Banks are financial institutions that provide a wide range of services to their customers. The primary function of banks is to accept deposits from customers, which are typically in the form of checking and savings accounts. Banks then use these funds to make loans to other customers, such as individuals and businesses.
When a bank makes a loan, it creates new money by crediting the borrower’s account with the loan amount. This new money enters the economy and can be used to purchase goods and services. This process is known as fractional reserve banking, because banks are only required to hold a fraction of their deposit liabilities in reserve, typically in the form of cash or assets that can be easily converted to cash.
The bank earns money by charging interest on loans, which is typically higher than the interest paid on deposits. Banks also earn money through fees for services such as wire transfers, account maintenance, and ATM usage. Banks also make money from investment activities such as trading securities and other assets.
Banks are heavily regulated by government agencies to ensure they operate safely and soundly and to protect the money of depositors. These regulations include measures such as minimum capital requirements, regular audits and examinations, and deposit insurance. Banks are also required to maintain a certain level of liquidity, which means they must have enough cash or assets that can be easily converted to cash to meet withdrawal demands from depositors.
In summary, banks work by accepting deposits from customers, using those funds to make loans to other customers and earning a profit from the interest spread between the two, and providing other financial services to customers and earning money from fees. Banks are also heavily regulated by government agencies to ensure they operate safely and soundly and to protect the money of depositors.