How Does a Bank Work?

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A bank works by taking people's money as a savings account and paying a bit of interest to the customer for letting them use the deposited money. Find out how banks make a profit with information from a portfolio manager in this free video on finance.

Part of the Video Series: Credits, Stocks & Pension
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Video Transcript

Have you ever lent money to a friend or family member, and expected to get it back with maybe a little interest of some type; maybe some dinner or a drink involved? Hi, this is Roger Groh, at Groh Asset Management. A bank works pretty simply. They advertise to you for you to put your savings with them, and let's say that they pay you a rate of interest of 2% in today's environment. They then take it, mark it up and lend that money back out to somebody else at 6, 7, 8% and up, depending upon their credit score and type of investment that that borrower is going to make. A bank's profit comes from the spread in there between what they're paying you, the depositor, and what they're getting from people that they've lent money to. Now, there might be one other thing that comes into play here. Some banks elect to take a lesser rate of interest and to take an equity interest in the companies that they actually lend money to. So, there are any number of ways that a bank can profit from loans that they've made. But still, they come to you; they ask you to deposit money with them. They lend it back out; they take the spread, everybody's happy. That's a little bit how banks work. I'm Roger Groh, with Groh Asset, and thank you very much for spendin' time with me.

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