How Banks Make Money: The Spread Explained

Why this matters

Overdraft fees are the answer most students give when asked how a bank makes money, and the real math says otherwise. A $1 billion community bank here earns $42 million a year in loan interest while paying only $12.75 million on deposits, and that gap, the spread, drives roughly 78 percent of its revenue.

I built the stress test because it turns arithmetic into a decision: once a competing online bank pays 4 percent on savings and this bank has to match it, students calculate exactly how much of that spread disappears. Running it themselves makes the loan-to-deposit ratio click, since protecting the spread and staying liquid are in direct tension.

From one teacher to another

The same question opens this lesson every year: you deposit $1,000 at 1.5 percent, the bank lends it out at 6 percent, so where does that 4.5-point gap actually go? That gap is the spread, and it's the engine behind roughly 78 percent of a community bank's revenue, which surprises students who assumed banks mostly live on overdraft fees. They work the full math for a real $1 billion bank, $700 million in loans earning $42 million a year against $850 million in deposits costing $12.75 million, calculating net interest income themselves before fees and investment income even get added in. The part that makes it stick is the stress test: when a competing online bank starts paying 4 percent on savings and this bank has to match it, students calculate exactly how hard net interest income gets hit, and "the spread" stops being an abstract vocabulary word and becomes the thing an entire board meeting would be about.