Deposits grew. The insured kind shrank

I checked twice.

In March 2023 I sat with my phone and looked up whether my own bank was on anybody's list of the shaky ones. You may have done the same thing that weekend. A search, a look at the balance, a small piece of arithmetic about the $250,000 line.

Then Monday came and the feeling went away.

The money came back to the banks after that. Deposits at American banks have now risen for eight quarters in a row. Earnings are up, charge-offs are down, and the number of banks on the regulator's watch list sits inside its normal range. That is the version of the story you read.

But the money came back as a different kind of money.

In the second quarter, domestic deposits at U.S. banks rose $142.7 billion. Every dollar of that increase, and a good deal more, came from balances the government does not guarantee. Uninsured deposits rose $317.4 billion. Insured deposits fell about 1%.

The FDIC put that in its own quarterly report in August. Uninsured balances drove the increase. Nobody framed it as news.

All of the quarter's deposit growth came from money the government does not stand behind.

Here is what uninsured means in practice. Anything above $250,000 per depositor, per bank, per ownership category. A payroll account at a 60-person engineering firm. The escrow at a title company. A church building fund. A hospital's operating cash. The proceeds of a house sale, sitting for three weeks.

That money behaves differently from a savings account. It has a treasurer attached to it. It reads the news. It moves by wire in an afternoon, and it moves first.

So the deposit base got a little bigger and a lot less patient. That is the whole story of the quarter, and it sits under a headline about record profits.

I have no idea when a funding mix starts to matter. Usually it doesn't. It sits there for years and nobody prices it… and then it matters on a Thursday afternoon.

What worries me is not the deposits. It's what the banks bought with them.

A deposit is a promise a bank makes. The other side of that promise is whatever the bank bought with the cash.

A lot of what they bought was long bonds, purchased in 2020 and 2021, when a ten-year Treasury paid under 1.5%. Rates went up. Those bonds are worth less than the banks paid for them.

At the end of June the gap was $326.7 billion across the industry. Two-thirds of that sits in the pile labelled held-to-maturity: $216.9 billion, or 10.5% of what those securities cost. The available-for-sale pile carries the other $109.8 billion, about 2.9% of cost.

The held-to-maturity label is an accounting choice, not a fact about the bonds. Choose it, and the loss never touches your reported capital. Sell one bond, and the loss becomes yours to report.

So it works perfectly, right up until a bank needs cash in a hurry.

Meanwhile the cushion got a little thinner. The industry's tier 1 ratio fell 17 basis points in the quarter to 13.75%, and the leverage ratio fell 17 points to 8.98%, because assets grew faster than capital did. Banks also paid out $78.4 billion in dividends, roughly 87% of what they earned.

And here's where it spreads. The system has been tested five times in 2026, and it passed five times, because every test was tiny.

Metropolitan Capital Bank & Trust in Chicago closed on January 30. Community Bank and Trust in LaGrange, Georgia followed on May 1, at a cost to the insurance fund of about $97 million. Kentland Federal Savings and Loan in Indiana went on July 10. Small Business Bank of Lenexa, Kansas went a week later with $73 million of assets.

The fifth was Tioga-Franklin Savings Bank in Philadelphia, closed on August 21. One branch, founded in 1873, $68 million of assets and $67 million of deposits. Another Philadelphia thrift took the whole book over the weekend and opened the doors on Monday. The insurance fund expects to lose $5.5 million on it.

Two banks failed in 2024. Two failed in 2025. The last year with five was 2023, and you remember that one for different reasons.

A one-branch thrift is easy. A buyer turns up on Friday, takes every account, and no depositor loses a dollar or a weekend. The resolution machinery works beautifully at $68 million. It has never been asked to work at speed on a bank funded mostly by wire.

Meanwhile, follow the households. When savers take cash out of a bank account these days, most of it goes to the same place.

Money market funds held $7.98 trillion in the week ending September 2, according to the Investment Company Institute. Retail investors own $3.11 trillion of that, and their share has grown steadily all year.

These funds are sensible things. They mostly own Treasury bills and overnight repo, they pay more than a savings account, and they can be liquidated in a day.

But they carry no government guarantee. A money fund is a promise about a portfolio, not a promise about your money.

So the guaranteed pool is shrinking from both ends. Corporate treasurers pile balances above the limit because they need the operating account. Households step out of the limit entirely, for a percentage point of yield.

Three more things worth keeping track of this week.

American banks are lending against stock again. Loans made to buy or carry securities, which is mostly margin lending, grew $131.3 billion over the past year, a rise of 29.7%. Ordinary home mortgages on bank books grew 1.1% over the same twelve months. When the fastest-growing loan book in the country is collateralised by share prices, the credit cycle and the market cycle stop being separate things.

Chinese households are doing a version of what American ones are doing. Household deposits grew 1.95 trillion yuan in June, below the monthly average of the previous two years, while deposits held at non-bank institutions rose 4.65 trillion yuan across the first half. Deposit rates below 1% have pushed savers into wealth-management products and funds. Chinese analysts call it deposit migration, and it moves money from a bank's liability to a manager's portfolio without changing anyone's belief that it is still cash.

Copper keeps telling two stories at once. China imported 1.41 million tonnes of refined copper in the first half, down 14.3% on last year, which reads like weak demand. But the Yangshan premium, the extra amount a Chinese buyer pays to get metal physically delivered, reached a 14-month high near $100 a tonne in July and has more than doubled this year. Buying less and paying up for what you do buy is the behaviour of somebody who is short, not somebody who is finished. We'll see.

One bank fought it.

Continental Illinois National Bank joined the federal deposit insurance system in 1937, and it joined under protest. Its executives told the FDIC that a compulsory insurance scheme was unconstitutional. They paid the premiums anyway, on coverage they said they did not need.

By 1984 Continental was the seventh-largest bank in the country. Only 15% of its deposits were insured. The rest was corporate money, foreign money, other banks' money, and it arrived by wire from people who read the wires.

Then the energy loans went bad and the rumours started.

The run began around May 7. Over the next ten days the bank lost about 30% of its funding. There was no queue on the pavement and no photograph of one. It happened by telex, from Tokyo and London and from the treasury desks of two thousand smaller American banks that kept their spare cash at Continental.

Sixteen large banks announced on May 15 that they stood behind it. The money kept leaving.

So on May 17 the FDIC, the Federal Reserve and the Comptroller of the Currency did something nobody had done since 1933. They announced that every depositor and every creditor of Continental Illinois would be paid in full. Above the limit and below it. Bondholders too.

The insurance the bank never wanted turned out, in the end, to be unlimited.

In July the FDIC put $4.5 billion into the bank and took 80% of it. It remains the largest bank rescue in American history. A congressman listening to the testimony afterwards described what he had heard as a policy for banks that were too big to fail, and the phrase stuck to the language.

Here is the part I keep turning over. The guarantee that saved Continental was not the one it had been paying for. That one covered 15% of the deposits and would not have stopped anything. The guarantee that worked was written in a hurry, over one weekend, by three people who had not planned to write it.

Every large depositor since has understood the lesson, and it is not the official one. The rule says $250,000. The precedent says: it depends who you bank with, and how bad the week is.

Deposit insurance is a promise about small money and a decision about large money.

We'll see.