Commercial banking

Commercial banks take deposits and make loans, and in doing so they create money, allocate credit and run the payments system. A bank's balance sheet balances: assets (reserves, loans, investments, cash) equal liabilities (deposits, borrowings) plus capital. Profit comes from the spread between lending rates and deposit rates, plus fees. Worked example: a bank with deposits 1000, a 10% reserve requirement and no excess reserves holds 100 in reserves and can lend 900; if it lends at 10% and pays depositors 4%, its gross interest spread on the loan book is roughly (0.10 x 900) - (0.04 x 1000) = 90 - 40 = 50.