How banks fund themselves · RiskAtoms Academy

By the end you will be able to

1Break a bank's funding into retail and corporate deposits, wholesale unsecured, secured and central bank funding, and measure each as a share of the balance sheet.
2Compare funding sources by stickiness and cost, and work out the average cost of funding and the price of making funding stickier.
3Explain why deposit insurance makes deposits stickier and how the liquidity rules use it.
4Describe what central bank facilities offer a bank, and why collateral is placed with the central bank in advance.

Why it matters

In 1998 retail deposits made up 60% of Northern Rock's liabilities. By June 2007, after nine years of rapid growth, they made up 23%; the rest came from wholesale lenders and from selling securitised mortgages (Shin, 2009). The mortgages were much the same kind of asset throughout. What changed was who could ask for their money back, and how fast. That is the question this lesson asks of RiskAtoms Bank.

Core explanation

Six sources, from sticky to flighty

Illustrative dataRiskAtoms Bank plc's liquidity book

A made-up UK bank's £67bn balance sheet on one made-up reporting date, in pounds, seen through its cash flows: every line's contractual maturity in ten buckets from overnight to over five years, its undrawn commitments and collateral triggers, and a 90-day stress test. The figures are round illustrative values, not any bank's data. The same book runs through every lesson in Module 3.5, so the figures agree.

The interest rates in this lesson are an extra on top of the book: illustrative annual rates against a policy rate of 4.00%, chosen to show the usual ordering, not taken from any market.

L1.8.02: A bank’s balance sheet split a bank's funding into deposits, wholesale funding and equity. A treasurer splits it finer, because each source behaves differently when trouble comes. RiskAtoms Bank's funding mix:

Retail deposits£38.0bn (56.7%)
Corporate deposits£10.5bn (15.7%)
Wholesale unsecured£9.0bn (13.4%)
Secured funding£4.0bn (6.0%)
Central bank£1.0bn (1.5%)
Capital (Tier 2 and equity)£4.5bn (6.7%)
Total funding£67.0bn (100.0%)

Retail deposits (56.7%): current accounts, instant-access savings and fixed-term savings. Many small balances, most of them insured: the core of the franchise.
Corporate deposits (15.7%). A company that runs its payroll and payments through the bank holds operational deposits, which it cannot move overnight. Its spare cash is another matter: large, uninsured, and watched by a treasurer.
Wholesale unsecured (13.4%): deposits from other banks, CP and CDs sold to money market funds, and senior bonds sold to investors for several years.
Secured (6.0%): repo against gilts, and covered bonds backed by a pool of mortgages. Lenders rely on the collateral, so they lend more cheaply, but the collateral is tied up.
Central bank (1.5%): £1.0bn of term funding from the Bank of England, falling due in one to two years.
Capital (6.7%): Tier 2 subordinated debt and equity. It never runs, but it is the most expensive money the bank has.

Customer deposits pay for 72.4% of the book. Across all US banks insured by the FDIC, deposits funded 78% of assets at the end of June 2026 (FDIC Quarterly Banking Profile), so RiskAtoms Bank is a deposit-funded bank of an ordinary kind.

Stickiness against cost

Two things matter about each source: how much it costs, and how sticky it is. The chart puts each one at its rate (across) and at the share the NSFR does not count as stable funding over a year (up), a regulator's view of how flighty it is. The bubble's size is the amount.

Bottom left is the treasurer's favourite: current accounts, cheap and sticky. Top right is the danger zone: short-term wholesale money, priced near the policy rate and gone in a stress. Everything else is a trade. Senior bonds and covered bonds are sticky because they are locked in for years, and that is what the bank pays for. Instant-access savings sit in between: cheap to hold, but rate-sensitive, and some balances are above the insurance limit. Customer deposits cost 1.85% on average; market funding 4.44%.

Sort itSticky or flighty in a stress?

A pensioner's current account of £8,000, into which her pension is paid.
£400m placed overnight by a money market fund through a CD that matures next week.
A payroll company's balances, used every day to pay 30,000 employees.
A tech company's £150m of spare cash in an instant-access account.
A five-year senior bond the bank issued two years ago.
Overnight repo against BBB corporate bonds.

Why deposit insurance matters

A run is a race: the depositors who leave first get paid in full; the last may not. Deposit insurance takes away the prize for most savers. In the UK the FSCS protects £120,000 per depositor per bank from 1 December 2025, up from £85,000; the US FDIC insures $250,000 per depositor, per ownership category, per bank; EU schemes cover €100,000.

The liquidity rules build on this. A retail deposit counts as stable only if it is fully insured and either transactional (a salary goes into it) or held by a customer with other established relationships with the bank. Stable deposits are assumed to run off 5% in a 30-day stress (3% under stronger insurance schemes); other retail deposits at least 10%. RiskAtoms Bank's £22.0bn of insured current accounts are its stable deposits; its £10.0bn of instant-access savings, rate-sensitive and partly above the limit, are treated as less stable. Silicon Valley Bank shows the other extreme: about 94% of its deposits were uninsured at the end of 2022 (Federal Reserve review).

