In addition, banks earn money by services through fees for services. These services can include cash machines, wealth management advice, and sale of financial products such as mutual funds. Banks also make money by buying and selling debt securities.
The money they earn by these means is reflected in their profit and loss statement under “other income.”
Banks often put 90 percent or more their deposits in investments that are not easily turned into cash. The risk of many customers taking their money out of the bank at one time requires banks to have access to cash.
Credit risk is the risk that a person or business that borrows from a bank will not be able to pay back the loan. This is at the bottom of the problem that many banks in Europe and US are struggling with right now. They made, or purchased, bad loans.
The term that banks use for a bad loan is a “non-performing asset.”
To reduce this risk, banks evaluate a borrower’s ability to pay by examining income and assets.
Banks also try to diversify their loan portfolios. They make different types of loans so that a high proportion of their loans don't go bad at the same time. They also buy and sell loan portfolios from other players.
Each loan is a kind of black box that generates a line of revenue for the bank. The quality of the black box depends on the credit-worthiness of the borrower, the rate of interest and the term of the loan.
As a consequence, a loan (which generates revenue) is considered an asset of the bank.
Craig Douglas, Boston Business Journal; Paul Krugman, Princeton University; Cornelius Healy, Boston University; Heather Landy, American Banker magazine; Investopedia; Kenneth Rogoff, Harvard University; Lawrence Kotlikoff, Boston University; The New York Times; Michael Lewis; Society of American Business Writers and Editors; Reynolds Institute for Business Journalism.