Banks take your money and lend/invest it. For example, all the people coming to them for auto/mortgages/small business loans. The bank charges 5% interest on an auto loan, pays you 1% interest on your savings, and keeps the remainder. Longer-term investments often pay higher interest for the bank, which is why less liquid accounts (CDs, money markets) pay more interest than savings. This is why a “run” was such a danger in the old days. The banks literally didn’t have the money to cover all the deposits because it had loaned or invested it in other people’s cars/buildings/businesses.
The biggest thing to understand about banks is that they do not have your money in any literal sense.
They agree that they owe you money, and you effectively ask them to pay for things on your behalf.
What they actually do with the money you put aside with them is invest it.
Whether that’s through loans, or through stock-market investments.
Basically they put your money to work, and pocket whatever gains are made through that, which is how the bank makes massive amounts of money.
If you ask for your money back, they generally have enough cash set aside and available to simply do so.
If everyone at the bank demanded their money at the same time, the bank would simply not be able to do it.
They would need to cash out all their investments, call in their loans, and generally dismantle the money-making portfolio they’ve built, and that takes time and isn’t a realistic prospect if there’s something disastrous happening very fast that’s making everyone want their money in cash.
The bank’s “best” customers are the ones that borrow money and/or incur late fees/overdraft fees, etc.
The well off upper middle class people who don’t need an auto loan and never have overdrafts aren’t really desirable to banks, with the exception of those that keep a large amount of cash in the bank that they can lend out.
Interest is a HUGE part of it… take in deposits, make loans with that money. The spread between the interest they pay out on savings accounts, CD’s is well below what they charge to borrow for car loans, mortgages, credit cards. 3-5% spread on tens of billions (Bank of America is almost $2 TRILLION in deposits) is a lot of money.
Banks borrow your money and pay you a fee to do it. That’s called interest. The amount they pay is considered fair because they are safe and can be trusted with your money, unlike a random stranger who wants to borrow money from you.
The way banks make money is by lending the money they borrowed to other people. They are better able to see how risky it is to loan to those random strangers and have better systems and connections to collect payments and write off bad loans when people don’t repay them. In exchange for this service, they charge a higher interest than they will pay the people who deposit money with them.
If you add up the expenses of making those loans and the interest they pay on your deposits, and subtract it from the interest they collect on their loans, then they will be profitable.
Banks have multiple lines of business and sources of income. Lending, asset management, brokering, payment services, legal services, vault services, credit cards, and so on. While lending and interest income is often a substantial source of income, banks often try to grow their other lines of business because they do not have the same kinds of capital requirements as lending.
For lending, a bank takes in money. Depending on the market and what the cheapest options are, sources can be e.g. payments, deposits, bonds, and central bank debt.
Then, the bank issues out loans. Because people seldom actually want to withdraw thrir money out of the bank, the bank doesn’t lend out the money it has only once but it lends it out multiple times. Based on statistics and mathematical formulae, the bank then keeps track of a number known as expected credit losses. This tells the bank how many times it can lend out the money they have without running out of money themselves.
In a way, the bank is like a turbocharger in a car engine. It boosts the efficiency of economic activity by enabling the reusing of the same money again and again. But like turbos, they can break the car if they are squeezed for too much power.
Most other lines of business are usually priced like any other service, either for a fixed price or commission-based.
Most people here are describing retail banking . Which is managing individuals deposits and using that money to sell loans to individuals
Commerical banks specialize in serving business. Which besides handling holding their cash offer variety of services like open lines of credit to make payment, Treasury (business term for handing the day to day money needs) services to help business manage their money. Helping with fraud etc .
Investment banks are very different as they don’t deal with deposits. They tend to do stuff like help with mergers, they underwrite(create) debt for corps. Help in selling stocks . And they deal with the day to day operation of the stock market.
A friendly reminder that Santa Clause is more real than the bank. You can’t draw a bank or describe what it looks like. The bank is just symbols on paper we all agree we are beholden to.
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Banks take your money and lend/invest it. For example, all the people coming to them for auto/mortgages/small business loans. The bank charges 5% interest on an auto loan, pays you 1% interest on your savings, and keeps the remainder. Longer-term investments often pay higher interest for the bank, which is why less liquid accounts (CDs, money markets) pay more interest than savings. This is why a “run” was such a danger in the old days. The banks literally didn’t have the money to cover all the deposits because it had loaned or invested it in other people’s cars/buildings/businesses.
The biggest thing to understand about banks is that they do not have your money in any literal sense.
They agree that they owe you money, and you effectively ask them to pay for things on your behalf.
What they actually do with the money you put aside with them is invest it.
Whether that’s through loans, or through stock-market investments.
Basically they put your money to work, and pocket whatever gains are made through that, which is how the bank makes massive amounts of money.
