Commercial banks take deposits from people like you, lend that money to businesses and individuals, and keep the difference between what they pay depositors and what they charge borrowers

A commercial bank is a for-profit business that handles money. You give them your paycheck, they store it in a checking or savings account. They then lend most of that money to someone else — a small business buying equipment, a homebuyer, a car buyer — and charge them interest. The bank pays you a tiny amount of interest on your deposit (often close to zero), charges the borrower much more, and keeps the gap as profit. That gap is how they pay their staff, rent their building, and make money for their owners.

This is different from a credit union, which is owned by its members and returns profits to them, or an investment bank, which mostly buys and sells securities rather than taking deposits. A commercial bank's main job is moving money from people who have it to people who need to borrow it.

Key Takeaways

  • Commercial banks profit by paying depositors low interest rates and charging borrowers higher rates on loans.
  • Banks use your deposits to fund loans to businesses and individuals, which is why they ask for your money in the first place.
  • The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account type at each bank, protecting your money if the bank fails.
  • Banks make additional money through fees on checking accounts, overdrafts, wire transfers, and other services.
  • Commercial banks are regulated by federal and state authorities to may support they do not take on too much risk with depositors' money.

How banks use your deposits

When you deposit money into a checking or savings account, the bank does not lock it in a vault with your name on it. Instead, they add the amount to a pool of deposits they can lend out. If you deposit $1,000, that $1,000 becomes part of the bank's lending capital. The bank keeps a small percentage in reserve — required by federal law — and lends the rest.

This is why banks want your deposits: they are the raw material for their lending business. A bank with no deposits cannot make loans. A bank with many deposits can make many loans and earn more interest income. This also explains why banks offer you a checking account at all — they are not doing it as a favor. They are paying for access to your money.

You can withdraw your money whenever you want (with some limits on savings accounts), and the bank counts on the fact that not everyone withdraws at once. This is called liquidity risk — the risk that too many people will ask for their money back at the same time. Banks manage this by keeping some deposits in reserve and by borrowing from other banks or the Federal Reserve if they need cash quickly.

The interest rate spread

The difference between what a bank pays you and what it charges borrowers is called the spread. Right now, a typical savings account might pay 0.01% to 4.5% annual interest, depending on the bank and the account type. A mortgage might charge 6% to 8%. A credit card might charge 18% to 25%. The bank keeps most of that difference.

The spread is not pure profit — the bank has to pay employees, maintain buildings and technology, cover loan losses when borrowers do not repay, and satisfy regulators. But the spread is the core of how commercial banks make money. The wider the spread, the more profitable the bank.

Interest rates change based on what the Federal Reserve does. When the Fed raises its benchmark rate, banks can charge borrowers more but often do not raise what they pay depositors by as much, so the spread widens. When the Fed lowers rates, the opposite happens. This is one reason banks lobby heavily on monetary policy — small changes in rates affect their profits significantly.

Fees and other income

Banks also make money from fees. A monthly maintenance fee on a checking account, an overdraft fee when you spend more than you have, a wire transfer fee, an ATM fee if you use another bank's machine, a fee to close an account early — these add up. For a bank with millions of customers, even small fees generate large revenue.

Some banks also offer investment services, wealth management, and insurance products, which generate additional fees. A commercial bank might charge you to manage your investments or take a percentage of assets under management. These services are often optional, but they are another income stream.

During periods when interest rates are very low, banks rely more heavily on fees because the spread narrows. During periods when rates are high, the spread widens and fee income becomes less critical to profitability.

How the FDIC protects your deposits

The Federal Deposit Insurance Corporation (FDIC) is a federal agency that insures deposits at member banks. If a bank fails, the FDIC pays depositors up to $250,000 per account type at each bank. This means if you have $100,000 in a checking account and $100,000 in a savings account at the same bank, both are covered because they are different account types.

