Bank

What Is a Bank?

A bank is a financial institution that accepts deposits from the public and uses those funds to make loans and other investments. Banks also provide payment services such as checking accounts, wire transfers, and card processing. In many countries, banks are licensed and supervised by government authorities. Deposits at many banks are also protected by deposit insurance, which compensates depositors up to a set limit if a bank fails.

How Banks Earn Income

Banks earn most of their income from the difference between what they pay depositors and what they charge borrowers. This spread is commonly measured as the net interest margin. Banks also earn fees for services such as account maintenance, overdrafts, currency exchange, and payment processing. Larger banks may generate additional revenue from trading, underwriting, and advisory work.

How Banks Operate

Most banks do not keep every deposit in cash. Instead, they hold a portion as reserves and lend out the rest, a practice known as fractional-reserve banking. Because depositors can withdraw funds on short notice while loans are repaid over years, banks must manage liquidity risk to meet withdrawal requests. They are also subject to capital requirements that limit how much they can lend relative to their own equity. Regulators use measures such as the capital adequacy ratio to assess whether a bank has a sufficient buffer against losses.

Why Banks Matter to Investors

Investors may encounter banks as depositors, borrowers, or shareholders. Bank profitability is closely tied to interest rate levels, the quality of loans, and overall economic conditions. When borrowers struggle to repay, banks face credit risk, which can reduce earnings and affect share prices. Because banks borrow heavily and connect many parts of the economy, their financial health is watched closely by regulators and markets. Investors who study bank stocks often review regulatory filings, loan loss disclosures, and capital levels to understand a bank's condition.