Your option of bank or financial services is one of the most socially and environmentally impactful decisions you can make with your cash. When cash is deposited in a bank, the bank can invest it in a various of things — small businesses, derivatives and securities, solar farms, fossil fuel extraction, mortgages for veterans, you name it. It distinct drastically rely on the bank.
The banking business model is a matter of using customer deposits to provide loans, and from those loans, the bank get interest fee that is transformed into interest paid to you. This starts to explain where a bank finds the cash to pay you interest. The dollars doesn’t materialize from thin air. The bank requires to make money somehow, too, and what better method than savings account deposits?
Banks can invest a portion of their funds in differ investment vehicles including real estate, government securities, and commercial and consumer loans. Real estate investments for banks include the mortgage lending arm of the business. Banks provide long-term lending on homes, farmland, and business property. They also invest in home equity lines of credit and construction loans. Loans might be fixed-rate or variable rate, both of which offer different advantages to the lender and the borrower.
Banks also invest by offering business loans. Small businesses and others borrow money in fixed amounts or via a line of credit through the bank, from which the bank earn interest charges.
Even though the higher bank balances are clearly a source of financial security for consumers, banks still need to make income somehow. Deposits at commercial banks were 30% higher than pre-pandemic deposit levels as of late August, according to The New York Times. This drives many banks to invest more in government bonds to get the interest they need for operations.