If you ask for your money back, they generally have enough cash set aside and available to simply do so.
If everyone at the bank demanded their money at the same time, the bank would simply not be able to do it.
They would need to cash out all their investments, call in their loans, and generally dismantle the money-making portfolio they’ve built, and that takes time and isn’t a realistic prospect if there’s something disastrous happening very fast that’s making everyone want their money in cash.
The bank’s “best” customers are the ones that borrow money and/or incur late fees/overdraft fees, etc.
The well off upper middle class people who don’t need an auto loan and never have overdrafts aren’t really desirable to banks, with the exception of those that keep a large amount of cash in the bank that they can lend out.
Interest is a HUGE part of it… take in deposits, make loans with that money. The spread between the interest they pay out on savings accounts, CD’s is well below what they charge to borrow for car loans, mortgages, credit cards. 3-5% spread on tens of billions (Bank of America is almost $2 TRILLION in deposits) is a lot of money.
Banks make money by lending out your deposits, charging fees, and investing in various financial products.
Monkey work hard to get leaves; Leaf valuable. Leaf must put in safe place.
So monkey put leaves in bank.
Bank Monkey say “Thank you, Monkey. We keep leaves safe”. Monkey happy.
Monkey think leaves just sit in box now. But nope.
Bank take Monkey’s leaves and give them to Monkey B– Monkey B say want banana house.
Bank say, “Here, borrow these leaves”. Monkey B say, “Thanks, I pay back later with extra leaf.”
That extra leaf equals interest.
Monkey A saved leaves. Monkey B borrowed leaves. Bank Monkey in middle make extra leaf.
Monkey A say, “Where my leaves at?” Bank Monkey say, “Don’t worry. You still have them.”
Monkey brain confused. But Monkey okay as long as leaves come back, bank don’t go poof.
Banks borrow your money and pay you a fee to do it. That’s called interest. The amount they pay is considered fair because they are safe and can be trusted with your money, unlike a random stranger who wants to borrow money from you.
The way banks make money is by lending the money they borrowed to other people. They are better able to see how risky it is to loan to those random strangers and have better systems and connections to collect payments and write off bad loans when people don’t repay them. In exchange for this service, they charge a higher interest than they will pay the people who deposit money with them.
If you add up the expenses of making those loans and the interest they pay on your deposits, and subtract it from the interest they collect on their loans, then they will be profitable.
Banks lend out your money, invest it, and charge fees to make a profit.
Banks have multiple lines of business and sources of income. Lending, asset management, brokering, payment services, legal services, vault services, credit cards, and so on. While lending and interest income is often a substantial source of income, banks often try to grow their other lines of business because they do not have the same kinds of capital requirements as lending.
For lending, a bank takes in money. Depending on the market and what the cheapest options are, sources can be e.g. payments, deposits, bonds, and central bank debt.
Then, the bank issues out loans. Because people seldom actually want to withdraw thrir money out of the bank, the bank doesn’t lend out the money it has only once but it lends it out multiple times. Based on statistics and mathematical formulae, the bank then keeps track of a number known as expected credit losses. This tells the bank how many times it can lend out the money they have without running out of money themselves.
In a way, the bank is like a turbocharger in a car engine. It boosts the efficiency of economic activity by enabling the reusing of the same money again and again. But like turbos, they can break the car if they are squeezed for too much power.
Most other lines of business are usually priced like any other service, either for a fixed price or commission-based.
Imagine i am a bank.
I have $50.
My friend A asks me to keep his money safe. I get $100 from him.
I have now $150.
My Friend B has no money and asks me to lend him $100. I lend him $50 of my money and $50 of the money of my friend A.
Friend B then has to repay me $125 at the end of the week.
I now have $175. $75 are mine and $100 belong to friend A.
Banks take deposits, and pay interest on them.
Banks take money from those deposits and make loans with them, and they charge interest on those loans.
If the total interest the bank earns from the loans is more than the total interest they have to pay on the deposits, the bank makes a profit.
Look up “net interest margin” for a basic bank operation
Most people here are describing retail banking . Which is managing individuals deposits and using that money to sell loans to individuals
Commerical banks specialize in serving business. Which besides handling holding their cash offer variety of services like open lines of credit to make payment, Treasury (business term for handing the day to day money needs) services to help business manage their money. Helping with fraud etc .
Investment banks are very different as they don’t deal with deposits. They tend to do stuff like help with mergers, they underwrite(create) debt for corps. Help in selling stocks . And they deal with the day to day operation of the stock market.
Most banks to a mix of these.
A friendly reminder that Santa Clause is more real than the bank. You can’t draw a bank or describe what it looks like. The bank is just symbols on paper we all agree we are beholden to.
A lot of people have already answered the question, but this practice is called “fractional reserve banking” in case you want to look further into it.