Your bank deposit is a loan you made to the bank

You will be able to explain what a bank does with your deposit and why it pays you interest for it.

Open your banking app and look at the balance in your savings account. It feels like a pile of your money sitting in a vault with your name on it. It isn't. That number is a promise. The bank owes you that amount, and has agreed to pay it back whenever you ask.

This is the first idea of the course: a deposit is a loan you make to the bank. When you put S$1,000 into a savings account, the bank records the money as a debt it owes you. Then it uses most of that money. It lends it to someone buying a flat, to a company paying for a new warehouse, to a family financing a car. It also buys government securities and keeps a portion as cash and reserves so it can pay people who withdraw.

Why would a bank do this? Because it earns more on the loans than it pays you in interest. If a home loan earns the bank more than your savings account costs it, the gap pays for staff, branches, apps and profit. This gap has a name, the net interest margin, and it is the core of how a retail bank makes money. The interest you earn on your savings is the bank's price for borrowing from you.

This explains a few things that can look strange. It explains why banks compete hard for your salary crediting and pay bonus interest when you also take their card or insurance: they want cheap, steady deposits they can lend out. It explains why a fixed deposit pays more than a savings account, because the bank knows it can lend that money for a fixed period without worrying that you'll pull it out next week. And it explains why the rate you earn moves when interest rates in the wider economy move, which you will meet properly in How the economy hits your wallet: rates, inflation and cycles.

It also explains the risk. If every depositor asked for their money on the same day, no bank could pay them all at once, because most of the money is out on loan. That is called a bank run, and it has happened many times around the world. Banks are regulated so that this is rare. In Singapore, MAS sets rules on how much capital and how much liquid cash a bank must hold, and supervises banks to check they follow them.

There is a second layer of protection for ordinary savers. The Singapore Deposit Insurance Corporation, or SDIC, runs a deposit insurance scheme. If a bank or finance company that is a member of the scheme fails, eligible Singapore dollar deposits are paid back up to a limit per depositor per member. You will look at what counts as eligible in lesson 1.3. For now, notice the logic. Insurance exists because the promise behind your balance depends on the bank staying healthy, and the government decided that small savers shouldn't have to judge a bank's balance sheet before opening an account.

Thinking of a deposit as a loan changes the questions you ask. Instead of asking where you can get the highest number, you ask who you are lending to, on what terms, and what happens if they can't pay. Those three questions will come back in every course that follows, from bonds to unit trusts to the loans you take out yourself. A savings account is the safest version of the deal. It is still a deal.

Take a minute to look at your own accounts this way. For each one, write down who owes you the money, whether you can get it back today or have to wait, and what interest you are paid for lending it. If you hold money anywhere other than a local bank, such as a digital wallet, a brokerage cash account or an overseas bank, note that too. You will find out in lesson 1.3 that some of these are covered by deposit insurance and some are not, and the list you make now is what you will check.

List every account where you hold cash and write who owes you the money, how fast you can get it back, and the interest you are paid.

Course

• How money works: banks, interest, inflation and risk