I've searched lot but I couldn't find an exact answer.

For example: a person who has 100 usd in his account. He opens a euro account and converts the usd to 90 euro at the bank's exchange rate....

Now does bank really credit 90 euros to his bank account, or is it just a number that the bank promises him he can use whenever he wants?

  • 1
    "Now does bank really credit 90 euros to his bank account, or is it just a number that the bank promises him he can use whenever he wants?" What is the difference?
    – glglgl
    May 7, 2020 at 5:45
  • @glglgl there's a big difference in the implications of either option to the banks risk profile/management which could have potential effects on its customers. In one case the bank prudently executes transactions to reflect and offset its FX risk, in the other, it just lets the risk ride until the day the customer shows up. Not a big deal if you're thinking of one customer with 90 euros, but a very big deal when you aggregate all bank customers with a few thousand each on average.
    – WittyID
    May 7, 2020 at 20:11
  • @WittyID it's up to each individual bank to choose their risk profile/management regarding currency risk within the appropriate legal limits set by regulators, if any. If the bank wishes to balance each trade, that's a valid choice, and if a bank wishes to be long one currency and short other, intentionally taking a speculative currency position (which involves some risk) that's also a valid choice that they have the right to take. They also can change that currency risk policy on a whim without any obligation to inform customers.
    – Peteris
    May 7, 2020 at 23:46
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    @WittyID however, the main point there is that "does bank really credit 90 euros to his bank account, or is it just a number that the bank promises him he can use whenever he wants" has absolutely no relation whatsoever to the issue of currency risk. "credit 90 euros to the bank account" is defined as "bank promises him he can use 90 euros whenever he wants", and the bank does not need to allocate any euro-denominated assets for that. They need to have reserves, but these can be in a different currency; they need some euro cash for withdrawals, but not for all the account balances.
    – Peteris
    May 7, 2020 at 23:55
  • @Peteris you are confusing the activities of retail/commercial banking and a currency trading desk within a bank. It is perfectly ok for the bank to warehouse speculative currency risk within a risk taking arm of the bank which retail/commercial banking absolutely doesn't fall under. As far as the deposit holding part of the bank is concerned, a credit is most definitely made and that risk is passed on to some other function that can lay it off in external markets, hold it to offset other internal positions or hold it for speculative purposes...outside the retail bank.
    – WittyID
    May 8, 2020 at 0:17

3 Answers 3


What is a bank account?

A bank account is legally speaking a "chose in action". A debt. The bank is a legal person who owes you money. When you withdraw the money you are simply asking the bank to pay you bank. Depending on what you have agreed, the debt could be in US dollars or Euro. While they might say you have a thousand dollars in your bank account, that is a representation of how much they owe you. They might have given some of that money to a customer who wanted to buy a car. After they get the car payment from the other customer, they in turn would pay you (or rather, add to your account) the interest they owe you on your bank account. The bank doesn't have to keep that money in actual notes in their safe, they can lend it to other people and use it for various investment activities.

Foreign Currency

Contrary to popular belief, foreign currencies are not traded on an exchange somewhere. Rather they are traded "over the counter" which is finance terminology to say it is just done between people who want to trade, whoever they are. As a result, the bank can pick the rates it wants to buy and sell at. If the rates are too far away from the market, most people would not want to trade with them so no trade will occur. As a result, most foreign exchange firms or banks check to see what the prevailing rates are, and based on how much they want to buy or sell, they set their rates close to the prevailing ones. One prevailing rate is the Bloomberg rate - the one that comes up if you punch in the currency pair on a Bloomberg terminal. They get that rate by polling a group of banks and seeing what their rate is. I know an (institutional) bank that told me that their rate is always better than the Bloomberg rate - so there is a lot of room for variability. Most firms also add on what is called a spread - a difference between the buy and sell price, for example, they might by at 1% below the prevailing rate and sell 1% above the prevailing rate. That gives them some flexibility to accommodate rate changes throughout the day and usually make a profit.

Is the Euro actually there?

In the same way the dollars are not actually there, neither is the euro. The bank will certainly make an entry in its ledger for the currency conversion, but unless the bank felt that they had too many dollars and not enough euro to cover their euro balances and were exposed to too much foreign exchange risks (i.e. they wanted to hedge), they probably would not try to buy euro to cover that debt.


The bank has a foreign exchange desk that aggregates all transactions like the one you described and executes trades to offset their obligations to their customer. Using your example, the foreign exchange desk would receive instructions to exchange that 100 USD to EUR which would then be the balance in your account. In reality, there might be millions to convert from multiple customers. Sometimes these offset each other, eliminating the need for any external trade.

Of course, they might exchange it at 0.92 EUR/USD and show you a rate of 0.90 EUR/USD, keeping 0.02 EUR/USD for themselves. This profit is either left as is or converted to some other currency that fits the bank's purpose e.g. converting it to the currency it reports its earnings in.

A similar set of transactions happens when you use your ATM card in a country with a different currency from the account's currency.


If the customer has an account denominated in Euros, then on the bank's balance sheet, that account credit will be in Euros.

The bank's retail exchange rate will determine how many Euros are credited to the customer's account when the customer converts dollars to Euros.

The bank's own Euro accounts are not directly affected by the conversion. If a bank offers accounts denominated in Euros then it will have a certain amount of Euros as a reserve. The amount of this reserve depends on the reserve requirements for the bank and their own policies and other factors.

When the bank needs to buy or sell Euros, it does so through other banks with whom it maintains a "correspondent" relationship. The exchange rate for these transactions is different than the retail exchange rate.

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