The FDIC does not insure investment accounts, brokerage accounts, or money market funds — only deposits. If you keep more than $250,000 at one bank, the amount over $250,000 is not protected. Some people spread large deposits across multiple banks to stay within the insurance limit at each one.

The FDIC has not had to pay out on a failed bank since 2008, but the insurance exists because bank failures do happen. The FDIC is funded by premiums that banks pay, not by taxpayer money, though the government backs the system.

Regulation and risk management

Commercial banks are regulated by multiple federal and state agencies. The Office of the Comptroller of the Currency (OCC) regulates national banks. The Federal Reserve regulates bank holding companies and state-chartered banks that are members of the Federal Reserve System. State banking departments regulate state-chartered banks that are not Fed members. The FDIC also supervises banks it insures.

These regulators set rules about how much capital a bank must hold in reserve, what kinds of loans it can make, how much risk it can take on, and how it must report its finances. The goal is to prevent banks from taking on so much risk that they fail and harm depositors.

Banks are required to undergo regular audits and stress tests — simulations of what would happen to the bank if the economy crashed, interest rates spiked, or borrowers stopped repaying loans. If a bank fails a stress test, regulators can force it to raise more capital or restrict its lending.

The difference between commercial banks and other financial institutions

A credit union works similarly to a commercial bank but is owned by its members rather than shareholders. Credit unions typically offer lower fees and better interest rates on deposits, but they may have fewer branches and services. You must be a member to use a credit union, usually by working for a certain employer or living in a certain area.

An investment bank does not take deposits from the public. Instead, it helps large companies and governments raise money by issuing stocks and bonds, and it trades securities. Investment banks also advise on mergers and acquisitions. They make money from fees and trading profits, not from the interest spread on deposits.

A savings bank or thrift is similar to a commercial bank but historically focused more on mortgages and savings accounts than on business lending. The distinction has blurred over time, and many thrifts now operate like commercial banks.

Why commercial banks matter to the economy

Commercial banks are the main channel through which money flows from savers to borrowers. Without them, a small business could not get a loan to expand, a family could not get a mortgage, and a student could not borrow for education. Banks make these loans possible by aggregating deposits from many people and lending to many borrowers.

This is also why bank failures are dangerous. If a large bank fails, it can disrupt the entire financial system. Businesses cannot get loans, people cannot access their deposits, and the economy can contract. This is why regulators watch banks so closely and why the government stepped in during the 2008 financial crisis.

Frequently Asked Questions

Do banks really lend out all my money?

No, not all of it. Banks are required to keep a percentage of deposits in reserve and cannot lend it out. The exact percentage varies, but it is typically 10% or less. The rest can be lent. You can still withdraw your money whenever you want because most people do not withdraw everything at once, and the bank can borrow quickly if needed.

Why do banks pay almost no interest on savings accounts?

Because they do not have to. Banks compete for deposits, but they also know that most people keep savings accounts for safety and convenience, not for interest income. When interest rates are very low (set by the Federal Reserve), banks have little incentive to pay more. When rates are high, some banks offer higher savings rates to attract deposits.

What happens if a bank fails?

The FDIC takes over the bank and pays depositors up to $250,000 per account type. The bank's assets are sold, usually to another bank. Depositors with less than $250,000 lose nothing. Depositors with more than $250,000 lose the amount over the limit. Shareholders and creditors may lose money.

Can a commercial bank refuse to give me my money?

In normal circumstances, no. You can withdraw money from a checking account anytime. Savings accounts may have limits on how many withdrawals you can make per month without penalty. If the bank suspects fraud or illegal activity, it can freeze your account temporarily while it investigates, but this is rare.

How do banks decide who gets a loan?

Banks use credit scores, income, employment history, debt-to-income ratio, and collateral (like a house or car) to assess whether a borrower is likely to repay. They also consider the purpose of the loan and current economic conditions. Different banks have different standards, so you might be turned down by one bank and approved by another.