Banks don’t just look after your money. They also lend money to those who need it.
Banks provide loans for many things, whether you’re a family looking to buy a house or a business seeking to expand, hire and grow. In this way, the flow of lending can help the economy as a whole to thrive.
Lending money is a risky business, though. Banks can lose out if someone they have lent money to doesn’t pay it back.
Banks know this, so they try to make sure they earn enough profit by charging more interest for lending money than they pay out in interest on people’s savings.
Of course, some loans are riskier than others – and banks will charge higher interest rates to reflect this.
But no-one can predict the future perfectly. Inevitably, banks sometimes get it wrong: sometimes a large number of loans will not be repaid. So the Bank of England makes sure that banks hold sufficient financial resources in case they face larger losses than they expect. That is part of ensuring banks operate in a safe and sound way.