High school students guess what happens to money deposited into checking accounts

In August 2007, the results of the first nationwide high school economics graduation tests were released. (Download the report [pdf].) It appears that the results were better than expected, but let's not celebrate too quickly: The results were that 42% of students rated "Proficient" and 3% "Advanced". And only 52% of the students could answer this multiple-choice question correctly:

What happens to most of the money deposited in checking accounts at a commercial bank?

  1. It is used to pay the bank's expenses.
  2. It is loaned to other bank customers.
  3. It is kept in the bank's vault until depositors withdraw the funds.
  4. It is paid to owners of the bank as return on their investment.

I guess 48% of the students have never seen It's a Wonderful Life.

Comments (37)
  1. pcooper says:

    I’ve never seen "It’s a Wonderful Life", and while the answer (I assume) is supposed to be B, the cynic in me makes me think that D is more correct lately. :)

  2. laonianren says:

    The answer is:

    E. It is paid to senior employees of the bank.

    No wonder the kids were confused.

  3. Ok I give up,  what is the correct answer?

  4. Some Guy Up North says:

    I’ve never seen "It’s a Wonderful Life" either… and I get rather nervous when a sixty-year-old movie is considered a primary source for learning what banks really do with your money.

    Hasn’t anyone written First World Economies for Dummies, yet?

  5. tzagotta says:

    The answer of B. is in theory correct; however, C. is more realistic in the past few quarters since banks have severly reduced or stopped making loans.  In addition, even when they received bailout money to help thaw the credit freeze, they also held that money instead of loaning it out.

    Also in the case of some banks, we should add "E. Use the money to fund mergers and acquisitions."

    The U.S. banking industry is a real disgrace.  One step above common criminals.

  6. steven says:

    I wonder how long this article has been in Raymond’s queue. Was that before the GFC started?

    The cynic in me wants to answer A. But then, I define a bank as "a place where you can get a loan if you can prove you don’t need one".

  7. Mishu says:

    Billy, half an hour ago I wanted to point you my favorite search engine. After 30 minutes I haven’t found any official list of restrictions that apply to banks when using your money. I have found 2 other places that point to B. Although I have a BS in economics I have to admit (with a "proud" shame – I never liked economics) that I don’t know a definitive answer.

    If I would implement a banking system I would probably chose B but I am highly unqualified for the job. People who know lots of stuff about a domain have sometimes solutions that are not intuitive to the average person. Want examples, just ask Raymond about non-intuitive performance improvements. There was a slight chance that the government would chose to give banks a high degree of freedom of choice in using your money so that the laws are flexible enough to allow the banks pursue the most effective business models. So, in this way, it could have been all. Even with stricter restrictions C seems a likely candidate for being allowed (of course, common sense says that it is not helping the bank investors, but real life comes with all sort of strange situations(like, given high risks on lending, for the moment they are just safe keeping the money and make you pay taxes on any operation on them)).

  8. Nick Lamb says:

    X: It is issued from ATMs and by tellers to other customers (a small portion is returned to a central bank because it is in poor condition)

    This answer, unlike A, D or the various E suggestions actually more or less works out in terms of arithmetic – a bank couldn’t conceivably spend as much on salaries and bonuses, returns to investors or in funding acquisitions as it receives from its customers, the numbers don’t even resemble one another. Answer C is wrong because there isn’t anywhere near enough currency in existence for it to work.

    Answering X might mean you don’t understand what the bank is for. Answering A, C, D or any of the E options, means you didn’t even think through your answer to see if could possibly be true.

  9. I guess 48% of the students have never seen It’s a Wonderful Life.

    Worse – some of those that didn’t see it got the answer right by pure chance.

    As I figure it, 69 1/3% of the students have never seen It’s a Wonderful Life.

