How Banks Work & Generate Revenue
Banks appear to simply hold your money safely , but underneath that humble exterior lies one of the most sophisticated money-multiplying machines ever created. Let me walk you through the full picture. 1. The Core Illusion: Fractional Reserve Banking When you deposit $10,000 into your bank account, your instinct says that money is sitting in a vault with your name on it. It is not. Banks operate on a principle called fractional reserve banking — they are only legally required to keep a fraction of deposits on hand (historically 10%, though many central banks have since moved to more flexible requirements). The rest? Lent out to borrowers. So your $10,000 deposit might look like this: $1,000 kept in reserve (10%) $9,000 lent to someone as a personal loan at 8% interest That borrower spends $9,000, which lands in another bank, which keeps $900 and lends out $8,100... and so the cycle continues. This is called the money multiplier effect — a single deposit can theoretical...