Where do banks get their money? From six interconnected sources: deposits customers place into accounts, interest paid by borrowers, returns on investment securities, service fees, short-term borrowing from other financial institutions and the Federal Reserve, and equity capital raised from shareholders. Deposits are the largest single funding source for most banks, and interest on loans is the largest revenue driver. The industry’s average net interest margin was 3.34 percent in the third quarter of 2025.1Federal Deposit Insurance Corporation. FDIC Quarterly Banking Profile Third Quarter 2025
Customer Deposits
The largest pool of funding for any bank is money that customers put into accounts. Checking accounts give you immediate access to your funds. Savings accounts pay a small amount of interest in exchange for keeping money on hand. Certificates of deposit 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 as a liability on the bank’s balance sheet, because the bank owes that money back to you.2Federal Deposit Insurance Corporation (FDIC). Line Item Instructions for the Consolidated Report of Condition Schedule RC – Balance Sheet
The federal government insures those deposits through the Federal Deposit Insurance Corporation. Each depositor is covered for up to $250,000 per insured bank.3Office of the Law Revision Counsel. 12 USC 1821 – Insurance Funds That insurance is a big part of why people trust banks with their money in the first place, because it prevents the kind of panic-driven mass withdrawals that can destabilize a bank.
Once deposited, your money does not sit in a vault. The bank puts most of it to work by lending it out and buying securities, while keeping enough cash on hand to cover daily withdrawals and transfers.
Interest Earned on Loans
Lending is the core money-making activity for most banks. The model is simple: a bank pays depositors a relatively low interest rate on their savings and charges borrowers a higher rate on loans. The gap between what the bank earns on loans and what it pays on deposits is called the net interest margin, and it represents the bank’s primary source of profit.
Banks offer a wide range of loan products, each generating interest income over different time horizons. Home mortgages, typically structured as 15-, 20-, or 30-year loans, represent the largest category of bank lending.4Consumer Financial Protection Bureau. Mortgages Key Terms Auto loans, personal loans, and small business lines of credit round out the lending portfolio with shorter repayment timelines. As borrowers make their scheduled payments, the bank receives both principal, which replenishes its lending pool, and interest, which is revenue.
Credit cards deserve special mention because they carry significantly higher interest rates than other loan products. Average credit card rates have climbed to record levels above 20 percent.5Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High Because cardholders who carry a balance pay interest every month, credit card portfolios generate outsized revenue relative to the dollar amounts involved. Major credit card issuers collected over $105 billion in interest charges in 2022 alone.
Banks also earn ancillary revenue from the lending process itself. Late payment fees add to income when borrowers miss due dates. Some mortgage lenders charge prepayment penalties if you pay off the full balance within the first few years of the loan, though these are less common than they once were.6Consumer Financial Protection Bureau. What Is a Prepayment Penalty Loan origination fees, charged upfront when a loan is issued, provide an immediate revenue boost before a single interest payment arrives.
How Lending Creates New Deposits
One counterintuitive feature of banking is that 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 that money, it lands in another person’s or business’s bank account, and that second 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 formula called the money multiplier, tied to the reserve requirement ratio. The Federal Reserve set reserve requirement ratios to zero in March 2020, and they remain at zero for 2026.7Federal 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 shaped instead by profitability, risk assessments, and capital requirements.8Federal Reserve Bank of St. Louis. Teaching the Linkage Between Banks and the Fed – R.I.P. Money Multiplier
Investment Income and Securities
Money a bank has not lent out to consumers or businesses does not sit idle. Banks invest surplus funds in a portfolio of securities designed to generate returns while staying relatively liquid and low-risk.
U.S. Treasury bonds are a cornerstone of most bank investment portfolios because they are backed by the federal government and can be sold quickly if the bank needs cash. Municipal bonds, which are debt issued by state and local governments to fund infrastructure like schools, highways, and utilities, offer an additional advantage: interest earned on most municipal bonds is exempt from federal income tax.9Municipal Securities Rulemaking Board. Municipal Bond Basics10IRS. Introduction to Federal Taxation of Municipal Bonds That tax benefit can make municipal bonds more profitable on an after-tax basis than higher-yielding alternatives.
Mortgage-backed securities are another significant holding. These are bundles of home loans packaged into tradable investments that pay interest as borrowers make their monthly mortgage payments.11Investor.gov. Mortgage-Backed Securities and Collateralized Mortgage Obligations Banks may also hold corporate bonds to diversify. The goal is to keep every available dollar earning some return while maintaining the ability to sell investments quickly if depositors need their money back.
