My job involves working with banks, *lots* of banks, but I am not a banker.
I'd like to know where the profit in banking comes from.
Is retail banking actually profitable? Do the fees + interest earned on deposits add up to enough to defray the costs of operating your regular operations?
I have thought for a long time that actually operating deposit accounts *CAN'T* be a seriously profitable undertaking. It just involves so much overhead, and many, many people keep very little in the bank on a daily basis.
I don't mind if you refer me to a web site that explains these things, but if I understood how and where banks made money I'd feel a lot smarter and more well-informed than I do now.

It's not the deposits that make money for a bank, it's the loans that those deposits fund. In simple terms, a bank's income is the difference between the interest that a bank earns on its loans and the interest that the bank pays on its deposits, otherwise known as the net interest margin. There's also non-interest income, such as the fees that banks charge on loans and deposits. As long as the net interest margin and fee income is greater than the bank's expenses, the bank makes money.

Exactly. The first post reflects a confusion I had to deal with when I first started banking. "You mean loans are assets ?" Yes, they are. Assets are things that you own, liabilities are things that you owe. If a customer wanted to come into the bank right now and withdraw all the money from his accounts, close his CD's etc., he can do it (plus a penalty on the CD). On the other hand, we own a loan in the sense that the customer who takes out the loan owes us that money back, plus interest. Deposits represent the financing of a bank's loans. Banks also invest extra cash, just like other companies, in things like bonds. Anyhow, good luck!

Normally, it's all about loans, as earnings come from a good Net Interest Margin: Interest Earned (loans [including loan fees], investments, minus interest paid, divided by Average Earning Assets. The NIM represents and measures the Bank's success in the basic business of banking - collecting deposits and lending those dollars to customers and investing excess funds. A minimum NIM of 5.00% is customarily achieved in a normal rate environment. Of course, generating noninterest income and controlling noninterest expense must also be included as the NIM may not be sufficient to actually produce a profit.

It's all about Asset and Liability Management.

BEGIN QUOTED MATERIAL
---
deposits and lending those dollars to customers and investing excess funds. A minimum NIM of 5.00% is customarily achieved in a normal rate environment. Of course, generating noninterest income and controlling noninterest expense must also be included as the NIM may not be sufficient to actually produce a profit.
---
END QUOTED MATERIAL

You say that a NIM of 5.00% is customarily achieved in a normal rate environment.
March 2003 is *not* a normal rate environment. Hey, if rates go any lower, we'll be having bona fide inflation.
What would a typical NIM be in this marketplace?

Retail banking is only one area of "banking". The other areas which are revenue generators are corporate banking, trade finance, asset management, foreign exchange, investments (bond and stock market - although this area has been more of an income loser in the past four years).

There is the trend for banks to move away from traditional reliance on net interest income (interest income - interest expense) to fee generated income and this is where revenues come in from credit cards, asset management services etc.

If you look at major US banks over the past couple of years, Retail Banking profit has been a constant. Regardless of the stock market, Retail Banking seems to be the "workhorse" line of business. Not particulary sexy, but steady. A few years ago when the stock market was booming, the revenue stream from retail looked pale in comparision to commercial and investment banking, but as the pendulum has swung, retail looks like a safer place to hang your hat.

Can anyone help me on this question? Suppose that the price of fertilizer, an input in the production of corn, falls. We would predict that the equilbrum quantity of corn will rise or fall? and the equilibrum price of corn will rise or fall?