The central bank's window

Central banks lend to banks against collateral, routinely and in stress. The Bank of England's Sterling Monetary Framework is a menu; click each tool.

ExploreBank of England lending tools (Sterling Monetary Framework)

Click a tool to see what it offers.

Short-Term Repo

Weekly, against the highest-quality collateral (Level A, mainly gilts). Supplies reserves.

Only collateral the Bank has already checked can be used quickly, which is why it urges banks to pre-position loan pools in advance. RiskAtoms Bank has placed £6.0bn of mortgages with the Bank; at a 30% haircut they would support £4.2bn of borrowing. The book does not count this in its buffer; L3.5.06: The liquidity buffer explains why.

The formal version

Shares, weighted averages and switches

All of this is percentages (M-A01: Percentages). With funding lines $F_i$ paying rates $r_i$ :

\begin{aligned} w_i &= \frac{F_i}{\sum_j F_j} && \text{share of line } i \text{ in the funding mix} \\ \bar r &= \frac{\sum_i F_i\, r_i}{\sum_i F_i} = \sum_i w_i\, r_i && \text{average cost of funding (equity left out)} \\ \text{LDR} &= \frac{\text{customer loans}}{\text{customer deposits}} = \frac{\text{£}45.5\text{bn}}{\text{£}48.5\text{bn}} = 93.8\% \end{aligned}

Replace $x$ of line $a$ with $x$ of line $b$ . Everything that depends linearly on the amounts moves by $x$ times the difference per pound:

\begin{aligned} \Delta(\text{interest}) &= x\,(r_b - r_a) \\ \Delta(\text{run-off}) &= x\left(\frac{R_b}{F_b} - \frac{R_a}{F_a}\right), \qquad \Delta(\text{stable funding}) = x\left(\frac{S_b}{F_b} - \frac{S_a}{F_a}\right) \\ \text{price of stickiness} &= \frac{\Delta(\text{interest})}{-\Delta(\text{run-off})} \end{aligned}

where $R_i$ is the line's 30-day stressed run-off and $S_i$ its stable funding. Watch the units: a rate difference of 0.90% is 0.90 percentage points, or 90 basis points, not 0.90% of the old rate.

Try it

Swap one funding source for another. Replacing short wholesale money with term funding costs interest and buys stickiness; replacing deposits with wholesale money does the opposite. Look for the switches that buy a lot of stickiness for little cost, and ask why the bank does not just do more of them.

Try itReshape the funding mix

Replace some of…

…with new…

Amount switched£1.0bn

Interest cost, per year+£9.0m

30-day stressed run-off−£350m

Stable funding (NSFR factors)+£825m

Rates: old line → new line4.20% → 5.10%

Average cost of funding2.464% → 2.478%

Run-off in total£8,160m → £7,810m

Stable funding in total£52.39bn → £53.22bn

Loan-to-deposit ratio93.8% → 93.8%

Deposits' share of funding72.4% → 72.4%

Illustrative rates (an extra on top of the book). The money taken out comes evenly from the old line's maturities; the new money has the new line's maturity profile. Run-off uses the book's LCR rates on what can leave within 30 days; stable funding uses its NSFR factors (both are built in L3.5.07).

Worked example

The treasurer's quarterly funding review

Mix, cost, stickiness, and one decision

Step 1 of 6

1

Shares of the mix

Source	£bn	Share	Avg rate
Retail deposits	38.0	56.7%	1.73%
Corporate deposits	10.5	15.7%	2.31%
Wholesale unsecured	9.0	13.4%	4.55%
Secured funding	4.0	6.0%	4.29%
Central bank	1.0	1.5%	4.00%
Capital (Tier 2 and equity)	4.5	6.7%	–
Total	67.0	100.0%	2.46%

Reading the review

Stable funding on the book is £52.39bn against the £67.0bn balance sheet. The NSFR compares it with what the assets need; L3.5.07: LCR and NSFR in practice does that line by line.

Regulatory lens

The Basel Committee's 2008 Principles for Sound Liquidity Risk Management and Supervision ask for a funding strategy with effective diversification in the sources and tenor of funding (Principle 7). The LCR's run-off rates (Basel Framework, LCR40) turn stickiness into numbers: 3% or 5% for stable retail deposits, at least 10% for less stable ones, 25% for operational deposits, 40% for other deposits from companies, and 100% for unsecured wholesale funding from financial institutions. The NSFR scores the same sources over a year. Both are calculated in full in M4.5: Liquidity and IRRBB regulation; concentration in a few providers is in L3.5.08: Funding concentration, and pricing funding inside the bank in L3.5.11: Pricing liquidity.

Spark Atoms

Spark Atom£120,000, and a moving target

The PRA raised the FSCS deposit limit from £85,000, set in 2017, to £120,000 from 1 December 2025. It had proposed £110,000 in March 2025 and went higher after consultation and the latest inflation data. Balances from life events such as a house sale are covered up to £1.4 million for a time.

