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Commercial Banks - How they Make a Profit (Financial Economics)

Level:
A-Level, IB Diploma
Board:
AQA, Edexcel, Eduqas, IB, OCR, WJEC

Last updated 4 Apr 2018

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A commercial bank makes its profit by paying interest to people who keep money there and charging a higher rate of interest to borrowers who borrow money from the bank . This short video looks at the data on bank profits and in particular, the spread on interest rates between savings deposits and bank loans.

How do commercial banks fail?

Run on the bank

  • Depositors panic and withdraw their money
  • This creates a liquidity crisis for the bank

Credit crunch

  • A bank may be unable to borrow money from other banks on even an overnight basis

Losses

  • High losses from bad debts / loan defaults
  • Credit rating of bank declines, share price falls
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