A bank is a business that takes in deposits and makes loans. A bank does not keep each deposit in its own box. A deposited bill is mixed with other cash, the balance is recorded by computer, and much of the money is lent out. Banks act as go-betweens for people who save and people who want to borrow.

There are several kinds of banks: commercial banks, savings banks, savings and loan associations, cooperative banks and credit unions. Commercial banks first focused on serving businesses. The first savings banks were founded in the early 1800s to give workers with little money a secure place to save.

A credit union is a financial group owned by its members, who pool their savings to make loans to one another. Credit unions began in the 1800s as a way for people shut out of ordinary lending to borrow in emergencies, using a pool of members' savings.

Starting a bank means applying for a charter from a state banking commission. The United States has a dual banking system, so founders may choose a state charter or a federal one.

A bank may pay savers 3 percent and charge borrowers 8 percent. The 5-point gap goes to the bank, and charging interest on loans is one of its main ways to make money. Loans that seem risky carry more interest. Lenders also check whether borrowers can repay before they lend.

The money in a bank belongs to its depositors, not to the bank's owners. So bankers have a special duty not to take big risks with loans. Banks fail when managers make poor choices, such as growing too fast or lending too much of one kind. They also fail when changing economic conditions stop borrowers from repaying loans.

A certificate of deposit (CD) is a savings deposit kept for a fixed time. The longer the term, the higher the interest, and taking money out early usually brings a penalty. Compound interest is interest paid on the original money and on interest the account has already earned.

Before federal deposit insurance, bank runs were common. At the first hint of trouble depositors lined up to withdraw money, and only the first few in line might get theirs. In the Great Depression thousands of banks closed. Congress set up the FDIC, and bank failures fell from about 4,000 in 1933 to 62 in 1934.

FDIC insurance covers $250,000 per depositor, per insured bank, for each ownership category. Deposits in one category at one bank are added together (as of November 2026). It covers deposit accounts such as checking, savings, money market deposit accounts and CDs. It does not cover investments such as stocks, bonds, mutual funds or annuities, even if a bank sells them.

The NCUA insures credit union accounts up to $250,000 through the Share Insurance Fund, backed by the full faith and credit of the United States (as of November 2026). Since the FDIC was founded in 1933, no depositor has lost a penny of FDIC-insured funds (as of November 2026).

In an electronic funds transfer (EFT), a bank sends a message telling a computer to subtract money from one account and add it to another. No cash or paper moves. In 2004 the Check 21 law let banks send electronic images of checks instead of moving paper checks around, which is faster and costs less.

Congress created the Federal Reserve in 1913. The Fed's jobs: guiding the economy's money and credit, supervising banks, keeping the financial system stable, and running payment systems. The Federal Reserve does not lend money to private borrowers, but it sometimes lends to banks when the need arises.

Words to know

• charter: license to operate
• depositor: person who deposits
• annuities: not covered
• supervising: watching over