Compare
| Line | A normal company | A bank |
|---|---|---|
| Deposits | Not applicable | A liability — money owed back to customers |
| Loans made | Not applicable | An asset — money owed to the bank |
| Main revenue | Sales of goods or services | Interest earned minus interest paid (the spread) |
| Biggest risk | Customers stop buying | Depositors all ask for their money at once |
Key point
A bank deliberately holds only a fraction of deposits as cash and lends the rest out. That is the entire business model — and also its central fragility. The bank promises depositors their money back on demand, but most of it is tied up in loans that won't be repaid for years. The mismatch is called 'borrowing short and lending long.'
Try it
Open the **Banks** directory and pick a large bank, then open its profile. Notice that deposits are far larger than the bank's own equity — the bank runs on other people's money. The spread it earns on that money is what you'll learn to measure next.
Check-in
A healthy bank suddenly fails in days, even though its loans were mostly good. What is the most likely explanation?
Key insight
Check your understanding
Sit with the ideas.
On a bank's balance sheet, where do customer deposits appear?
Why: