Banks get their money primarily from customer deposits, and that is the short answer to where do banks get their money. Checking balances, savings accounts, and certificates of deposit make up the largest and cheapest pool of funding for most U.S. banks. On top of that base, banks earn interest on the loans and securities they hold, sell loans into the secondary market, collect fees from account holders and merchants, borrow from the Federal Reserve and other wholesale lenders, and hold a cushion of shareholder capital and retained profits. The spread between what banks earn on their assets and what they pay on their funding sat at 3.39% at the end of 2025, the widest since 2019.1FDIC.gov. FDIC Quarterly Banking Profile Fourth Quarter 2025
Customer Deposits Are the Main Source
When you put money in a checking or savings account, the bank doesn’t lock it in a vault. It records the balance as a liability, pays you a modest rate (or nothing at all), and lends out most of what you deposited. Because only a small share of customers withdraw cash on any given day, a bank can safely put the bulk of its deposit pool to work. This is the fractional reserve model, and it is the engine of commercial banking.
The Federal Reserve used to require banks to keep a minimum percentage of deposits in reserve. That requirement was reduced to zero in March 2020 and remains at zero for 2026.2eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D) Banks still keep reserves on hand to meet daily withdrawals, but the legal floor is gone.
Not every deposit comes from a walk-in customer. Banks also pick up brokered deposits, which are large sums gathered by third-party brokers and placed at institutions willing to pay competitive rates. They’re useful when a bank wants to grow its deposit base quickly, but regulators view them as less sticky than ordinary retail money. A bank that slips below “well capitalized” status faces limits on accepting brokered deposits and on the rates it can offer to attract them.3FDIC.gov. Brokered Deposits
Holding deposits does carry a cost. Every insured bank pays an assessment to the FDIC to maintain the fund that protects depositors up to $250,000 per ownership category. Rates run from about 2.5 to 42 basis points a year depending on the bank’s size and risk profile.4FDIC.gov. FDIC Assessment Rates A bank paying 5 basis points on $1 billion in deposits owes roughly $500,000 a year just for insurance.
Interest on Loans and Investments
Deposits sit on the liability side of the ledger. The money the bank actually makes comes from the asset side: loans and securities. Mortgages, often running 15 or 30 years, are usually the largest interest-earning asset on a commercial bank’s balance sheet. Auto loans and personal lines of credit pay higher rates to compensate for shorter terms and more risk. Credit cards sit at the top, with rates that climb much higher for borrowers with weaker credit.
Cash a bank hasn’t lent out gets invested. U.S. Treasury bonds, agency mortgage-backed securities, and municipal bonds all generate steady interest with lower credit risk than consumer loans. These portfolios also work as a liquidity buffer. If loan demand slows or depositors pull back, the securities keep paying, and the bank can sell them to raise cash.
The gap between what a bank earns on these assets and what it pays on its deposits and other funding, measured against earning assets, is the net interest margin. Industry-wide, that margin was 3.39% at the end of 2025.1FDIC.gov. FDIC Quarterly Banking Profile Fourth Quarter 2025 Margins move with prevailing rates: when the Fed raises rates, banks can charge more on new loans quickly, but they also eventually have to pay more to keep deposits from leaving.
Selling and Securitizing Loans
Banks don’t always keep the loans they make. Selling a loan on the secondary market turns a 30-year repayment stream into immediate cash, which the bank can lend out again. Residential mortgages move this way routinely. The originating bank often keeps servicing the loan—collecting your monthly payment and passing it along to the new owner—even after the note itself has been sold.
Securitization is the next step up. A bank bundles thousands of similar loans into a single pool and issues securities backed by the cash flows coming off that pool.5U.S. Securities and Exchange Commission. Asset-Backed Securities (ABS) Issuances Investors buy the securities, the bank books the proceeds, and the default risk shifts partly or entirely to the buyers. For lenders without a deep deposit base, this sell-and-recycle approach is essential. Without it, they’d run out of lendable cash after a few rounds.
Fees and Service Charges
Fee income gives banks revenue that doesn’t depend on the gap between deposit and loan rates. Checking accounts commonly carry monthly maintenance fees of $5 to $15, often waivable if you keep a minimum balance or set up direct deposit. Small per account, large across millions.
