Banks handle massive amounts of money. In many cases, a single bank will handle more money than the average person will see in their entire life. The money they handle isn't just the money you deposit; it's also the money they earn from fees and costs that they charge their customers, businesses in the area, interest from loans, and more. Banks are such gigantic financial institutions they must be involved in investing to some degree, but what do banks invest in?
The answer is that banks invest in just about everything. Depending on which bank or banks you use, your own banks may invest in various securities, bonds, small businesses, large ones, mortgages and mortgage-related investments, and even government securities from the Treasury.
To many people, this may not make much difference to them or have any bearing on who they choose to do their banking with. To others, how their potential bank invests or doesn't invest in things that are important to them personally can have a drastic impact on where they eventually choose to do their business. There are many ways that banks can invest and many more ways that they create revenue, and being informed of these can help you dig a little deeper when evaluating a potential new bank.
Where Do Banks Put Their Money For Interest
Banks use a wide variety of investments. Many invest a portion of their money into the real estate market, commercial loans, consumer loans, and government securities. These are some of the most commonly-seen investments, but there are many more, and if you can think of it, there is probably a bank that invests in them.
One of the biggest investments for many banks, particularly larger national banking institutions, is real estate. This is due in no small part to the mortgage industry being such an important aspect of business for many banks. This leads to them offering long-term lending solutions not only for homes but for commercial properties and even farmland. While many people don't realize it, issuing a loan is representative of the bank investing in that particular borrower.
They invest in them by issuing a loan, which will hopefully earn them a healthy return via interest and fees. In most cases, the bank will evaluate the potential borrower to be sure they are a reasonably safe investment, minimize the risk, and maximize the potential return. This works the same way for things like home equity loans and construction loans.
Where Do Banks Invest Their Depositor's Money
Many consumers may not be aware of this, but when you deposit money into your bank account, that money isn't used by the bank, not even when you deposit it into a savings account and forget about it for years. Basically, banks do not take the money you deposit and use that as their investment funds, nor do they loan those funds out directly to other consumers.
Instead, they use the money you deposit to help balance their books. Just like any other business, banks are required to have significant cash reserves on hand, though banks are more so. These book-balancing funds are used to meet cash reserve requirements that facilitate their abilities to lend cash through loan programs. The money you deposit isn't needed to fund loans, since the loans that cash facilitates create their own revenue streams for the bank.
Where Do Ethical Banks Invest Their Money
Ethical banks refrain from investing in things that are considered to be unethical by many or in some cases, simply ecologically unwise. This precludes them from investing or lending to companies or industries that directly or indirectly cause environmental harm, such as fossil fuel extraction, or in companies that endanger human lives. Most ethical banks are guided by robust social responsibility policies that allow them to invest more ethically than others while still maintaining a profitable business.
Ethical banks instead focus on community investment, programs and companies that reduce or mitigate climate change, and even housing or community programs for underserved or vulnerable communities. Still, others invest in renewable energy infrastructure for communities that currently have high-carbon economies. This is what sets ethical banks apart from their conventional cousins, as they are actively invested in the industry's transition to a more sustainable model.
Depending on how the banks are ethically investing their money, they will earn specific ethical certifications. In some cases, not only will the bank be actively investing its own funds, but some commit a percentage of the fees they collect as earmarked for ethical investment as well. Some of the most common certifications for ethical bank investments include:
- Community Development Financial Institution
- Community Development Credit Union
- Fossil-Free Certified
- Global Alliance For Banking On Values
- Green America Certified
- Minority Depository Institution
- Women-Owned Bank
- 1% For The Planet
Socially Responsible & Ethical Banks
There are some incredibly ethical banks being formed, and they are becoming highly focused on not only responsible investing but improving the banking framework in general. Some of the top metrics used to evaluate whether a bank is ethical or not include:
- Investment transparency
- Paying their taxes, rather than implementing tax avoidance policies
- Treating staff and clients fairly
- Well-outlined policies preventing ecological harm or danger to human lives
- Ethical bank certifications or accreditations
Using these metrics, you can determine if a bank is ethical or not. Some of the most ethical banks are below.
A certified B Corporation, Aspiration has pledged not to invest in fossil fuels, private for-profit prisons, or companies that produce weaponry. They were founded in 2013, and have made transparency one of its primary pillars, helping its customers to understand where their bank is investing. They donate 10% of all customer purchases to charity and also contribute to forestry rebuilding programs.
Amalgamated Bank is an ethical banking institution based in New York, and its primary focus is to help communities transition to renewable energy, while also investing in projects that create affordable housing for community residents. They are politically progressive and frequently back progressive initiatives. Amalgamated Bank features a 40% ownership stake by the Workers United labor union, which is unique among banks and starts their employees at $20/hour. They are Global Alliance For Banking On Values certified and are a B Corporation.
A well-known banking leader in the Pacific Northwest region, Beneficial State Bank is driven to help build safer communities by engaging in and helping to fund socially conscious initiatives. They abstain from lending to any company or entity affiliated with the private prison industry and are making a focused effort to remove money already invested in prisons out and into other, more ethical investments. They strive to provide service to traditionally underserved members of the indigenous community, as well as other People of Color in the local community.
Created to bridge the racial wealth gap and bring financial empowerment to the black community at large, OneUnited Bank is the largest black-owned Community Development Financial Institution certified bank. They operate across the nation to help those who are traditionally underserved financial consumers and strive to help them create and retain wealth. They have unique programs like BankBlack, which allows customers to access their pay up to 48 hours ahead of their scheduled payday. They also organize and fund financial literacy programs aimed at helping the black community manage wealth.
Another New York-based B Corporation bank, Spring Bank makes affordable and fully-transparent financial products and banking services available to underserved sections of the population, as well as area small businesses. They leverage innovative and unique loans and depository instruments and make a concerted effort to provide the tools and knowledge that local residents need to get out of debt. They also make a point of helping to fund entrepreneurs with everything from multi-million dollar investments to microloans.
Sunrise is known for setting a high bar in the context of transparency and accountability. They are based in Minnesota and are B Corporation, Community Development Financial Institution, and Global Alliance For Banking On Values certified. Their goal is to help drive and fund social initiatives that help community members enjoy improved and empowered lives. They invest largely in fintech, community leaders, and partnerships with social enterprises, and their deep attachment and sense of service to their community and even guide them to provide 40 paid hours of volunteer time to their employees.
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Being Informed About How Banks Invest Their Money Can Help You Choose Ethically
With a nearly endless array of industries and companies that banks can invest their own funds in, it's becoming increasingly important for many people to make sure they're doing business with an ethical company. Publicly available data can help you research your own banks, as well as those you may potentially do business with, allowing you to examine what companies and industries they are actively invested in. Learning what banks invest in and taking that information in the context of what's important to you can help guide you to make much more ethical banking decisions in the future.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.