When you deposit £1,000, the bank does not lock your specific notes in a safe. Your deposit becomes a liability on the bank's balance sheet, a promise to pay you back on demand, and the cash itself becomes an asset the bank is free to lend, invest, or hold as reserves. You are, legally, an unsecured creditor of the bank.

Most of it gets lent out. Banks make money on the spread: they might pay you 2% on your deposit and lend it at 6% as a mortgage or business loan. To do this safely they only need to keep a fraction on hand. In the UK and EU there is no statutory reserve ratio, but banks must hold high-quality liquid assets to survive a run; in the US the Fed cut the reserve requirement to 0% in March 2020. The real constraint is capital (Basel III rules) and liquidity buffers, not a simple reserve fraction.

A small slice stays liquid. The bank keeps some as physical cash and some as central bank reserves, its own deposit account at the Bank of England or the Fed. Reserves are how banks settle with each other overnight, and the central bank pays interest on them, so parking money there is a real alternative to lending.

Your money is "safe" because of insurance, not a vault. If the bank fails, you are protected by a government scheme: FSCS covers up to £85,000 per person per institution in the UK; FDIC covers $250,000 in the US. This is why splitting large balances across separate banking licences matters, the limit is per institution, not per account.

The risk is a bank run. Because deposits are repayable instantly but loans are locked up for years, a bank is always maturity-mismatched. If too many depositors demand cash at once, even a solvent bank can collapse, as Silicon Valley Bank did in 48 hours in March 2023. Deposit insurance and central-bank lending exist precisely to stop that panic from starting.