How the Commercial Banks Create Money

Topics: Bank, Cheque, Money Pages: 2 (571 words) Published: July 28, 2013
How the commercial banks create money.
Commercial banks are those that provide the general public with deposit and withdrawal accounts services, and with loans. The odds are you deal with a commercial bank on a regular basis. There are a variety of methods by which commercial banks make a profit, including fees, credit card interest, loans and optional add-ons. Firstly, commercial banks make a profit by fees. There are fees attached to most of the products that a commercial bank provides, and these fees add up to a large part of the average annual profit. Fees are charged for checking accounts, debt card use, and credit card swipes. There are penalty fees for overdrafts and for late payments on bank-issued credit cards, and there are maintenance fees for many types of savings and investment accounts. Multiply each fee by the number of patrons at each bank and you will quickly understand how much is made in this way. Prepaid credit cards are a particularly profitable venture for many commercial banks. They stand to earn threefold through monthly fees, use fees and payment fees. Secondly, commercial banks make a profit by loans. Commercial banks lend money to consumers in the form of car loans, mortgages and personal loans. The money distributed for these loans comes from the deposits of other bank customers, whose withdrawals may be restricted by a minimum balance, or by the term of their certificate of deposit accounts, for instance. Since the bank knows these funds will most likely remain where they are for a given period, a certain amount of the funds can be lent to others, who will then repay their loans with interest. The bank collects interest on the money of its depositors while never risking any actual money of its own. In this way, the finances of several bank customers are managed using the funds of perhaps one depositor. Thirstly, commercial banks make a profit by credit cards. The interest rate on most credit cards far outweighs that charged for any...
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