How Can a Credit-Builder Loan Help You Build Credit?

When you take out a credit-building loan, you make monthly payments towards the total amount. Your lender reports your payments to the credit bureaus, contributing to a higher credit score.

The low borrowed amount (also called the principal) makes the payments small and manageable. This feature helps borrowers with limited resources successfully pay the loan. Late payments and failure to pay the loan will hurt your credit, so it’s crucial to pay on time and take on a loan with affordable payments.

How to Apply for a Credit-Builder Loan

Applying for a credit-builder loan involves gathering information and choosing the option that best fits your circumstances. Here are the steps you should take.

Check Your Credit Report

Before applying for a credit-builder loan, it’s a smart move to check your credit report. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year through AnnualCreditReport.com. Reviewing your report will help you understand your current credit situation and set goals.

Research Lenders

Not all financial institutions offer credit-builder loans, so you’ll need to research various banks, credit unions, and online lenders. It’s recommended to find a lender that reports to all three credit bureaus to ensure the loan gives you the maximum benefit.

Then, you can ask each lender for information about their credit-builder loan products. Carefully read and understand the terms and conditions of the available loans. Pay attention to details such as the interest rate, fees, monthly payment amount, length of the loan term, and how much accrued interest you’ll receive at the end.

Gather Necessary Documents and Apply

Different lenders have different application requirements, but generally, you will need to provide:

•   Personal identification (e.g., driver’s license, passport)

•   Social Security number

•   Proof of income or employment

•   Information about your current financial situation

•   Monthly housing payment amount

•   References

Remember, a conventional credit check might not be necessary to qualify. Instead, the lender can review your banking history. Positive banking activity such as a checking account with a consistent balance can help your application. On the other hand, a history of bounced checks and unpaid loans can hinder your application.

Make On-Time Payments

If the lender approves your application and sets up the credit-builder loan, you’ll start making monthly payments on the agreed-upon date. Doing so will allow you to build a positive credit history.

Repay the Loan in Full

If you repay the loan successfully, you’ll finish in a span between six months and two years, depending on the loan. After you make the final payment, you’ll receive the principal plus any applicable interest. In addition, your credit history will reflect the on-time payments you worked hard to make.

Credit-Builder Loan Requirements

There are no credit score requirements for credit-builder loans because the goal is for borrowers to improve substandard credit histories. That being said, lenders may charge fees to provide the loan and impose requirements regarding your banking habits.

With credit-builder loans, lenders prefer borrowers with a banking history that demonstrates healthy financial practices. For instance, writing checks that clear instead of bounce is helpful for your application. In addition, little debt and a positive bank account balance are favorable markers. Lenders usually use a borrower activity report from a company like ChexSystems to review this information.

Is a Credit-Builder Loan a Good Idea?

A credit-builder loan can be a good idea for individuals with limited or poor credit histories. It’s essentially a personal loan to build credit. For example, if you’re new to credit and have little or no credit history, a credit-builder loan can help you establish a positive credit history.

Similarly, if you’ve had past financial difficulties that have resulted in a lower credit score, a credit-builder loan can be a tool for gradually boosting your credit score.

However, existing high debt balances may disqualify you from a credit-builder loan. This type of loan may also be insufficient in these situations and exacerbate your current problems because it adds another monthly payment to the pile.

Remember, using a personal loan to build credit can take time, so it’s crucial to be patient and not expect immediate results. It may take several months or even longer to see significant improvements in your credit score with this loan type.

In addition, the payments will work against you if you’re late, so the loan is only beneficial if you can afford the extra monthly expense. Lastly, you can’t access the borrowed funds until you pay off the loan, meaning you won’t receive money for immediate expenses after applying. So, if you’re looking for an infusion of cash to shore up your bank account or consolidate debt, a different loan product is likely a better idea.


💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

The Takeaway

A credit-builder loan is an effective tool for individuals aiming to build their credit profile. By emphasizing responsible borrowing behavior over time, this type of loan differs from conventional loans, as the loan amount is securely held in an interest-bearing account until you pay it off through monthly installments.

This loan type can benefit new borrowers without a credit history. However, it may not be suitable if you have existing high debt balances or need immediate financial assistance. Ultimately, understanding your financial circumstances and goals will help determine whether a credit-builder loan is the right choice for you.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A swaption, or swap option, is a financial derivative that grants the holder the right — but not the obligation — to enter into an interest rate swap contract with specified terms. Swaptions are primarily used to hedge interest rate risk, but can also serve other strategic financial purposes.

Swaptions are often used to manage interest rate exposure, giving the holder flexibility to secure favorable borrowing or lending terms depending on market conditions. Read on for how they work, the different types, pros and cons, and more.

How Swaptions Work

As mentioned above, a swaption is an option on a swap rate. Like other types of options contracts, the buyer pays a premium to enter into the swaption, and beyond that they are not obligated to act on the contract.

Although swaptions are a type of option, they are financial derivatives that provide the right to enter into a swap agreement. Similarities to swaps include:

•   They are traded over-the-counter instead of on centralized exchanges.

•   They are customizable and offer a lot of flexibility since they are not standardized exchange products.

