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A bank is a financial institution licensed to receive deposits. This type of bank is referred to as a commercial or retail bank.  Some banks also engage in the issuance of new securities to the public.  This type of bank is usually referred to as an investment bank.  Due to deregulation, a single bank is allowed to do both. 

A bank that operates as a commercial bank accepts customer deposits in the form of demand deposit accounts, savings accounts, money market accounts and timed accounts such as certificates of deposits (CDs).  Banks pay interest to the depositors on some of these accounts.

Banks loan the deposited money to borrowers who pay interest to the bank as long as the loan is outstanding.  Typical loans include short-term loans, car loans, mortgages, large loans to businesses to fund capital purchases and lines of credit.  Some commercial banks also issue credit cards as part of their services. 

Just like any other business, a bank’s goal is to earn a profit for its owners.  It does this by earning more on the interest it charges its borrowers than it loses on the interest it pays to depositors. 

If, in a year, a bank has $100 million in deposits for which it pays 2% to the depositors and then loans that $100 million to borrowers at a rate of 5%, the bank earns a profit of 3% ($3 million) for the year.  

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