What Does a Bank Actually Do?

Answer 1

You would be hard pressed to find anybody in the modern world who goes about their day-to-day life without using a bank. We all need banks in order to store our money in a place where we know it can’t easily be stolen or lost. Nevertheless, there are a great deal of people who don’t even realize exactly what it is that a bank does. How do they stay in business? Those overdraw fees can catch you by surprise, but they aren’t enough to pay the staff of the entire bank, right?

There was once a time when you actually had to pay a fee to use the bank. After a while, however, bankers realized that they could offer free checking by embarking in a new kind of business, loans. Many people don’t realize this, but a bank actually takes your money and lends it out to people. The total amount of money in all of the checking and savings accounts in the bank is a great deal more than the amount of money that the bank actually has on hand at any given time. If everybody were to run to the bank at the same time, and ask to withdraw there money, it wouldn’t be there. This is the reason for the FDIC. They are there to ensure that you will get your money if something were to happen to the bank.

The bank makes money be giving out loans to individuals, organizations, and businesses. When the loans are paid back, the bank charges interest on the principal of the loan. The higher the interest, and the longer the borrower takes to pay off the loan, the more money the bank makes in interest.

Banks can leverage their investments by going to a broker. The broker can, for example, give the bank ten times as much money as they currently have in exchange for a fee when it is paid back. The bank will then loan this money out, earn ten times more interest than they otherwise would, and pay the fee to the broker. In some cases, the banks may also sell financial packages off to investors, so that the investors can earn some of the interest off of the bank loans.