Overdraft fees were traditionally one of the most profitable items on the list, running around $35 per transaction. Competitive pressure and regulatory attention have reshaped that market.6FDIC.gov. Overdraft and Account Fees Several major banks have cut their overdraft fees to $10 or $15, and some have dropped them entirely. Industry-wide overdraft and nonsufficient-funds revenue in 2023 was more than 50% below pre-pandemic levels, saving consumers roughly $6 billion a year, though they still paid over $5.8 billion in these fees that year.7Consumer Financial Protection Bureau. Overdraft/NSF Revenue in 2023 Down More Than 50% Versus Pre-Pandemic Levels
Every debit card swipe generates a small interchange fee paid by the merchant’s bank to the cardholder’s bank. For issuers with more than $10 billion in assets, federal rules cap the fee at 21 cents plus 0.05% of the transaction, with an extra penny available for banks meeting certain fraud-prevention standards.8Federal Reserve Board. Regulation II (Debit Card Interchange Fees and Routing) Credit card interchange is not capped federally and runs considerably higher, which is one reason credit card programs are such profitable products.
Wire transfer charges, out-of-network ATM surcharges, and various account-related fees fill out the picture. Domestic wires generally cost $15 to $35 to send, and international transfers run higher. Larger banks also collect wealth management, trust, and advisory fees based on assets under management, a revenue stream that scales up with institution size.
Borrowing from the Fed, Other Banks, and the FHLB System
When deposits don’t cover a bank’s cash needs, it borrows wholesale. The Federal Reserve’s discount window lets banks borrow directly from their regional Reserve Bank against pledged collateral, serving mainly as a backstop during periods of stress.9Federal Reserve. Discount Window Lending
On ordinary days, banks lend to each other. In the federal funds market, an institution with excess cash overnight lends to one that’s short. The rate on these overnight loans, the federal funds rate, is the benchmark the Federal Open Market Committee targets when it sets monetary policy.10Federal Reserve Board. Policy Tools – Open Market Operations
Repurchase agreements offer another short-term channel. In a repo, a bank sells securities (usually Treasuries) to a counterparty and agrees to buy them back the next day or soon after at a slightly higher price. The price difference is effectively interest. Repos stay cheap because the securities themselves serve as high-quality collateral.
For community and mid-size banks especially, the Federal Home Loan Bank system is the workhorse of wholesale funding. The 11 regional FHLBs lend to member institutions against mortgage loans and government securities. Advances tend to be cheaper than other borrowing options and move inversely with deposits: when deposits leave, FHLB advances fill the hole; when deposits recover, the advances get paid down. During the deposit outflows of 2022 and 2023, large banks replaced lost deposits almost entirely with FHLB borrowing rather than tapping capital markets.11Federal Reserve Bank of Kansas City. Bank Funding and FHLB Advances
Shareholder Capital and Retained Earnings
Every bank needs a permanent base of funding that nobody can demand back. That’s equity. When a bank forms or needs new capital, it issues stock. Investors buy shares, the bank gets cash, and the money sits on the balance sheet as equity rather than debt. No maturity date, no withdrawal risk.
Banks also build capital internally by keeping profits. After operating expenses, loan losses, taxes, and any dividends paid out, whatever’s left stays on the books as retained earnings. Growing capital this way is usually the cheapest route because it doesn’t require issuing new shares or paying interest.
Larger banks sometimes issue subordinated debt, long-term borrowing that ranks below depositors and general creditors if the bank fails. These instruments must have an original maturity of at least five years, can’t be secured by collateral, and are not FDIC-insured.12Office of the Comptroller of the Currency. Licensing Manual – Subordinated Debt Because subordinated debt absorbs losses before any taxpayer money would, regulators let qualifying instruments count toward a bank’s regulatory capital.
How Much Capital Banks Must Hold
Banks don’t get to decide for themselves how thin a cushion to run on. Every institution must meet minimum capital ratios, and the biggest banks face the strictest standards. The baseline common equity tier 1 ratio is 4.5% of risk-weighted assets, with an additional stress capital buffer of at least 2.5% on top, and a further surcharge for globally significant institutions.13Federal Reserve Board. Federal Reserve Board Announces Final Individual Capital Requirements for Large Banks
In practice, most large banks hold capital well above those floors. The average common equity tier 1 ratio for major U.S. banks sits around 13%, roughly triple the baseline. Falling below the required ratios automatically triggers restrictions on dividends and executive bonuses, which is why banks keep a comfortable margin.14Federal Register. Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement Annual stress tests, which model severe recessions, directly shape how much headroom a bank has to return money to shareholders through dividends and buybacks.