How do banks make money?
Banks are just like other businesses. Their product just
happens to be money. Other businesses sell widgets or services;
banks sell money -- in the form of loans, certificates of
deposit (CDs) and other financial products. They make money on
the interest they charge on loans because that interest is
higher than the interest they pay on depositors' accounts.
The interest rate a bank charges its borrowers depends on both
the number of people who want to borrow and the amount of money
the bank has available to lend. As we mentioned in the
previous
section, the amount available to lend also depends upon the
reserve requirement the Federal Reserve Board has set. At the
same time, it may also be affected by the funds rate, which is
the interest rate that banks charge each other for short-term
loans to meet their reserve requirements.
Loaning money is also inherently risky. A bank never really
knows if it'll get that money back. Therefore, the riskier the
loan the higher the interest rate the bank charges. While paying
interest may not seem to be a great financial move in some
respects, it really is a small price to pay for using someone
else's money. Imagine having to save all of the money you needed
in order to buy a house. We wouldn't be able to buy houses until
we retired!
Banks also charge fees for services like
checking,
ATM access and overdraft protection. Loans have
their own set of fees that go along with them. Another source of
income for banks is investments and securities.
If you
want to learn more about this thema you can find more info at:
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