Banks are traditionally viewed as places where money is stored with high security, but there is a lot the banks do with the money in order to net a positive return in investments and profits. When banks loan money out, the major return on bank loans is generated via the interest rate on the loan. Smaller sources of money creation for banks include bank fees (these vary between banks, sometimes to
. a significant degree), non-loan investments and other securities. To understand how banks generate money via loans, a basic primer on banks loans is in order. When a bank issues a loan (whether it is a small loan, a credit card/line of credit or a mortgage), an interest rate is attached. Over the estimated repayment life of that loan, interest is generated as an additional expense. The original amount of the loan, known as the "principle" amount, is only paid upon when the accumulated interest during a payment period is settled. In most bank loans, the early part of the repayment period usually generates larger amounts of interest. This happens because a larger principle amount creates more interest that needs paid on the loan. The practice of interest rates creating additional revenue is also observed with major credit cards, which usually charge even higher interest rates than banks. A critical element of understanding how banks create money is the difference between interest rates charged on loans and interest rates offered to customers investing in the bank. Customers are offered such services and products as checking/saving accounts, CDs (Certificates of Deposit) and other investments. The interest rate paid out to customers with these services and product is always lower than interest rates charged to those taking out loans - this is the fundamental principle of banking. Rates on both sides of the equation vary between banks, but the fundamental principle does not change. http://www.tradingstocks.net/html/banks_create_money.html or http://www.npr.org/templates/story/story.php?storyId=113058225
