A Commercial and retail banks
When people have more money than they need to spend, they may choose to save it. They deposit it in a bank account, at a commercial or retail bank, and the bank generally pays interest to the depositors. The bank then uses the money that has been deposited to grant loans - lend money to borrowers who need more money than they have available. Banks make a profit by charging a higher rate of interest to borrowers than they pay to depositors.
Commercial banks can also move or transfer money from one customer's bank account to another one at the same or another bank, when the customer asks them to.
B Credit
Banks also create credit - make money available for someone to borrow - because the money they lend, from their deposits, is usually spent and so transferred to another bank account.
The capital a bank has and the loans it has made are its assets. The customers" deposits are liabilities because the money is owed to someone else. Banks have to keep a certain percentage of their assets as reserves for borrowers who want to withdraw their money. This is known as the reserve requirement. For example, if the reserve requirement is 10%, a bank that receives a ˆ 100 deposit can lend ˆ90 of it. If the borrower spends the money and writes a cheque to someone who deposits the ˆ90, the bank receiving that deposit can lend ˆ81. As the process continues, the banking system can expand the first deposit
of ˆ 100 into nearly ˆ1,000. In this way, it creates credit of almost ˆ900.