Your deposits don’t sit in a vault. Banks put most of the money to work in loans, hold roughly a quarter in bonds and other securities, and keep the rest in cash and short-term instruments so withdrawals clear without friction. Across all FDIC-insured institutions at the end of 2025, loans and leases made up about 53% of total assets, investment securities about 23%, and cash and interbank balances filled in the rest.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 So where do banks invest their money? Mostly in other people’s borrowing, with a careful cushion of government bonds and ready cash behind it. The business runs on the gap between what the bank pays you for your deposit and what it earns on everything it does with that deposit.
Loans Are Where the Majority Goes
Lending is the core of commercial banking. Industry-wide, loans and leases totaled $13.5 trillion at the end of 2025.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 When your bank funds a mortgage, a car loan, or a line of credit for a local contractor, it’s putting depositor money behind that borrower’s promise to repay with interest.
Real Estate Loans
Real estate dominates the loan book. Loans secured by real estate totaled $6.1 trillion at the end of 2025, about 45% of all bank loans.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 That includes residential mortgages, typically 15- or 30-year fixed-rate, along with commercial loans on office buildings, retail centers, and warehouses.
Many residential mortgages don’t stay on the bank’s books for long. The bank originates the loan, collects its fees, and sells it into the secondary market to free up capital and shed the interest rate risk that comes with holding a 30-year fixed-rate asset. It often continues servicing the loan for a fee even after the loan itself has moved on.
Commercial real estate loans have shorter terms, usually five to ten years, often with a large balloon payment at the end. Regulators watch this exposure closely. Once a bank’s commercial real estate loans reach 300% or more of its risk-based capital and the portfolio has grown more than 50% in three years, it draws extra scrutiny.2Office of the Comptroller of the Currency. Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices That isn’t a hard cap, but it is a line that invites examiners to ask harder questions.3Board of Governors of the Federal Reserve System. Interagency Guidance on Concentrations in Commercial Real Estate Lending
Business Loans
Commercial and industrial loans fund payroll, equipment, inventory, and expansion. These usually carry floating interest rates tied to a benchmark such as the Secured Overnight Financing Rate (SOFR), with a margin on top that reflects the borrower’s credit quality. Terms generally run one to seven years depending on the use.
The risk is whether the borrower can produce enough cash flow to service the debt. Banks look at the debt service coverage ratio and the loan-to-value ratio of any pledged collateral, and borrowers with thinner margins pay higher rates to compensate.
Consumer Credit
Auto loans, personal installment loans, and credit cards fill out the lending side. Rates on these are higher than on mortgages or business loans because default rates run higher on unsecured or lightly secured consumer debt. In the second quarter of 2025, the net charge-off rate for loans to individuals was 2.90% across all FDIC-insured institutions, with credit cards running well above that average and auto loans below it.4FDIC. Statistics at a Glance – Second Quarter 2025
Banks absorb those expected losses through the allowance for credit losses. Under the current expected credit loss methodology (CECL), the reserve has to reflect losses the bank expects over the remaining life of each loan, built from historical data and economic forecasts.5Office of the Comptroller of the Currency. Allowances for Credit Losses – New Comptrollers Handbook Booklet That reserve comes straight out of reported earnings, which is why consumer loans are priced to absorb the hits.
Investment Securities Provide Yield and Liquidity
About a quarter of industry assets sit in investment securities. These holdings do two jobs: they pay steady interest, and they can be sold quickly if deposits start walking out the door. A loan is hard to unload on short notice; a Treasury bond trades in seconds.
Treasuries and Agency Mortgage-Backed Securities
U.S. Treasury securities anchor the portfolio. They carry a 0% risk weight under federal capital rules, meaning the bank doesn’t have to hold any additional capital against them.6eCFR. 12 CFR 324.32 – General Risk Weights A dollar in Treasuries uses no regulatory capital, while a dollar in a commercial real estate loan uses a meaningful cushion. That math alone pulls bank portfolios toward government paper.
Banks also hold mortgage-backed securities issued or guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac. These pay a bit more than Treasuries because of prepayment risk: when mortgage rates fall and homeowners refinance, the securities return principal earlier than expected. The implied government backing still keeps the risk rating favorable.
Securities land in one of two buckets on the balance sheet. Held-to-maturity securities are carried at original cost and ride out their term, which keeps short-term price swings off the income statement. Available-for-sale securities are marked to current market value, with gains and losses flowing through a special equity account. The AFS portfolio is the one the bank sells from when it needs cash in a hurry.
Municipal Bonds
State and local government bonds fund schools, roads, and water systems. The draw for banks is that interest on most municipal bonds is exempt from federal income tax.7Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds A 3% muni can out-earn a higher-coupon taxable bond once the tax treatment is factored in. Banks tend to favor general obligation bonds backed by the issuer’s taxing power over revenue bonds tied to a single project. Federal rules trim the benefit by reducing the deduction for the cost of carrying tax-exempt securities, so the advantage is narrower for banks than for individual investors, but munis remain a steady piece of many community bank portfolios.
Cash, Reserves, and Overnight Markets
A portion of every bank’s assets stays in cash and highly liquid short-term instruments for an obvious reason: depositors need to be able to pull their money. The Federal Reserve eliminated mandatory reserve requirements in March 2020, so there’s no specific percentage banks must hold.8Board of Governors of the Federal Reserve System. Reserve Requirements They still keep substantial balances at the Fed voluntarily, because those balances earn interest.
