Banks are commonly thought of as deposit-taking institutions that lend money. The legal reality is different: banks do not take deposits, and banks do not lend money.
What is a “deposit”? It is not actually a deposit. It is not a bailment, and it is not held in custody. At law, the word “deposit” is essentially meaningless in this context. Court judgments have made this very clear: when you give money to a bank—even though it is called a deposit—that money is simply a loan to the bank. There is no true deposit. The name is just a label. In substance, the banks are borrowing from the public.
What about lending? Surely they are lending money? No. Banks do not lend money. Again, the law is clear: they are in the business of purchasing securities. That is all.
You might say, “Don’t confuse me with legalese—I just want a loan.” Fine. Here is the loan contract and the offer letter. You sign. At law, what has happened is clear: you have issued a security—namely a promissory note—and the bank has purchased it.
In plain terms, what the bank is actually doing is very different from what it presents to the public.
