Ever Wondered How Do Banks Make Money?

WORLD BANK

Banks create "money" by creating credit. If I put $100 in the bank, and the bank then loans out $20 of it to someone else, there is now magically $120 floating around.

This works because the bank doesn't need to find 120 dollar bills and give 100 to me and 20 to the person that gets the loan.

Instead the bank just credits each of our ATM accounts with the money we "have," which is basically an IOU from the bank.  n

You can imagine that a lot of money is created when all the banks in the country do this at scale.

Obviously things would get really bad if everyone who uses the bank wanted to withdraw all their cash at once.

This is called a "bank run" and the result is that not everyone gets all their money because there simply isn't enough cash to cover all the IOU's the bank has created.

So there are rules about how much a bank is allowed to create money.

For example, if the bank gets $100 from me, there is a fraction they are required to keep "in reserve" and not loan out.

In the US and many other countries there is also something called "deposit insurance,"

which protects a certain amount of money in your bank account from this type of situation.

Banks, Like JP Morgan and Goldman Sachs, are developing their blockchain technology to compete.