Explain what a bank does with your deposit and why it pays you interest on it.
Money you deposit with a bank is money you have lent to it. The figure shown on your savings account is a promise from the bank to repay that sum whenever you ask for it. There is no pile of notes in a vault with your name on it.
That idea comes first in the course because so much follows from it. A deposit is a loan from you to the bank, and the bank's own books record it that way. If you pay S$1,000 into a savings account (an invented example), the bank enters S$1,000 in its records as a debt owed to you.
The bank uses most of what depositors pay in. It lends the money on to people buying a flat, to companies paying for things like a new warehouse, and to families financing a car. Some of it goes into government securities. A portion stays as cash and reserves, so the bank can pay customers when they make withdrawals.
The bank earns more interest on its loans than it pays you on your deposit. Staff salaries, branches, apps and the bank's profit all come out of the difference. Bankers call that difference the net interest margin, and for a retail bank it is the core of how it makes money.
From the bank's side, the interest on your savings account is the price it pays to borrow from you. Several familiar habits of banks make sense once you look at it like this. Banks compete hard to have your salary credited to them, and they offer bonus interest if you also hold their card or buy their insurance, because cheap, steady deposits are what they want to lend out. Fixed deposits pay a higher rate than savings accounts because the bank can count on lending that money for the whole fixed period, with no chance of you withdrawing it next week. Your savings rate also rises and falls with interest rates across the wider economy, and the course "How the economy hits your wallet: rates, inflation and cycles" goes into why.
Treating a deposit as a loan also shows where the risk lies. Because most deposited money has been lent out, no bank could repay every depositor on the same day if all of them asked at once. A rush of that kind is a bank run, and there have been many of them in countries around the world.
Regulation exists to keep bank runs rare. In Singapore, MAS sets rules on how much capital and how much liquid cash each bank must keep, and it supervises banks to make sure they comply. For ordinary savers there is a second safeguard: a deposit insurance scheme run by the Singapore Deposit Insurance Corporation (SDIC). When a bank or finance company belonging to the scheme fails, eligible Singapore dollar deposits are paid back up to a limit for each depositor at each member. Lesson 1.3 sets out which deposits are eligible.
The government set this up because the promise behind your balance holds only while the bank stays healthy, and it decided small savers should be able to open an account without first studying a bank's balance sheet.
Thinking of deposits as loans also changes what you ask before choosing where to keep money. Instead of looking only for the highest advertised rate, you ask who you are lending to, on what terms, and what happens if they cannot pay. You will use those three questions again in each later course, when you look at bonds, unit trusts and loans you take out yourself. A savings account is the safest form of this arrangement, and it is still an arrangement between you and a borrower. Money you keep outside a local bank, for example in a digital wallet, a brokerage cash account or an overseas bank, may or may not have deposit insurance, and lesson 1.3 sorts out which.
Spend a minute going through your own accounts with this in mind. Write down each account you hold. Next to each one, note who owes you the money, whether you could take it out today or would have to wait, and the interest you are paid for the loan. Add any money held somewhere other than a local bank, such as a digital wallet, a brokerage cash account or an overseas bank. Keep the list: in lesson 1.3 you will check it against deposit insurance, because some of these holdings are covered and some are not.
List every account where you keep cash. For each one, write who owes you the money, how fast you can get it back, and the interest you are paid.
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