How do banks earn a profit?

Question

Accepted Answer

Banks earn profit primarily through interest on loans, fees, and investment activities.

Interest on Loans: Banks lend money at higher interest rates than they pay on deposits. For example, if a bank pays 2% on savings accounts but charges 5% on personal loans, the difference (3%) is profit.
Fees and Charges: Banks charge fees for various services, such as account maintenance, ATM usage, and overdrafts. For instance, a monthly maintenance fee of $10 on checking accounts adds to their revenue.
Investment Income: Banks invest in securities and earn returns. For example, if a bank invests in government bonds, the interest earned contributes to its profits.
Interbank Lending: Banks can lend to each other at interest rates, earning profit from the difference in rates.

Accepted Answer

Banks earn profits primarily through the difference between the interest rates they charge on loans and the interest they pay on deposits, as well as by charging fees for various services. They also generate income from trading activities, wealth management, and investments.