  10. X: It is issued from ATMs and by tellers to other customers

    Or speaking more generally, "it is used to redeem loans the bank has taken out"

  11. Mike says:

    This used to confuse me too until I came across this video one day. It’s 45 minutes but it should be required watching for all world citizens:


  12. John says:

    Mike: It’s ok, I’m not a world citizen; at least not THIS world.  Perhaps I’ve said too much…

  13. Mishu,

    I was being a bit sarcastic. I use to work for the 11th largest Commercial bank in the US

    The correct answer is B, in theory a commercial bank makes its profit by charging interest on loans to other businesses.

    Paraphrased / or just stolen from Wikipedia

    Commercial bank is a type of bank or division of a bank that mostly deals with deposits and loans from corporations or large businesses

    A retail bank is a type of bank or division of a bank that handles deposits and loans with individual.

    An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions.

  14. Mishu says:

    Now I noticed. The question contains a "most of the". This question is not really multiple choice as there is just one most of. Of course that varies in time and from bank to bank. I suspect that B and C are "most of" in legally operating banks depending on risk of lending.

    As Mike points out this might be a trap question as banks do not actually lend borrowed money but use that as a basis to legally allow them to make loans 9 times the value of the borrowed money.

  15. Gaspar says:

    I really think this is a shame of a question because the correct answer SHOULD be B+C.  In the U.S. most types of banks are required to keep a percentage of total deposits available for immediate withdrawal.

    This means if I deposit $100, then (depending on what type of bank) a percentage (at least 10% to be "well capitalized" under FDIC requirements) has to be kept in case I want to close/withdraw my account.  The rest then would be used for investments.

    Obviously in practice a bank will be doing math on the total changes for a day/month/other and not per account but the concept is still the same.

  16. Christian says:

    Can someone explain the joke about Wonderful life? That would be great!

    [Not a joke, just a reference to the bank run scene from the movie. -Raymond]
  17. Stephen Jones says:

    —-"and I get rather nervous when a sixty-year-old movie is considered a primary source for learning what banks really do with your money."——

    Particularly when the people supposed to know about it are teenage high school students.

  18. someone else says:


    Luckily, it was phrased as “most of the money.”

  19. Mishu says:

    Forget about those loans 9 times the borrowed money. After I checked more sources on the internet it seems that is not that simple. It seems that it can get to 9 times the original deposits but after a more complex process. They do lend borrowed money (otherwise bank runs wouldn’t be possible). Mikes video may be a little misleading although it is right about the fact that commercial banks can create money.

    The information linked most on the internet seems scarce and in some cases somewhat contradictory.

    Does anyone have a good source of information on the subject?

  20. Austin Spafford says:

    Color me ignorant!

    I had previously assumed that checking accounts followed C and only savings accounts and above followed B! Loosely, like generations of a garbage collector, with loans only being pulled from the older generations.

  21. Ray Trent says:

    We can hope that many of them thought: "This is a ridiculous question with no/all right answers" and simply refused to answer it.

    But that would be overly optimistic, I’m afraid.

    The right answer, of course, is "All of the above, and a whole lot more, though the percentages vary a lot depending on current economic conditions and the bank’s balance sheet".

  22. ::Wendy:: says:

    Are the answers mutually exclusive?  Surely the actual money (literal notes and coins) could be used for all options. What a poorly designed question. How can you trust school qualifications if the assessors can’t write and evaluate their questions appropriately before using them to assess others. Seems a bit of basic process quality.


    pour me a tea.

    [That’s why the question asked you choose the answer that describes what happens to most of the money, not all of it. In many cases, more than one answer has some validity, but you are expected to choose the best answer. -Raymond]
  23. Kriz says:

    The answer given in the linked pdf is wrong.

    When money is deposited in checking accounts at a commercial bank then the bank creates a liability on their balance sheet equal to the amount deposited and at the same it creates an asset (cash) on the balance sheet as well (again equal to the amount deposited).

    In reality the bank does not create new assets and liabilities but increases the preexisting cash amount available to the bank and the checking account balance.

