Banks get their money from six main sources: deposits from customers, interest paid by borrowers, returns on investment securities, service fees, short-term borrowing from other financial institutions, and equity capital raised from shareholders. Deposits are the biggest pool of funding for almost every bank, and interest on loans is the biggest source of profit. The industry’s average net interest margin — the gap between what banks earn on loans and what they pay on deposits — was 3.34 percent in the third quarter of 2025.1Federal Deposit Insurance Corporation. FDIC Quarterly Banking Profile Third Quarter 2025
Customer Deposits
The single largest source of money for a bank is the cash that customers put into checking accounts, savings accounts, and certificates of deposit. Checking gives you daily access. Savings pays a small amount of interest for keeping money on hand. CDs lock funds away for a set term, commonly six months to five years, in exchange for a higher rate.
Every dollar you deposit is recorded on the bank’s balance sheet as a liability, because the bank owes it back to you.2Federal Deposit Insurance Corporation (FDIC). Line Item Instructions for the Consolidated Report of Condition Schedule RC – Balance Sheet The Federal Deposit Insurance Corporation insures each depositor for up to $250,000 per insured bank, which is a large part of why customers are willing to hand cash to a bank in the first place.3Office of the Law Revision Counsel. 12 USC 1821 – Insurance Funds
Once the money is deposited, the bank puts most of it to work — lending it out and buying securities — while keeping enough cash on hand to cover daily withdrawals.
Interest on Loans
Lending is the core money-making activity of a bank. The model is simple: the bank pays a low rate to depositors and charges a higher rate to borrowers. The spread is profit.
Home mortgages, typically written as 15-, 20-, or 30-year loans, are the largest category of bank lending.4Consumer Financial Protection Bureau. Mortgages Key Terms Auto loans, personal loans, and small-business lines of credit fill out the rest of the portfolio with shorter payoff timelines. Each scheduled payment sends principal back to the bank (which can then be lent again) and interest (which is revenue).
Credit cards are a category of their own because the rates are much higher. Average credit card rates have climbed to record levels above 20 percent, and major card issuers collected over $105 billion in interest charges in 2022.5Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High Cardholders who carry a balance pay interest every month, so card portfolios generate outsized revenue relative to the dollar amounts involved.
Loans also produce revenue outside of interest. Late fees add income when payments are missed. Some mortgages carry prepayment penalties if the balance is paid off in the first few years, though those are less common than they used to be.6Consumer Financial Protection Bureau. What Is a Prepayment Penalty Origination fees charged upfront give the bank an immediate return before a single interest payment arrives.
Investment Securities
Money the bank has not lent out does not sit idle. Banks invest surplus funds in securities designed to generate returns while staying reasonably liquid.
U.S. Treasury bonds are a cornerstone holding because they are backed by the federal government and can be sold quickly if cash is needed. Municipal bonds — debt issued by state and local governments to fund schools, highways, and utilities — carry a tax advantage: interest on most municipal bonds is exempt from federal income tax, which can make them more profitable on an after-tax basis than higher-yielding alternatives.7Municipal Securities Rulemaking Board. Municipal Bond Basics8IRS. Introduction to Federal Taxation of Municipal Bonds
Mortgage-backed securities — bundles of home loans packaged into tradable investments — pay interest as the underlying borrowers make their monthly mortgage payments.9Investor.gov. Mortgage-Backed Securities and Collateralized Mortgage Obligations Corporate bonds add further diversification. The point is to keep every available dollar earning something while preserving the ability to sell if depositors need their money back.
Fees and Noninterest Income
Not all bank revenue depends on interest rates. Fees and service charges, together called noninterest income, have historically accounted for roughly 30 to 40 percent of total industry revenue. The common categories:
- Monthly maintenance fees on checking accounts, commonly $5 to $14 at major banks, often waived with a minimum balance or direct deposit.
- Overdraft fees when a transaction clears against insufficient funds. Many large banks have reduced or eliminated these, but they remain significant industrywide.
- Wire transfer fees, typically $25 to $30 for domestic outgoing wires and higher for international.
- ATM surcharges from out-of-network machines, averaging around $5 per transaction once both the ATM owner’s fee and your own bank’s fee are counted.
