Banks put your deposits to work in a fairly predictable mix. Across all FDIC-insured institutions in the fourth quarter of 2025, loans and leases accounted for about 53% of total assets, investment securities another 23%, and the balance sat in cash, balances at other banks, and other holdings.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 So the short answer to where banks invest their money: mostly in loans to households and businesses, with a large secondary bucket of government and municipal bonds, and enough cash and overnight lending to meet withdrawals on any given day. The exact proportions shift from one bank to another, but the logic is the same everywhere. Earn interest on longer-term assets, fund them with cheaper short-term deposits, and stay inside the guardrails regulators set.
Loans Are the Biggest Piece
Lending is the core business. Total loans and leases across the industry reached $13.5 trillion at the end of 2025, and this is where banks earn their highest yields and carry the most credit risk.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 When a bank writes a mortgage or funds a business line of credit, it is putting depositor money behind a borrower’s promise to pay it back with interest.
Real Estate Loans
Real estate is the dominant category inside the loan book. Loans secured by real estate totaled $6.1 trillion at the end of 2025, roughly 45% of all bank loans.1FDIC. Quarterly Banking Profile – Fourth Quarter 2025 That covers residential mortgages, typically 15- or 30-year fixed-rate loans, and commercial property loans on offices, retail centers, and warehouses.
Residential mortgages are the workhorse, but banks often don’t hold them. They originate the loan, collect fees, and sell it into the secondary market to free up capital and shed the interest rate risk of holding a 30-year fixed-rate asset. The bank frequently keeps servicing the loan (collecting payments, handling escrow) for a fee even after selling it.
Commercial real estate looks different. Terms run five to ten years, often with a balloon payment at the end. Regulators track CRE exposure closely: when 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 heightened supervisory attention.2Office of the Comptroller of the Currency. Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices That threshold isn’t a hard cap, but crossing it puts the bank under a microscope.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. They usually carry floating rates tied to a benchmark like the Secured Overnight Financing Rate plus a margin that reflects the borrower’s credit. Terms generally run one to seven years depending on the purpose.
The risk here is whether the borrower can generate enough cash flow to keep paying. Banks look at the debt service coverage ratio and the loan-to-value of any pledged collateral. A business with thin margins gets charged a higher rate to compensate.
Consumer Credit
Auto loans, personal installment loans, and credit cards fill out the lending side. They carry higher rates than mortgages or business loans because default rates on unsecured or lightly secured consumer debt run higher. In the second quarter of 2025, the net charge-off rate for loans to individuals was 2.90% across 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 these expected losses through a reserve called the allowance for credit losses. Under the current expected credit loss methodology (CECL), banks must estimate losses they expect over the remaining life of a loan, not just losses already visible, using historical data and economic forecasts.5Office of the Comptroller of the Currency. Allowances for Credit Losses – New Comptrollers Handbook Booklet That reserve reduces reported profit, which is one reason banks price consumer credit high enough to absorb the hits.
Investment Securities: Bonds and the Liquidity Buffer
About a quarter of industry assets sit in investment securities. These holdings earn steady interest and, just as important, can be sold quickly if depositors start pulling money out. Loans are hard to unload on short notice. A Treasury bond can be sold in seconds.
Treasuries and Agency Mortgage-Backed Securities
U.S. Treasuries are the foundation of the securities portfolio. Under federal capital rules they carry a 0% risk weight, meaning banks don’t have to hold additional capital against them.6eCFR. 12 CFR 324.32 – General Risk Weights That makes them extraordinarily capital-efficient. A dollar in Treasuries consumes no regulatory capital; a dollar in commercial real estate loans consumes a meaningful cushion.
Banks also hold securities issued or guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac, primarily mortgage-backed securities. These pay a slightly higher yield than Treasuries because of prepayment risk: when rates fall, homeowners refinance and the bonds pay off earlier than expected. The implied government backing keeps the risk rating favorable.
Banks split their securities into two accounting buckets. Held-to-maturity securities are carried at original cost and sit there until they mature, 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 ready source of cash when the bank needs to sell.
Municipal Bonds
State and local government bonds fund schools, roads, and water systems. The appeal 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 muni paying 3% can compete with a taxable bond paying more, depending on the bank’s tax position.
Banks tend to favor general obligation bonds backed by the taxing power of the issuer over revenue bonds tied to a single project. Federal rules reduce the deduction banks can take for the cost of carrying tax-exempt securities, so the tax benefit isn’t as clean as it is for an individual investor. Munis still hold a meaningful place in many portfolios, especially at community banks.
