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How does a bank work?
Quick answer
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. It accepts deposits and pays a little interest on them.
Step by step
- It accepts deposits and pays a little interest on them.
- It lends most of that money out at higher interest.
- The difference between the two rates is its profit.
- It keeps only a fraction on hand, since not everyone withdraws at once.
- Central banks and insurance backstop the system for stability.
People also ask
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.
Part of the guide: Money Basics: Save, Borrow & Invest →