When two parties enter a swaption agreement, they negotiate the terms of the contract, such as the premium, expiration date, notional amount, the swap’s legs (fixed vs. floating), benchmark rate,and the adjustment frequency of the variable leg.

Recommended: Options Trading 101 Guide

Who Often Uses Swaptions

Swaptions are typically used by institutional investors instead of retail investors, while retail investors rarely trade them. Some private banks offer swaptions to high-net-worth clients. Large corporations, investment banks, commercial banks, and hedge funds use them for various purposes. It takes a lot of work and experience to create a portfolio of swaptions, so they generally aren’t used by individuals or small firms.

They are often used to hedge against macroeconomic risks such as interest rate risk or securities risks. If an institution thinks interest rates might change, they can enter into an agreement to protect against that. Financial institutions can also use them to change their interest payoff terms.

Swap options tend to be used to hedge specific financings, but they can also be used to hedge a broader change in future interest rates. This can be useful if an institution holds a lot of debt maturities for the year and doesn’t want to risk losses.

A swaption’s strike price represents the fixed interest rate at which the swap will execute if the option is exercised. The holder’s risk is limited to the upfront premium, but the potential benefit depends on how market rates compare to the strike price at expiration.

Swaptions can be purchased in most major currencies, such as the U.S. Dollar, Euro, and British Pound.

Recommended: Popular Options Trading Terminology to Know

What Are the Different Types of Swaptions?

Swaptions come in two main types: payer and receiver. Both types give the holder the right to enter an interest rate swap, but the difference comes down to whether the buyer chooses to pay or receive a fixed interest rate if the option is exercised.

Payer Swaption

If a buyer enters into a payer swaption, they are purchasing the right, but not the obligation, to enter into a future swap contract. When exercised, the buyer would become the fixed-rate (non-changing) payer and receive the floating rate (variable) payments.

Fixed interest rates remain constant for the duration of a loan. Floating rates change based on a benchmark interest rate. Historically, the most common reference rate was the London Interbank Offered Rate (LIBOR), but that has been largely phased out in favor of the Secured Overnight Financing Rate (SOFR) in the United States and Euro Interbank Offered Rate (EURIBOR) in Europe. These institutions determine interbank lending interest rates, which then influence commercial and retail loan interest rates.

Receiver Swaption

In a receiver swaption contract, the swap holder has the option to pay the floating rate and receive the fixed rate. These contracts are often used by investors who anticipate falling interest rates and want to lock in a higher fixed return.

When Can a Swaption Be Exercised?

There are also swaptions that have different terms of execution. The three most common are:

American

American swaptions can be exercised on any date prior to and including the expiration date. This flexibility makes them useful for hedging against unpredictable interest rate movements.

European

European options can only be exercised on the expiration date, making them less flexible. They are often easier to price and value since they don’t require continuous monitoring.

Bermudan

Bermudan swaptions have several specific dates when they can be exercised prior to the expiration date. This structure provides a balance between flexibility and cost, often making them cheaper than American swaptions.

Swaption Example

A borrower wants to purchase rate protection on their current floating rate debt maturities totaling $50 million. They decide that they would like to purchase the right, but not the obligation, to pay a fixed rate on their debts for ten years.

For this right, they are willing to take on the risk of 10-year interest rates up to 3.8%, but no higher than that.

The borrower enters into a swaption agreement with a settlement date in the current year, for a notional amount of $50 million, with a 10-year term and a 3.8% strike price. In the context of swaptions, the strike price represents an interest rate rather than a fixed dollar amount. The premium for this contract is $400,000.

Including the premium, the rate is actually hedged higher than 3.8%, but for the sake of this example we will call the strike 3.8%.

If the strike is lower or the settlement date is farther in the future, this increases the value of the swaption and therefore increases the cost of the premium.

The borrower enters into this agreement to hedge against a large increase in swap rates but without choosing a specific rate they want when the contract expires.

It’s important to note that the swaption isn’t tied to the 10-year Treasury, it’s tied to 10-year swap rates, although their movements tend to be related. Also, swaptions are derivatives, so they aren’t the underlying assets themselves, but contracts derived from rates or assets.

When the settlement date occurs, there are two ways the swaption could turn out:

1.    If 10-year swap rates fall below 3.8%, the option contract expires worthless, the swaption seller (or counterparty) keeps the premium, and the borrower must enter a new swap at the prevailing market rate.

2.    If 10-year swap rates are higher than 3.8%, the borrower exercises the option. In this case the provider of the swaption pays the borrower the difference between the swap rate and 3.8%. The borrower locks in the current swap rate for a swap agreement, and uses the payment they received to buy down the rate on this new swap.

Pros and Cons of Swaptions

There are a few reasons why financial institutions use swaptions, but there can be downsides to them as well. Some of the pros and cons of swap options are:

The Takeaway

Entering into swaption agreements is one type of options trading strategy commonly used by institutional investors. They are usually used to help with restructuring a current financial position, alter a portfolio, hedge options positions on bonds, or adjust payoff profiles.

Swaptions are primarily used by institutional investors for hedging and risk management. Retail investors more commonly trade standard stock options — such as calls and puts — on stocks, exchange traded funds (ETFs), and other types of assets to speculate on price movements or manage portfolio risk. There are other types of options on the market that retail investors often trade.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

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SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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