    The bank will then use this additional liquidity to pay its expenses most of the time (=answer A).

    Commercial banks actually do not loan money deposited, so answer B is wrong.

  24. JohnFx says:

    E: Pay back federal bailout money to the Government who uses this newfound "income" to send out stimulus checks to taxpayers who deposit them back in the bank. Repeat until no one knows who owes whom what anymore.

  25. Cheong says:

    If I had to answer that question, I’d be confused too.

    I haven’t heard of checking account. Only heard of current and saving accounts.

  26. Gregory Kong says:

    Theoretically, a savings account is meant for you to save your money in; it pays (nowadays minimal) interest, and before the advent of ATMs and other debit facilities, you had a passbook and had to show up in person at the bank to withdraw money.

    A current account is a checking account – it involves servicing fees, no interest and a chequebook facility, which allowed you to use the funds without having to physically take the money out.

    Nowadays, of course, the difference is minimal, and moot in some cases. HSBC has a hybrid savings + current account.

    All of which is really meaningless, because there are some people out there who cannot properly calculate the change for your purchases if their checkout machine breaks down. And we’re worried about whether they know how banks work?

  27. Mark says:

    Kriz: agreed, the question is misleading.  The money is not directly loaned out, assets are offset against liabilities.  And non-interest income is pretty close to 50% now: http://www.reuters.com/article/pressRelease/idUS113444+20-Feb-2008+BW20080220.  From their fines, I think my bank are trying for even more.

  28. someone else says:

    Come one, guys, think!

    It’s not really their money, so they can’t permanently give it away. That excludes A and D. And since they want to work with the money (to make more), they’ll loan it, instead of depositing it somewhere. Therefore, B is the most logical answer.

  29. Stephen Jones says:

    —"I haven’t heard of checking account. Only heard of current and saving accounts."—-

    Current accounts is British English.

  30. Brian Tkatch says:

    New question:

       What happens to most articles posted in Raymond’s blog queue at MSDN?

          1. It is stolen by other bloggers to raise their stats.

          2. It is posted in the past so Raymond can add links to an even newer posts.

          3. It is kept in the blog’s queue so Raymond wants to take some time off.

          4. It is published in an a new book venture to pay for previous failed ventures.

  31. Mark says:

    someone else: they certainly can give it away, and buying into risky loans is close to that.

    Another misleading aspect is the suggestion that it can be "kept it in the bank’s vault".  That implies the question is about currency, rather than funds, and could be A or C.

  32. Aaron G says:

    The correct answer is (E): It is invested into forward rate agreements, credit default swaps, asset-backed commercial paper, and various other types of derivatives, which subsequently chip away at its value until it is worth almost nothing and a government loan is required to keep enough cash in the ATMs for you to take it back out at some point in the distant future.

  33. Mark says:

    Mishu: check out http://en.wikipedia.org/wiki/Fractional-reserve_banking  You’re right, writing "most of" helps you ignore it; a good questioner would use "the majority of" to reinforce the quantitative spin of the question.

  34. someone else says:


    Banks won’t use the money for anything without the intention of getting it back. Giving it to investors or paying for it’s expenses is not something where you have a chance to get it back. Risky loans are.

  35. porter says:

    > Current accounts is British English.

    Or is it "Current accounts are British English"?

  36. Mark says:

    someone else: the bank’s concern is more whether a client will withdraw their money, not whether a loan they make will be repaid.

  37. Gregory Kong says:

    @porter: Seriously side-tracked now, but the sentence you quoted is properly worded (and implied)

    [The term] current accounts is [a] British English [term].

    Hence quite correct, even if somewhat terse.

    @Mark: Both are grave concerns for banks, I must say. Banks have to make a profit, after all, and loans are usually where they make it.

    A full reserve bank (such as Pictet) is not so worried about customers withdrawing their monies as they are about investments paying off.

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