If you are about to apply for a mortgage, or wondering why your savings account pays what it does, it helps to understand the business you are dealing with. A bank is, at its core, a company that borrows money from many people at one rate and lends it to other people at a higher one. Everything else, from FDIC insurance to the Federal Reserve to the mortgage rate you are quoted, hangs off that spread.
Deposits are loans you make to the bank
When you deposit money, the bank owes it to you on demand, and in exchange it pays you interest, or, at many large banks, almost none. The money does not sit in a vault. The bank lends it out: car loans, credit cards, business lines, mortgages. Its profit is the difference between what it earns on those loans and what it pays you.
The industry-wide version of that spread is called the net interest margin. The FDIC’s Quarterly Banking Profile put it at 3.32% for the second quarter of 2026, across 4,238 insured institutions that earned $90.1 billion in the quarter. On $10,000 of your deposits, a bank running at the industry margin earns roughly $332 a year in net interest.
The 2014 version of this article used a 1% savings rate for its example. In 2026 the range is far wider: the best high-yield savings accounts pay about 4% and top CDs 4.3% to 4.5%, while many big traditional banks still pay under 1% on standard savings. That gap is the single most useful thing to know about how banks work. A bank with a large, loyal deposit base can pay very little and still fund its loans; an online bank without branches competes by paying more. On a $30,000 balance, 4% versus a big-bank rate below 1% is worth roughly $1,000 a year. Our guide to high-yield savings in 2026 covers where the good rates are and how long they may last.
Why CDs pay more than checking
A bank prices deposits by how reliable they are. Money in a CD is committed for a fixed term; the bank can lend against it with confidence, so it pays more. Savings balances are stickier than checking but still withdrawable, so they pay less. Checking balances turn over constantly and are the least dependable funding, which is why interest checking pays little or nothing. Today’s CD rates show what that commitment is worth.
The reserve requirement is zero
Older explanations of banking, including the original of this article, described a bank keeping a fraction of each deposit in reserve and lending out the rest, say $8,000 of a $10,000 deposit. Since March 26, 2020 the Federal Reserve’s reserve requirement ratio has been zero: banks are no longer required to hold reserves against deposits at all. What limits lending today is capital (the bank’s own funds, which regulators require it to hold in proportion to its loans), liquidity rules, and the bank’s own judgment about whether the borrower will pay.
Where the Fed comes in
Banks also lend to and borrow from each other overnight, and the Federal Reserve steers the rate they charge one another. At its July 29, 2026 meeting the Fed held its federal funds target range at 3.50% to 3.75%, unchanged since December 2025; it pays banks 3.65% on the reserves they park at the Fed and charges 3.75% at the discount window, its direct lending facility. Those numbers matter to you because they are the benchmark everything else is priced around: deposit rates sit near or below the Fed’s rate, loan rates well above it. The original article described a bank borrowing from the Fed at 0.25% and lending on a mortgage at 3.75%. Today the discount window is 3.75% and a 30-year mortgage is in the mid-6s. The numbers are higher; the spread, and the business, is the same. The Fed’s next scheduled meeting is September 15-16, 2026.
FDIC insurance: why a bank run is not your problem
Because deposits are lent out, no bank could repay every depositor on the same day. The Federal Deposit Insurance Corporation exists so you never need to test that. It guarantees deposits up to $250,000 per depositor, per insured bank, per ownership category; credit unions carry the same coverage through the NCUA. If you hold more than that, spread it across ownership categories or institutions. One 2026 caution: a fintech app that advertises FDIC insurance is usually relying on pass-through coverage from a partner bank, which protects you if the bank fails, not if the app or its ledger provider does.
Banks borrow too: warehouse lines and the mortgage market
Deposits alone cannot fund the country’s borrowing, and for mortgages in particular, the bank often is not the lender. Independent mortgage companies, which take no deposits at all, originated almost two-thirds of U.S. home loans in 2025. They fund each loan from a warehouse line of credit, a short-term facility from a larger bank, then sell the closed mortgage to Fannie Mae, Freddie Mac or another investor and repay the line. The mortgage note is the collateral for the warehouse line, and the lender may keep servicing your loan or sell that too, which is why the address you send your payment to can change while the loan itself does not.
The Fed also lends and borrows cash overnight against Treasury securities through its repo and reverse repo facilities; those operations keep short-term rates inside its target range and matter to your mortgage only indirectly.
Why mortgage rates are not savings rates plus a markup
Because most mortgages are sold, their rates are set by what investors will pay for them, not by what the originating bank pays on deposits. A 30-year fixed rate tracks the yield on the 10-year Treasury plus a spread that covers the risk of prepayment and default; that spread has been running wider than its long-run norm in the 2024-26 environment, which is part of why 30-year rates have stayed in the mid-6s even as the Fed held. On top of that, each lender adds its own margin, and those differ: on any given morning the gap between the highest and lowest posted rate across lenders can exceed a full percentage point. The mechanics, and how to shop them, are in How Mortgage Rates Work in 2026.