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** How Banks Work **

by Lee Ann Obringer

· Page
· 3

Why does banking work?

· 4

Types of Banks

· 5

How do banks make money?

· 6

How do you start your own bank?


** How do banks make money? **

­ Banks are just like other businesses. Their product just happens to be
money. Other businesses sell widgets or services; banks sell money -- in
the form of loans, certificates of deposit (CDs) and other financial
products. They make money on the interest they charge on loans because that
interest is higher than the interest they pay on depositors' accounts.

The *interest rate* a bank charges its borrowers depends on both the number
of people who want to borrow and the amount of money the bank has available
to lend. As we mentioned in the previous section, the amount available to
lend also depends upon the reserve requirement the Federal Reserve Board
has set. At the same time, it may also be affected by the funds rate, which
is the interest rate that banks charge each other for short-term loans to
meet their reserve requirements. Check out How the Fed


how do banks make money

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