A bank is a business that holds your money, lends it out, and charges fees for both

A bank is a licensed financial institution that takes deposits from customers, keeps that money in accounts, lends it to other customers or businesses, and makes profit from the difference between what it pays you in interest and what it charges borrowers. When you put money in a checking or savings account, the bank doesn't lock it in a vault with your name on it—it uses your deposit to fund loans, mortgages, and other lending products. You get access to your money on demand (or on a schedule, depending on the account type), and the bank gets to use it in the meantime.

Banks are regulated by federal and state authorities—primarily the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—which means they must follow rules about how much money they keep on hand, how they treat customers, and how they report their activities. This regulation exists because banks handle other people's money and can fail if they make bad lending decisions or run out of cash. The FDIC insurance that covers your deposits up to $250,000 per account type per bank is part of that safety net.

Key Takeaways

  • A bank makes money by paying you low interest on savings while charging borrowers higher interest on loans, and by collecting monthly fees for accounts and services.
  • Your deposits are not sitting in a physical vault; banks lend that money out and are required by law to keep only a fraction of deposits on hand at any time.
  • The FDIC insures deposits up to $250,000 per account type per bank, so your money is protected if the bank fails.
  • Banks are regulated by federal agencies that set rules about lending, customer treatment, and how much capital banks must hold in reserve.
  • Different types of banks—commercial banks, credit unions, online banks, and investment banks—operate under different rules and offer different products.

How a bank makes money from your account

A bank's primary income comes from the spread—the gap between the interest rate it pays depositors and the rate it charges borrowers. If a bank pays you 0.01% annual interest on a savings account and lends money to a mortgage customer at 6.5%, that difference is profit. Banks also charge monthly maintenance fees, overdraft fees, wire transfer fees, ATM fees, and fees for stopping payment on a check. Some banks charge for paper statements, for falling below a minimum balance, or for using another bank's ATM.

The interest rate a bank pays on savings accounts and money market accounts is set by the bank itself and varies widely. As of 2024, some online banks offer savings rates above 4% annually, while traditional brick-and-mortar banks often pay 0.01% to 0.05%. The rate depends on the bank's funding needs, competition in your area, and the Federal Reserve's benchmark interest rate—when the Fed raises rates, banks have more room to raise what they pay depositors, but many choose not to immediately.

What happens to your money after you deposit it

When you deposit $5,000 into a checking account, that money enters the bank's general pool of funds. The bank is not required to keep all of it on hand. Instead, it must maintain a reserve requirement—a percentage of deposits that stays available. As of 2020, the Federal Reserve eliminated the reserve requirement for most banks, but banks still keep cash on hand to meet customer withdrawals and regulatory expectations. The rest of your deposit is lent out as mortgages, auto loans, business loans, credit card balances, and other products.

You retain the right to withdraw your money on demand (for checking accounts) or on a schedule (for savings accounts and CDs). The bank's obligation to pay you back is separate from whether it has physically lent out your specific dollars. If many customers withdraw at once—a "bank run"—and the bank doesn't have enough cash on hand, it can borrow from the Federal Reserve's discount window or sell loans to raise cash quickly. If a bank becomes insolvent and cannot meet its obligations, the FDIC takes over and pays depositors up to the insurance limit.

Types of banks and how they differ

A commercial bank is the most common type—it takes deposits, makes loans to individuals and businesses, and offers checking and savings accounts. Wells Fargo, Bank of America, and Chase are examples. A credit union is a member-owned cooperative that operates similarly but is run by and for its members rather than shareholders; credit unions often charge lower fees and pay higher interest on savings, but membership is restricted (you might need to work for a certain employer or live in a certain area). An online bank has no physical branches and operates entirely through a website or app; it typically has lower overhead costs and passes savings to customers through higher interest rates and lower fees. An investment bank primarily handles securities trading, underwriting, and mergers rather than taking deposits from regular customers.