- Interchange fees paid by the merchant’s bank each time you swipe a debit or credit card. For debit cards from banks with more than $10 billion in assets, federal rules cap this at roughly $0.21 plus 0.05 percent of the transaction. Credit card interchange is uncapped and commonly runs 1.5 to 2 percent.10Federal Reserve Board. Regulation II – Debit Card Interchange Fees and Routing
Interchange is especially valuable because it comes in steadily no matter what interest rates are doing. Card transactions number in the billions each year, so small per-transaction amounts add up quickly, and the flow helps stabilize earnings when loan demand drops or deposit rates rise.
Borrowing From Other Financial Institutions
Deposits and earnings are not the only sources of funding. Banks borrow from each other and from the Federal Reserve when they need short-term liquidity, and they borrow from a specialized government-sponsored system to fund longer-term mortgage lending.
The Federal Funds Market
On any given day, some banks have more cash than they need and others are short. The federal funds market lets them lend to each other overnight at the federal funds rate, which is the rate the Federal Reserve targets through its monetary policy decisions.11Federal Reserve Board. The Fed – Economy at a Glance – Policy Rate These overnight loans smooth out daily cash swings without forcing banks to sell longer-term investments at a loss.
The Federal Reserve Discount Window
When no private lender is available, a bank can borrow directly from the Federal Reserve through the discount window. Federal law authorizes each Federal Reserve Bank to make advances to member banks on notes secured by collateral the Reserve Bank considers sufficient.12Office of the Law Revision Counsel. 12 USC 347b – Advances to Individual Member Banks on Time or Demand Notes The window acts as a safety valve when a bank faces an unexpected wave of withdrawals or a temporary cash shortfall.13Board of Governors of the Federal Reserve System. Discount Window Lending
Federal Home Loan Bank Advances
A third borrowing channel is the Federal Home Loan Bank system. Member institutions, including commercial banks, credit unions, and insurance companies, can take out secured loans called advances from their regional Federal Home Loan Bank.14FHFA. About FHLBank System Advances are backed primarily by residential mortgage loans and government securities and priced at a small spread over comparable Treasury rates.15Office of the Law Revision Counsel. 12 USC 1430 – Advances to Members For many banks, FHLB advances are a steady, low-cost way to fund mortgage lending.
Shareholder Equity Capital
Banks also raise permanent funding by selling ownership stakes to investors. Common stock and retained earnings — profits kept rather than paid out as dividends — form the core of a bank’s equity capital. Unlike deposits or borrowed money, equity never has to be repaid, which makes it the most stable form of funding a bank has.
Many banks issue preferred stock as well. It pays a fixed dividend, sits between common stock and debt in the capital structure, counts toward regulatory capital requirements, dilutes common shareholders less than a new stock issuance would, and is generally cheaper than other forms of capital.
Equity capital does two things at once. It funds loans and investments alongside deposits, and it acts as a cushion that absorbs losses before depositors or creditors are touched. Regulators watch closely how much equity a bank holds relative to its assets and require minimum ratios so a bank can withstand losses without failing.
How Lending Itself Creates New Deposits
One aspect of banking that surprises most people: banks do not simply lend out existing cash. When a bank approves a loan, it credits the borrower’s account with new funds, creating a new deposit in the process. The borrower spends the money, it lands in someone else’s account at another bank, and that bank now has a new deposit it can use as the basis for further lending. The banking system as a whole expands the money supply well beyond the original cash deposited.
Economists once described this expansion with a “money multiplier” formula tied to the reserve requirement ratio. The Federal Reserve set reserve requirement ratios to zero in March 2020, and they remain at zero for 2026.16Federal Register. Regulation D – Reserve Requirements of Depository Institutions Banks are no longer required to hold any specific percentage of deposits in reserve. Lending decisions are now shaped by profitability, risk, and capital requirements rather than a mechanical reserve formula.17Federal Reserve Bank of St. Louis. Teaching the Linkage Between Banks and the Fed – R.I.P. Money Multiplier The Fed influences bank behavior mainly through the interest rate it pays on reserve balances, which sets a floor for the rates banks will accept when lending to each other or to borrowers.