Eli5: do governments have bank accounts?
In: 3
Local and State Governments have bank accounts just like any business. The bank has to be designated a Qualified Public Depository (QPD). There are people within the bank that specialize in government banking. There are laws and regulations the bank has to follow to protect “public funds”.
All money on deposit in a bank for a govt entity is collateralized. This means that for every dollar in a govt account the bank has to put up a dollar at the federal reserve. This is to protect the government funds in the case of a bank failure. Similar to FDIC coverage, but the bank has to put up the money. This is the reason why government entities typically bank at larger banks. Smaller banks may not be able to afford to collateralize $100 million in deposits.
As for the US federal government. The federal reserve is the bank. Specific agencies within the federal government may open accounts at other banks for specific reasons, but most is done with the federal reserve.
Source: used to work in government banking in a major bank.
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