Originally Posted by
natehall
they take gambles when lending money
Let me just re-iterate what has been pointed out before - they do not LEND money. Banks do NOT have enough capital to cover the amounts they loan out. It is a system called fractional reserve which relies on a) currency being Fiat i.e. worthless and just a concept with perceived value; and b) people not taking everything out at once - which is largely what caused Northern Rock to fail.
What they do is create money by increasing your account, then subsequently making you pay it back with 'real money' aka sweat equity. Therefore, for every loan taken out, they earn the capital PLUS interest, not just the interest.
Originally Posted by The Bank of England’s Quarterly Bulletin 2008 Q1 Vol. 48 No. 1 - Paul Tucker, Executive Director for Markets
...banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money.
Chris