The Interest on Reserve Balances rate currently sits at 3.65%.9Board of Governors of the Federal Reserve System. Interest on Reserve Balances Parking money at the Fed at that rate is as close to risk-free as banking gets, and it sets a floor for short-term rates across the economy, because no bank will lend to another institution for less than it earns doing nothing.
Banks with excess cash on a given day lend it overnight to banks running short through the federal funds market. The Federal Open Market Committee sets a target range for that rate, currently 3.5% to 3.75%.10Board of Governors of the Federal Reserve System. Federal Reserve Issues FOMC Statement Repurchase agreements do similar work: a bank lends cash overnight, takes Treasury or agency securities as collateral, and gets its cash back the next morning with a small return. More than $8 trillion in Treasury-collateralized repo was outstanding in mid-2025, with over half maturing overnight.11Office of Financial Research. How Will Central Clearing Impact the Repo Market These markets let banks earn something on cash they only need parked for a day or two.
How the Bank Earns Money on All of This
The business model behind the whole portfolio is simple: borrow cheap, lend expensive. Your savings account might pay 1% or 2% while the mortgage your deposit funded earns 6% or 7%. The gap between what the bank earns on its assets and what it pays for its funding is the net interest margin, and it drives bank profitability.
In early 2025, net interest margins averaged roughly 3% at large banks with more than $100 billion in assets, 3.4% at regional banks, and 3.5% at community banks.12Federal Reserve Bank of St. Louis. Banking Analytics – Net Interest Margins Rise at US Banks Large banks run thinner because they compete harder on deposit rates and hold more low-yielding liquid assets. Community banks, with more relationship lending and stickier deposits, earn wider spreads. Every mix decision, higher-yielding loans versus safer Treasuries, feeds back to that margin.
What Can Go Wrong
Two risks sit on top of everything a bank does with your money: credit risk, meaning borrowers who don’t pay, and interest rate risk, meaning existing bonds that lose value when rates rise. The 2023 collapse of Silicon Valley Bank showed how destructive interest rate risk can be inside a portfolio full of government securities.
SVB had loaded up on long-term bonds during a stretch of near-zero rates. When the Federal Reserve raised rates aggressively in 2022, the market value of those bonds dropped sharply. Unrealized losses on the held-to-maturity portfolio went from about $1.3 billion at the end of 2021 to roughly $15.2 billion a year later.13Federal Reserve Board Office of Inspector General. Material Loss Review of Silicon Valley Bank Accounting rules kept those losses off the income statement because the securities were held-to-maturity. When SVB finally needed cash and sold from its available-for-sale portfolio at a $1.8 billion loss, depositors panicked and the bank failed.
The point for any depositor trying to understand what their bank is doing: held-to-maturity classification lets a bank avoid reporting paper losses, but the losses are still there, and they become real the moment the bank is forced to sell. Regulators have since tightened their look at unrealized losses and how banks would hold up if forced to liquidate.13Federal Reserve Board Office of Inspector General. Material Loss Review of Silicon Valley Bank
Credit losses are less dramatic and more constant. The allowance for credit losses acts as a built-in shock absorber, and CECL forces banks to put the reserve in place based on lifetime expected losses rather than waiting for borrowers to actually fall behind.5Office of the Comptroller of the Currency. Allowances for Credit Losses – New Comptrollers Handbook Booklet
Why Bank Portfolios Look the Way They Do
Banks don’t choose their investment mix freely. Federal rules push the portfolio toward certain assets and away from others, and those rules explain a lot of what you see on any bank’s balance sheet.
Every asset gets a risk weight. Treasuries get 0%. A standard mortgage might get 50%. A commercial loan can get 100%.6eCFR. 12 CFR 324.32 – General Risk Weights The bank multiplies each asset by its weight to produce risk-weighted assets, then has to hold capital against that total. The minimum Common Equity Tier 1 ratio is 4.5% of risk-weighted assets, with a stress capital buffer of at least 2.5% on top, bringing the effective floor to at least 7% for large banks, and globally systemic institutions face an additional surcharge.14Board of Governors of the Federal Reserve System. Annual Large Bank Capital Requirements Riskier assets eat more capital, which drags on shareholder returns, so banks tilt heavily toward government securities and well-collateralized loans.
The Volcker Rule, put in place after the 2008 crisis, largely bars banks from proprietary trading. They can’t use their own capital to make short-term speculative bets on stocks, bonds, derivatives, or other instruments.15eCFR. 12 CFR Part 248 – Proprietary Trading and Certain Interests in and Relationships with Covered Funds Your deposits don’t fund a trading desk gambling on market direction.
Regulators also watch for overconcentration in any single category, borrower, or industry. The commercial real estate threshold is one example; similar scrutiny applies when exposure to any single counterparty grows too large relative to capital. The intent is diversification, so a single bad bet can’t take down the institution.
Put the pieces together and the picture is coherent. The heavy tilt toward government securities isn’t about love of low yields; it’s that those assets consume zero capital, convert to cash instantly, and keep examiners comfortable. Loans earn the real money, but each one comes with a capital cost and a credit risk the bank has to price against the regulatory frame it operates within. Your deposit sits inside that balance.