You can’t withdraw all your money from your bank account because it is constantly being invested and reinvested, but how come banks are never ‘down’ on these investments in the same way the average person is with their investments? Are they protected by government guarantee so they can just reap huge profits by investing constantly without risk?
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Banks borrow money from their depositors, and sometimes from other lenders. They typically prefer to borrow from depositors because depositors don’t ask for as much interest, while other lenders will only loan at the prevailing market rate.
Then they try to find borrowers that want to borrow money at the prevailing market rate. This could be individuals, businesses, etc.
Since they borrow at a low interest rate from depositors and lend out at the higher market rate, the difference is their revenue.
Then they also have other costs like IT costs, costs of maintaining physical branches, customer service, mailing and shipping costs, etc. After all, the only reason that depositors don’t ask for as much interest is because they’re receiving some sort of convenience from you. These are your costs. Sometimes your costs exceed your revenue and you lose money.
Then there’s also withdrawal risk. Sometimes depositors want to withdraw their money from you. This is a much bigger risk for smaller banks. For larger banks, on average, when someone makes a withdrawal, someone else also makes a deposit, so your total deposits don’t change very much. You have to either have enough cash on hand to deal with these withdrawals or be able to quickly borrow money to fund them. These days, borrowing is basically instant so it’s less important to have actual cash on hand.
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