So you go to your local bank to open a new account with, let’s say, a year’s worth of savings. You get very good conditions and the interest is quite high. That’s obviously very good for you. After all, you want to make as much money as you can without doing too much. But then, your spider senses start tingling. How come they borrow my money and then give me even more? After all, banks are not non-profit, charitable institutions, they want to have profits. Maybe they invest my money, then earn more, and give me my share? But not every investment is always profitable. Maybe they are stealing some of my money? Relax. Nothing like that happens. Just sit tight and read on to learn how do banks make money.
It’s all about loans. Loans are the primary, though not the only, source of bank’s income. When giving a loan of X dollars, they get it back plus installments and that is where their money flow comes from. That is why since decades banks have been lobbying making loan regulations as lenient as possible and no wonder. If loans generate their income, then obviously they would like to give as many loans as they can. But you see, they are restricted by law in this matter. In the past, bankers were extremely afraid of a bank run. That is why they kept all the money they were given by customers available in vaults. But then they understood, that bank runs happen extremely rarely and that, normally, people keep their savings in their vaults for a very long time. Therefore, they used a part of that cash to give more loans. As we have already established, the more loans, the more cash flows into bankers pockets.
That is an accurate, though not complete, answer to the question “how do banks make money.” Obviously, they also invest. Whether it’s a housing market or a stock market, bank’s cash reserves are never exceeding the required minimum (which is imposed on them). Through these investments they can not only earn more money, but also influence, for example by mergers.
An average Joe would need no one less than a Miami accountant to make any sense of the jungle of laws and regulations, as well as to fish out the best banking offer available on the market. But at least now you know how do banks make money.