Business
How does a bank work?
A bank works by taking in deposits and lending most of that money out at interest, making a profit on the gap. It keeps your money safe and accessible while channeling savings into loans for homes, businesses, and spending.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how a bank works.
Step by step
- 1It accepts deposits and pays a little interest on them.
- 2It lends most of that money out at higher interest.
- 3The difference between the two rates is its profit.
- 4It keeps only a fraction on hand, since not everyone withdraws at once.
- 5Central banks and insurance backstop the system for stability.
Frequently asked questions
- How does a bank make money?
- Mainly by paying low interest on deposits and charging higher interest on loans, pocketing the difference, plus various fees.
- Is my money just sitting in the bank?
- No — banks lend most deposits out, keeping only a fraction in reserve, since depositors rarely all withdraw at the same time.
- What happens if everyone withdraws at once?
- That's a 'bank run'; because banks hold only a fraction in cash, deposit insurance and central banks exist to prevent and contain them.