That is not true at all. Banks are not funded by depositors money. Banks create money when they make loans, and destroy money when loans are repaid. Deposits in current accounts are liabilities from the bank’s point of view.
Yes, deposits in current accounts are *liabilities* from a bank's point of view. This may seem counterintuitive, as we typically think of deposits as the bank's money. However, in accounting terms, a liability is something a business owes to others.
### The Bank Owes You Your Money
When you deposit money into a current account, you are essentially lending that money to the bank. The bank has an obligation to return these funds to you whenever you demand them, whether by withdrawing cash from an ATM, writing a check, or making an electronic payment. This obligation to repay the depositor is what makes the deposit a liability for the bank.
### How it Works on a Bank's Balance Sheet
A bank's financial health is represented by its balance sheet, which must always balance. The basic accounting equation is:
$$Assets = Liabilities + Equity$$
Here's a simplified breakdown of how your deposit fits in:
* *Liabilities:* Your current account deposit is recorded on the liability side of the bank's balance sheet. It represents a debt the bank owes to you. Other liabilities for a bank include savings account deposits, certificates of deposit (CDs), and money borrowed from other financial institutions.
* *Assets:* When you deposit cash, the bank's cash holdings (an asset) increase. The bank then uses the funds from your deposit to generate income by making loans to other customers or by investing in securities. These loans and investments are considered assets for the bank because they represent money that is owed to the bank.
*In essence, the bank takes on a liability (your deposit) and creates an asset (a loan or investment).* The bank's profit comes from the difference between the interest it earns on its assets (e.g., the interest rate on a loan) and the interest it pays on its liabilities (e.g., the interest paid on a savings account, though current accounts often have very low or no interest).
Therefore, from the bank's perspective, the money you have in your current account is not its own money but rather a debt it must be prepared to repay at any time.
