Question

Banks make a profit by

Answer 1

Banks profit from the difference between the interest rate paid to depositors and the interest rate banks receive from loan repayments. Once a depositor deposits money at the bank, the bank then turns around and lends the money to clients for mortgage, personal, auto or business loans. This process is how money is created into the financial system which expands the monetary base. If a bank offers 2% interest on deposits and charges an average of 6% on loans, it keeps the 4% difference as profit. However, banks do not lend out all the money they have or receive because it is dictated by a central bank on how much banks needed to keep as reserves. Central banks such as the Federal reserve publishes a reserve requirement.