How does a Bank work?

Was flirting with an idea of starting a Bank, and decided I should document my thoughts.

It is quite interesting to note that its confidence of people that runs the bank. People park their money in the bank. They do this through savings/ current account, fixed deposits likewise.

Bank keeps this money and lends out a share of this to the public. They charge interest on this.


The profit made by the bank = Interest charged on the loan – Interest given away to account holders.

So where does Confidence parameter come into picture??

Primarily, It is the confidence of the people that drives them to put their money in a particular bank.

Secondly, It is the confidence of the people ( that their money is secure )that propels the bank as its this money( the bank) lend out as various loans.

The end of the day its confidence of people that matters.

Brand building is of paramount importance. For eg SBI is a bank that has good brand value and has confidence of majority.

SBI also has the largest customer base. It has a high ratio of current and saving account. This enable it to make more profit. As they make more profit they keep their lending rate a bit lower than the other banks and hence is prospering.

This kind of banking is called commercial banking.

There is an another genre of banking called Investment banking. Well they deal in millions and corporates. Their activities are different. They deal in raising money from the capital market for the corporates. Apart from this, they do multitude of activities like M&A,consulting etc.

Its so obvious that Investing banking is more profitable. At the same time, the amount of risk associated with it proportional to the profit earned.

So, paraphrasing my whole thought process, if you have knowledge and skill to manage an investment bank , there is no better way to make some real good money. However, its risky. Commercial banking is safer option but then profit is less.

Hehe.... what a way to timepass. Only few days to go.