How Banks Actually Work

What you'll learn

• The Banking System Nobody Explains
• What Central Banks Actually Do
• Fractional Reserve Banking Explained
• Where New Money Really Comes From
• Why This Matters for Crypto
• How Payments Actually Settle
• For Deeper Reading

Key terms

Central bank

The institution at the top of a country's banking system that sets interest rates, manages money supply, and acts as a lender of last resort. The U.S. Federal Reserve, European Central Bank, and Bank of Japan are major examples.

Fractional reserve banking

A system where banks keep only a fraction of deposits in reserve and lend out the rest, effectively multiplying the money supply through the credit creation process.

Quantitative easing (QE)

A central bank policy of creating new money to purchase financial assets like government bonds, increasing money supply and lowering long-term interest rates. Used heavily 2008-2014 and 2020-2022.

Bank run

A situation where many depositors withdraw their money simultaneously, potentially causing a bank to fail due to insufficient reserves. Silicon Valley Bank in March 2023 is a recent example.

FDIC

Federal Deposit Insurance Corporation, a U.S. government agency that insures bank deposits up to $250,000 per depositor per bank. The 2023 SVB rescue extended insurance to all deposits via "systemic risk exception."

Money multiplier

The factor by which the money supply increases through fractional reserve lending. With a 10% reserve requirement, $1 in reserves can support $10 in deposits.

M2 money supply

A measure of the total dollars including cash, checking, savings, and money market funds. U.S. M2 grew from $15.4T (Feb 2020) to $21.7T (April 2022), a 41% expansion.

SWIFT

Society for Worldwide Interbank Financial Telecommunication. The messaging network that banks use for international wire transfers. Transfers typically take 3-5 business days and involve correspondent banks taking fees.

ACH (Automated Clearing House)

The U.S. domestic batch payment network. ACH transfers typically settle in 1-3 business days. Slower than crypto rails but free or low-cost for users.

Bank Term Funding Program (BTFP)

Emergency lending facility created by the Federal Reserve in March 2023 in response to the SVB collapse, allowing banks to borrow against held-to-maturity securities at face value.