What do banks do?

Banks serve as financial intermediaries between lenders and borrowers: Depositors, such as households, place their money in banks (i.e., make deposits). In turn, banks can lend this money to those who seek additional funds (i.e., make loans).

Most bank deposits are short term, in the form of checking and savings deposits. Depositors can withdraw money from their bank accounts at almost any time with little to no restriction. In other words, these bank liabilities are highly liquid.

How do banks safeguard their deposits?

To protect depositors’ money and their own financial stability in the case of unexpected and potentially large withdrawals, banks also need to hold liquid assets. Their most-liquid assets are bank reserves, which are funds that a bank deposits at the Federal Reserve.

A sufficient amount of bank reserves ensures banks can satisfy unexpected liquidity needs. So, the amount of bank reserves the banking sector holds depends on the level and composition of their deposits, including how liquid those deposits are.

What do the data show?

The FRED graph above shows the level and composition of bank deposits as a proportion of GDP:

• Before the pandemic, total deposits were roughly 70% of GDP: 10% in checking and 60% in time and savings deposits.
• At the onset of the pandemic, around the second quarter of 2020, total deposits jumped to 90.6% of GDP.
• In the post-pandemic period, total deposits began to gradually decline to near pre-pandemic levels, reaching 73% of GDP by the third quarter of 2023.

The data also show that a decrease in the level of time and savings deposits is responsible for the overall decline in deposits. In fact, checking deposits have remained elevated since the pandemic, between 24% and 26% of GDP.

An increase in checking deposits relative to time and savings deposits changes the liquidity of banks’ liabilities. Savings accounts have withdrawal limits and time deposits have penalties for early withdrawals, so those deposits are slightly less liquid than checking deposits. Despite the similarity in the overall level of bank deposits, the change in the composition of deposits may lead to banks to hold more bank reserves compared with pre-pandemic periods.

How this graph was created: Search FRED for and select “Private Depository Institutions; Total Time and Savings Deposits; Liability, Level.” Using the blue sliding bar at the bottom of the graph, or the date entry box in the top right-hand corner, adjust the timespan to your desired date range. To customize the data, go to the “Edit Graph” section (orange button in the top right-hand corner). Begin by adding a series to your existing series and create a customized formula to transform or combine additional series. In this case, add “Gross Domestic Product” and use the formula a/(1000*b). Repeat for the series “Private Depository Institutions; Checkable Deposits; Liability, Level.” The third and final line (green) follows a similar process and is calculated as the total between lines one (blue) and two (red).

Suggested by YiLi Chien and Ashley Stewart.