Spark AtomFour years, then six, then ten

Most drawings under the Bank of England's TFSME, opened in 2020, had a four-year term. Lenders could then extend part of it to six years, and in 2024 the Bank allowed a further extension from six to ten years, capped at the government-backed Bounce Back Loans on their books. Central bank funding is normally short; this was the exception.

Key takeaways

RiskAtoms Bank funds 56.7% of its balance sheet with retail deposits, 15.7% with corporate deposits, 13.4% wholesale unsecured, 6.0% secured and 1.5% from the central bank.
Each source trades cost against stickiness: insured current accounts are cheap and sticky, short wholesale money is priced near the policy rate and leaves first.
The average cost of funding is a weighted average, Σ wᵢ rᵢ: 2.46% on the book.
Terming out £1bn of CP into senior bonds costs £9m a year and removes £350m of 30-day stressed run-off.
Deposit insurance makes deposits sticky by removing the reason to run; the LCR's stable deposits must be fully insured.
Central banks lend against collateral, routinely and in stress; collateral pre-positioned in advance is what makes that lending fast.

Reaction

Check what stuck

Question 1 · objective 1

RiskAtoms Bank has £38.0bn of retail deposits out of £67.0bn of funding. What share of its funding is that, in %?

%

Question 2 · objective 1

Customer loans are £45.5bn and customer deposits £48.5bn. What is the loan-to-deposit ratio, in %?

%

Question 3 · objective 2

A bank funds itself with £30bn of deposits at 1% and £10bn of bonds at 5%. What is its average cost of funding, in %?

%

Question 4 · objective 2

The bank replaces £1.0bn of CP and CDs at 4.20% with senior bonds at 5.10%. How much more interest does it pay a year, in £m?

£m

Question 5 · objective 3

Why do supervisors expect insured current accounts to be stickier than large uninsured corporate deposits?

AInsured depositors get their money back even if the bank fails, so they have little reason to run; uninsured ones lose if they are last outBCurrent accounts pay higher interest, so customers keep themCCompanies are not allowed to move deposits during a stressDInsured deposits cannot be withdrawn without notice

Glossary

Funding mix: Funding mix: the shares of a bank's balance sheet paid for by each source of funding.
Operational deposit: Operational deposit: a company's balance held for payments, clearing, custody or cash management, which it cannot move quickly without disrupting its business.
Wholesale funding: Wholesale funding: money raised in bulk from professional lenders (banks, money market funds, asset managers, companies' treasuries), unsecured or against collateral.
Commercial paper and certificates of deposit: Commercial paper (CP) and certificates of deposit (CDs): short-term unsecured debt securities, typically from overnight to a year, sold to money market investors.
Senior unsecured bond: Senior unsecured bond: a bank's ordinary long-term debt, ranking above subordinated debt and equity, with no collateral.
Repo: Repo: a sale of securities with an agreement to buy them back, which works as a loan secured on the securities.
Covered bond: Covered bond: a bond secured on a ring-fenced pool of the bank's loans (usually mortgages), with a claim on the bank as well.
Stickiness: Stickiness: how likely a source of funding is to stay when the bank or the market is under stress.
Deposit insurance: Deposit insurance: a scheme that repays depositors up to a limit if their bank fails, such as the FSCS in the UK and the FDIC in the US.
Stable deposit: Stable deposit (LCR): the part of a retail deposit fully covered by effective deposit insurance and held in a transactional account or by a customer with other established relationships with the bank.
Loan-to-deposit ratio: Loan-to-deposit ratio: customer loans divided by customer deposits.
Pre-positioned collateral: Pre-positioned collateral: assets, often loan pools, placed with the central bank in advance so that it has valued them and set a haircut before the bank needs to borrow.
Basis point: Basis point: one hundredth of a percentage point, 0.01%.

Deep Dives & Origins

Deep Dives

Bank of England, Bank of England Market Operations Guide: Our tools, bankofengland.co.uk. Intermediate.
H. S. Shin, “Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis”, Journal of Economic Perspectives, 23(1), 2009, pp. 101–119. Intermediate.

Origins

Basel Committee on Banking Supervision, Basel Framework, LCR40 Cash inflows and outflows (paragraph 40.7 and the run-off rates), and LCR99 Application guidance, BIS.
Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision, BIS, 2008, Principle 7.
Prudential Regulation Authority, “PRA confirms FSCS deposit limit to be increased to £120,000 from 1 December”, Bank of England, 18 November 2025.
Federal Deposit Insurance Corporation, “Understanding Deposit Insurance”, fdic.gov.
Directive 2014/49/EU on deposit guarantee schemes, Article 6(1), as published on legislation.gov.uk.
FDIC Quarterly Banking Profile, total deposits and total assets of FDIC-insured institutions, Q2 2026, via FRED (Federal Reserve Bank of St. Louis), series QBPBSTLKDP and QBPBSTAS.
Bank of England, Market Operations Guide: Our tools; and TFSME market notices, 11 March 2020, 17 December 2020 and 17 May 2024.
Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023.
H. S. Shin, “Reflections on Northern Rock”, Journal of Economic Perspectives, 23(1), 2009, pp. 101–119.

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