Yes, banks borrow money, and they do it every day on a massive scale. The whole business model rests on borrowing cheaply and lending at higher rates, so a bank is constantly pulling in funds from six main sources: its own depositors, other banks, the Federal Reserve, the repurchase agreement market, the Federal Home Loan Bank system, and bond investors. Each channel has its own rules, costs, and risks, and a well-run bank uses all of them.
Your Deposits Are a Loan to the Bank
The single biggest source of borrowed money for most banks is customer deposits. When you put cash into a checking or savings account, you are not renting a lockbox. You are lending the bank your money. The bank becomes your debtor and you become an unsecured creditor with a claim for repayment on demand. The interest the bank pays on a savings account is the price it pays to borrow from you.
Certificates of deposit make the loan more formal. You agree to leave the money alone for a set term at a fixed rate, and the bank gets funding it can plan around. Take the money out early and you pay a penalty. Federal rules require that any withdrawal within the first six days of opening a time account carry a penalty of at least seven days’ interest, and most banks impose steeper penalties on longer CDs, often several months of interest.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD)
Because deposits are effectively public loans to private banks, the federal government stands behind them. FDIC insurance covers each depositor up to $250,000 per bank, per ownership category, so if the bank fails, depositors get their money back up to that ceiling.2FDIC. Deposit Insurance That guarantee is the reason people are willing to lend their savings to a bank at modest interest rates.
Borrowing From Other Banks Overnight
Banks with extra cash lend to banks that are running short, usually overnight, in what’s called the federal funds market. These loans are unsecured, so the lending bank is relying entirely on the borrower’s creditworthiness, and they settle within a single business day. The volume-weighted median rate on these loans is the effective federal funds rate, which the Federal Open Market Committee steers by setting a target range.3Federal Reserve Bank of New York. Effective Federal Funds Rate
One boundary worth noting: banks are no longer legally required to hold reserves against deposits. The Fed set the reserve requirement ratio to zero for all depository institutions in March 2020.4Federal Reserve Board. Reserve Requirements Banks still hold reserves voluntarily and still trade in the fed funds market to manage cash, but the old obligation that drove much of this daily borrowing is gone.
Borrowing From the Federal Reserve
When a bank needs cash quickly and the private market isn’t cooperating, it can borrow directly from the Fed through the discount window. The Fed calls this tool critical for “supporting the liquidity and stability of the banking system,” and the loans are always short-term, typically overnight.5Federal Reserve. Discount Window Lending
There are three tiers. Primary credit goes to banks in solid financial shape. Secondary credit is available to banks that don’t qualify for primary credit, usually because they’re under stress, at a higher rate. Seasonal credit serves smaller banks, generally those with less than $500 million in deposits, that see predictable swings in loan demand tied to industries like farming or tourism. Seasonal borrowers can lock in funding for up to nine months but must reapply annually.6Federal Reserve Board. Discount Window7The Federal Reserve Discount Window. Seasonal Credit Program
The interest rate on primary credit, called the discount rate, is pegged to the top of the FOMC’s target range for the federal funds rate. As of early 2026 that rate sits at 3.75%.8Federal Reserve Board. H.15 – Selected Interest Rates (Daily) Every discount window loan must be backed by collateral, and the Fed accepts a wide range of assets, including government securities and mortgage loans. If a bank fails to repay, the Fed can seize the collateral.
There’s a stigma attached to borrowing at the window. Banks worry it signals weakness to regulators and competitors, so they treat it as a last resort. That reluctance is part of the design. The Fed wants banks to find private funding first and only come to the window when they truly need it.
The Repo Market
Repurchase agreements are one of the largest sources of short-term funding in the entire financial system. In a repo, a bank sells securities to a lender and simultaneously agrees to buy them back the next day, or within a few days, at a slightly higher price. The difference between the sale and buyback price is effectively interest on a very short loan, and the securities themselves are the collateral. The U.S. repo market averaged roughly $12.6 trillion in daily exposures during the third quarter of 2025.9Office of Financial Research. Sizing the U.S. Repo Market
Lenders protect themselves with a haircut, meaning they lend less than the full market value of the collateral. Hand over $100 million in bonds and the lender might advance only $95 million, keeping a 5% cushion in case the collateral drops in value. Treasury securities command small haircuts. Riskier assets require larger ones. In a crisis, lenders raising haircuts can create a squeeze, because each increase forces the borrowing bank to find funding elsewhere or sell assets at a loss.
Federal Home Loan Bank Advances
The Federal Home Loan Bank system is a government-sponsored network of eleven regional banks that lends to member institutions. Most commercial banks, credit unions, and insurance companies are members, and they borrow through what are called advances, which are secured loans from their regional FHLB.10FHFA. About FHLBank System
Long-term advances must go toward residential housing finance or, for smaller community financial institutions, small business and agricultural lending.11GovInfo. U.S.C. Title 12 – Banks and Banking – Chapter 11 Short-term advances give members flexible cash management. Every advance must be fully secured, and eligible collateral includes mortgage loans, mortgage-backed securities, agency securities, and cash on deposit at the FHLB. Smaller community institutions can also pledge small business and farm loans.12Federal Register. Federal Home Loan Bank Advances, Eligible Collateral, New Business Activities and Related Matters
This system is the quiet backstop most consumers never hear about. It gives banks a reliable funding source that doesn’t depend on depositor confidence or overnight markets. During the 2023 regional banking stress, FHLB advances surged as banks losing deposits turned to the system for replacement funding.
Selling Bonds and Notes to Investors
Large banks also borrow by selling debt directly to institutional investors like pension funds and money market funds. This taps the capital markets rather than the banking system and lets banks raise large sums for longer periods than overnight lending allows.
Commercial paper is the short-term version. These unsecured notes mature in 270 days or less, which keeps them exempt from SEC registration, though average maturities run closer to 30 days.13Board of Governors of the Federal Reserve System. Firms’ Financing Choice Between Short-Term and Long-Term Debts Corporate bonds are the longer play, with average maturities near ten years, letting a bank lock in a fixed rate and plan its funding for years.
Not all bank debt is equal. Senior debt gets paid first if the bank fails. Subordinated debt sits lower in the pecking order, meaning depositors and senior creditors are paid in a liquidation before subordinated bondholders see a dime. The extra risk earns a higher interest rate. Regulators actually encourage subordinated debt because it can count toward Tier 2 capital, adding a cushion the bank can use to absorb losses.14eCFR. 12 CFR 5.47 – Subordinated Debt Issued by a National Bank
Why Banks Use All of These Channels at Once
No healthy bank leans on a single source. The mix usually includes a stable base of retail deposits, access to the discount window for emergencies, repo capacity for daily cash, FHLB advances for mortgage-related funding, and capital market debt for longer-term needs. When one channel tightens, like depositors pulling money after a scare, the bank leans harder on the others.
That balance is what regulators watch. Federal stress tests evaluate whether large banks can survive severe economic shocks by measuring how their capital and funding hold up under hypothetical scenarios.15Federal Reserve. Dodd-Frank Act Stress Tests 2026 The banks that end up in trouble are usually the ones that depended too heavily on one funding source, especially a flighty one like uninsured deposits or short-term wholesale borrowing.