All banks are regulated, but credit unions fall under the National Credit Union Administration (NCUA) rather than the FDIC, though NCUA insurance works the same way—up to $250,000 per account type. Online banks are still commercial banks; they are simply chartered and regulated the same way as brick-and-mortar banks but operate without physical locations. The choice between bank types depends on your needs: if you want in-person service, a traditional bank or credit union branch may suit you; if you prioritize interest rates and low fees, an online bank often wins.

FDIC insurance and what it covers

The FDIC insures deposits at member banks up to $250,000 per depositor, per bank, per account ownership category. This means if you have a checking account in your name at Bank A with $300,000, only $250,000 is insured; the remaining $50,000 is not protected if the bank fails. However, if you have a joint account at the same bank with your spouse, that account is insured separately up to $250,000 because the ownership category is different. A retirement account (IRA) at the same bank is also a separate category and covered up to $250,000.

FDIC insurance does not cover investment products like stocks, bonds, or mutual funds held at a bank's brokerage arm, nor does it cover safe deposit box contents. If you need more than $250,000 in FDIC coverage, you can spread deposits across multiple banks or use different account ownership categories at the same bank. The FDIC maintains a tool called the Electronic Deposit Insurance Estimator (EDIE) on its website where you can calculate your coverage.

How banks are regulated and what regulators do

The Federal Reserve sets monetary policy and supervises large banks. The OCC charters and regulates national banks. The FDIC insures deposits and takes over failed banks. State banking regulators oversee state-chartered banks. Together, these agencies set rules about how much capital a bank must hold, what kinds of loans it can make, how it must treat customers, and how it reports financial information to the public.

Regulators conduct regular examinations of banks to check for unsafe practices, compliance with lending laws, and adequate capital reserves. Banks must also follow consumer protection laws like the Truth in Lending Act (which requires clear disclosure of interest rates and fees), the Fair Credit Reporting Act, and the Gramm-Leach-Bliley Act (which restricts how banks share customer information). If a bank violates these rules, regulators can impose fines, restrict its activities, or force it to close.

The difference between a bank and other financial institutions

A bank is distinct from a brokerage (which buys and sells securities), an insurance company (which pools risk), and a payday lender (which makes short-term loans at high interest rates). However, large financial conglomerates often own multiple types of institutions under one corporate umbrella. JPMorgan Chase, for example, is a bank holding company that owns a commercial bank, an investment bank, and a brokerage.

The key difference is that a bank's core business is taking deposits and making loans, while other institutions serve different functions. A credit card company is not a bank unless it also takes deposits and makes other types of loans. A money services business that transfers funds or exchanges currency is not a bank unless it is chartered as one. Understanding which institution you are dealing with matters because different rules apply—a bank's deposits are FDIC-insured, but a brokerage's securities are not.

Frequently Asked Questions

What happens if a bank fails?

The FDIC takes over the bank, pays depositors up to $250,000 per account category, and either sells the bank to another institution or liquidates its assets. You will have access to your insured funds within a few business days. Amounts over $250,000 per category may not be fully recovered.

Can a bank refuse to give me my money?

A bank can place a hold on deposits (usually for checks) for a set number of business days, but it cannot permanently refuse to let you withdraw your own money. If a bank closes your account or freezes it due to suspected fraud or legal action, it must notify you and explain why. You have the right to dispute the freeze.

Why do banks charge so many fees?

Banks charge fees to cover operating costs (staff, buildings, technology) and to generate profit beyond the interest spread. Overdraft fees, ATM fees, and maintenance fees are discretionary—you can often avoid them by choosing a bank with low-fee accounts, maintaining a minimum balance, or using the bank's own ATMs.

Is my money safer in a bank or under my mattress?

A bank is safer because your deposits are FDIC-insured and the bank is required to keep records and follow security protocols. Cash at home can be lost, stolen, or destroyed. A bank also pays interest on savings, so your money grows over time instead of losing value to inflation.

Can a bank use my deposits to invest in the stock market?

A bank can lend your deposits to borrowers and invest in bonds and other debt securities, but it cannot use deposits to buy stocks on behalf of the bank itself without regulatory limits. Banks must hold capital in reserve and cannot take excessive investment risk with customer deposits. If a bank's brokerage arm offers investment products, those are separate from your deposit account and not FDIC-insured.