Service Fees and Noninterest Income
Not all bank revenue depends on interest rates. Fees and service charges, collectively called noninterest income, make up a substantial share of what banks earn. At the industry level, noninterest income has historically accounted for roughly 30 to 40 percent of total bank revenue.
Common fee categories include the following.
- Monthly maintenance fees on checking accounts, though most banks will waive them if you maintain a minimum balance or set up direct deposit. Fees at major banks commonly run around $5 to $14 per month.
- Overdraft fees, charged when a transaction goes through despite insufficient funds. Many large banks have voluntarily reduced or eliminated these, but they remain a significant industrywide source of revenue.
- Wire transfer fees, typically $25 to $30 for outgoing domestic wires, with international wires running higher.
- ATM surcharges when you use an out-of-network machine, often from both the ATM owner and your own bank, averaging around $5 per transaction combined.
- Interchange fees, paid by the merchant’s bank to your bank every time you swipe a debit or credit card. For debit cards issued by banks with more than $10 billion in assets, federal rules cap this fee at roughly $0.21 plus 0.05 percent of the transaction value. Credit card interchange is not subject to the same cap and commonly runs 1.5 to 2 percent of the purchase price.12Federal Reserve Board. Regulation II – Debit Card Interchange Fees and Routing
Because card transactions number in the billions each year, even small per-transaction fees add up to enormous revenue. Interchange income also flows in steadily regardless of what interest rates are doing in the broader economy, which helps stabilize earnings when loan demand drops or deposit rates rise.
Borrowing From Other Financial Institutions
Banks do not rely solely on deposits and earnings to fund their operations. They also borrow money from other banks and from the Federal Reserve when they need short-term liquidity.
The Federal Funds Market
On any given day, some banks have more cash on hand than they need while others are running short. The federal funds market lets them lend to each other overnight at a rate known as the federal funds rate, the interest rate the Federal Reserve targets through its monetary policy decisions.13Federal Reserve Board. The Fed – Economy at a Glance – Policy Rate These overnight loans help banks smooth out daily fluctuations in cash positions without selling off longer-term investments at a loss.
The Federal Reserve Discount Window
When a bank cannot find a willing lender in the private market, it can borrow directly from the Federal Reserve through a facility known as the discount window. Federal law authorizes each Federal Reserve Bank to make advances to member banks on notes secured by collateral the Reserve Bank deems sufficient.14Office of the Law Revision Counsel. 12 USC 347b – Advances to Individual Member Banks on Time or Demand Notes The discount window ensures that banks facing unexpected withdrawal spikes or temporary cash shortfalls can meet their obligations without disrupting service to customers.15Board 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, which include commercial banks, credit unions, and insurance companies, can take out secured loans, called advances, from their regional Federal Home Loan Bank.16FHFA. About FHLBank System These advances are primarily backed by residential mortgage loans and government securities and are priced at a small spread over comparable Treasury rates.17Office of the Law Revision Counsel. 12 USC 1430 – Advances to Members Federal Home Loan Bank advances give banks a reliable, cost-effective source of funding for both short-term liquidity needs and longer-term mortgage lending.
Equity Capital From Shareholders
Beyond deposits and borrowing, banks raise permanent funding by selling ownership stakes to investors. Common stock, the shares you can buy on an exchange, and retained earnings, which are profits the bank keeps rather than paying out as dividends, form the core of a bank’s equity capital. Unlike deposits or borrowed funds, equity capital never has to be repaid, making it the most stable form of funding a bank holds.
Many banks also issue preferred stock, which pays a fixed dividend and sits between common stock and debt in the bank’s capital structure. Preferred stock counts toward regulatory capital requirements, avoids diluting common shareholders as much as issuing new common shares would, and is generally cheaper than other forms of capital.
Equity capital serves two purposes at once. It provides funds the bank can deploy into loans and investments, and it acts as a financial cushion that absorbs losses before depositors or creditors are affected. Federal regulators set minimum capital levels, measured chiefly through the Tier 1 leverage ratio, that every bank must maintain to keep operating and to be considered well capitalized.18Federal Register. Regulatory Capital Rule – Modifications to the Enhanced Supplementary Leverage Ratio Standards