Cash, Reserves, and Overnight Lending
Banks keep a portion of their assets in cash and highly liquid short-term instruments for the obvious reason: depositors need to be able to withdraw. The Federal Reserve eliminated mandatory reserve requirements in March 2020, so there is no specific percentage a bank must hold.8Board of Governors of the Federal Reserve System. Reserve Requirements But banks still park 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 Money at the Fed at that rate is about as close to risk-free as banking gets. The IORB rate also acts as a floor for short-term rates across the economy, since no bank will lend to another institution for less than the Fed pays for doing nothing.
Banks with excess cash on a given day can 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 Overnight lending keeps the system balanced so temporary swings in deposits don’t force any single bank into a crunch.
The repurchase agreement market is the other big short-term channel. In a repo, a bank lends cash overnight in exchange for Treasury or agency securities as collateral, then gets the cash back the next morning plus a small return. As of mid-2025, more than $8 trillion in Treasury-collateralized repo was outstanding, with more than half of it maturing overnight.11Office of Financial Research. How Will Central Clearing Impact the Repo Market Repos let banks squeeze a return out of cash they only need parked for a day or two.
How Banks Actually Make Money on All This
The business model behind the whole portfolio is simple: borrow cheap, lend expensive. Your savings account might pay 1% or 2%. The mortgage your deposit helped fund earns the bank 6% or 7%. The gap between what the bank earns on its assets and what it pays for funding is the net interest margin, and it is the primary driver of profitability.
As of early 2025, net interest margins averaged roughly 3% at large banks (those over $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 Big banks run thinner margins because they compete harder on deposit rates and hold more low-yielding liquid assets. Community banks, with relationship lending and stickier deposits, tend to earn wider spreads. Every choice a bank makes about its investment mix feeds back to this margin.
The Rules That Shape the Mix
Banks don’t have free rein over how they invest, and the rules heavily influence what you see on their balance sheets.
Capital Requirements
Every asset gets a risk weight. Treasuries get 0%.6eCFR. 12 CFR 324.32 – General Risk Weights A standard mortgage might get 50%. A commercial loan might get 100%. Multiply each asset by its risk weight, add them up, and the bank must hold capital equal to a set percentage of that total.
The minimum Common Equity Tier 1 ratio is 4.5% of risk-weighted assets, and a stress capital buffer of at least 2.5% brings the effective floor to at least 7% for large banks.13Board of Governors of the Federal Reserve System. Annual Large Bank Capital Requirements Globally systemically important banks face an additional surcharge. Riskier assets require more capital, which lowers the return the bank can generate for shareholders, so portfolios lean toward government securities and well-collateralized loans rather than speculative bets.
The Volcker Rule
Banks are largely prohibited from proprietary trading. They can’t use their own capital to make short-term speculative bets on stocks, bonds, derivatives, or other instruments.14eCFR. 12 CFR Part 248 – Proprietary Trading and Certain Interests in and Relationships with Covered Funds The rule, put in place after the 2008 crisis, keeps banks focused on lending and fee-based services rather than behaving like hedge funds with depositor money at stake.
Concentration Limits
Regulators also watch for overconcentration in any single category. The CRE thresholds mentioned above are one example. Banks face similar scrutiny when exposure to a single borrower or industry grows too large relative to capital. The point is diversification, so that no single bad bet can bring the institution down.
What Can Go Wrong
Two risks dominate a bank’s investment portfolio: credit risk (borrowers not paying) and interest rate risk (the value of existing bonds falling when rates rise). The 2023 collapse of Silicon Valley Bank showed how devastating interest rate risk can be even in a portfolio full of supposedly safe government securities.
SVB had loaded up on long-term bonds when rates were near zero. When the Federal Reserve began raising rates aggressively in 2022, the market value of those bonds fell sharply. Unrealized losses on SVB’s held-to-maturity portfolio grew from about $1.3 billion at the end of 2021 to roughly $15.2 billion a year later.15Federal Reserve Board Office of Inspector General. Material Loss Review of Silicon Valley Bank Because those securities were held-to-maturity, the losses did not hit the income statement. But when SVB needed cash and sold its available-for-sale portfolio at a $1.8 billion loss, depositors panicked and ran.
The lesson applies to every bank. Held-to-maturity classification keeps paper losses off reported earnings, but it does not make them go away. If the bank ever has to sell, the losses become real. Regulators have since increased scrutiny of unrealized losses and how they would affect a bank’s ability to function under stress.15Federal Reserve Board Office of Inspector General. Material Loss Review of Silicon Valley Bank
Credit losses on loans are less dramatic and more constant. Banks absorb a steady stream of defaults through the allowance for credit losses, which CECL requires them to build up based on expected lifetime losses rather than waiting for borrowers to actually stop paying.5Office of the Comptroller of the Currency. Allowances for Credit Losses – New Comptrollers Handbook Booklet That reserve is supposed to be in place before the losses arrive, and it explains why a rise in charge-offs during a downturn dents earnings without necessarily threatening the bank itself.