Personal Finance

How much does a bank earn for each dollar on deposit?

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  • May 25th, 2015 2:06 am
Jr. Member
Sep 26, 2009
133 posts
23 upvotes

How much does a bank earn for each dollar on deposit?

How much does a bank earn for each dollar on deposit?

I'm putting this in "Personal Finance" because so often here we have situations where a bank provides poor service, makes an offer but doesn't follow through on it (bait and switch), or raises fees, and some RFDers transfer their $60,000 RSP from that institution to another. It hits the bank, but we don't know what that $60,000 is worth to the bank's bottom line. With this information, one could make a statement such as "the bank gambled by a sneaky fee hike of $15 per year, but they lost $xxx more than that on my account. I hope they're happy with their new business."

Here's a placebo accounting. For each dollar you have on deposit, the bank lends out seven dollars. After factoring in bad debts, salaries, branch building depreciation etc etc, the bank makes 1% on its loans. So in this hypothetical case, the bank would make 1% * 7 dollars = 7 cents for each dollar deposited. So permanently removing your $60,000 RSP would cost the bank .07 * $60,000 = $4,200 per year. I've guessed, oversimplified, and overstated by perhaps an order of magnitude, that's why I'd welcome comments from RFDers who have a handle on the real figures. TIA.

Another way of attacking the problem would be to divide the bank's profits by its deposits, but I'm guessing that banks do lots of profitable business that is not tied to deposits.
8 replies
Jr. Member
Mar 2, 2015
101 posts
28 upvotes
Toronto, ON
This is post is so full of mistakes I don't even know where to start :cheesygri

RSP is not a deposit account, its a segregated account owned by a trust company affiliated with the bank.

The bank can lend money based on the deposit accounts, ie checking. This is called "Fractional-reserve banking". Please look on wikipedia for explanation.

Banks make a lot of money on other things. For example, mutual funds fees. Request the annual report from any bank it has the breakdown of their income.
Deal Addict
Jul 29, 2006
4253 posts
1078 upvotes
banks can make money on a lot more things as the poster above mentioned.

too many to list but some include investment banking fees, deposits, loans, bank fees, credit cards, brokerage fees, etc. Basically too many factors to even think about that's worth your time.
Jr. Member
Sep 26, 2009
133 posts
23 upvotes
investing200aweek wrote: This is post is so full of mistakes I don't even know where to start :cheesygri

RSP is not a deposit account, its a segregated account owned by a trust company affiliated with the bank.

The bank can lend money based on the deposit accounts, ie checking. This is called "Fractional-reserve banking". Please look on wikipedia for explanation.

Banks make a lot of money on other things. For example, mutual funds fees. Request the annual report from any bank it has the breakdown of their income.
Wow. Science is correct, placebos do work.

When the bank is, say, TD Canada Trust, the trust company can be rather closely affiliated. So when the RRSP instrument is issued by "TD Mortgage Corporation" or "The Toronto Dominion Bank" and is held in your RRSP at TD Canada Trust, you'd think that would ultimately contribute to the profits of TD Canada Trust. The issuers might even belong to the fractional-reserve banking system, or something like it. If this money ultimately is treated so differently from deposit accounts as the poster seems to imply, would banks have bought in to the RRSP game?

The two replies so far imply that the question is not worth the effort to answer. In case anybody missed the placebo implication, I am not looking for an exact answer.
Jr. Member
Mar 2, 2015
101 posts
28 upvotes
Toronto, ON
GrapeBunch wrote: Wow. Science is correct, placebos do work.

When the bank is, say, TD Canada Trust, the trust company can be rather closely affiliated. So when the RRSP instrument is issued by "TD Mortgage Corporation" or "The Toronto Dominion Bank" and is held in your RRSP at TD Canada Trust, you'd think that would ultimately contribute to the profits of TD Canada Trust. The issuers might even belong to the fractional-reserve banking system, or something like it. If this money ultimately is treated so differently from deposit accounts as the poster seems to imply, would banks have bought in to the RRSP game?

The two replies so far imply that the question is not worth the effort to answer. In case anybody missed the placebo implication, I am not looking for an exact answer.

How much does a bank earn for each dollar on deposit?
Do you have a calculator ? Did you look at a bank annual report ?

Here are the numbers from BMO 2013 Annual Report:

Revenue - 14 463 million
Net Income - 4 248 million
Deposits - 366 821 million
Jr. Member
Sep 26, 2009
133 posts
23 upvotes
So if we note that a bank with $0 deposits has $0 net income, and adopt a linear model, a bank makes a bit more than 1% on deposits. And if thine bank offend thee, and thou pluckest out $60,000, and thou claimest that thine bank have thus foregone $720 in profits each annum, and thy friends laugh until the ale foams out their noses, tellest thou them that GrapeBunch hath sent thee.

Referring to the fractional reserve banking part of the conversation, I found this (excerpt from a) forum post: " I would think that each CU or bank would have some kind of leverage ratio that they would have to feel comfortable with based on how frequently money moves in and out. Savings accounts would probably have a lower flow rate than chequing accounts. RSP savings accounts and TFSAs would probably have even lower flow rates, so I would guess that institutions that specialize in savings products would actually be more leveraged than institutions that have chequing products.

In Canada, there are no legislated reserve requirements or reserve ratios, the Bank Act only specifies capital requirements, for which I have never seen that term defined."
Jr. Member
Sep 26, 2009
133 posts
23 upvotes
The rapid exchange of opinions has faded, so we're left with a range of values.

A hundred dollars deposited to a Canadian bank may carry over to the profit of the bank as little as: zero. This posits no connection between deposits and loans. "In Canada, there are no legislated reserve requirements or reserve ratios, the Bank Act only specifies capital requirements, for which I have never seen that term defined." The ultimate Canadian solution. If they have to justify their reserve (or lack thereof), they simply spout nonsense, much like federal politicians. Even sceptical voters have proven to believe the politicians; what hope could there be that bank regulators would doubt their brothers-in-arms?

A hundred dollars deposited to a Canadian bank may imply as much as $1.20 annual profit to the bank, by calculation.

Neither of these figures relies on the fractional reserve banking system; the lower figure does speak to the looseness of its application.

So choose any value between zero and $1.20, zero percent and 1.2 percent. For that, you are not less honest than the aforesaid politicians. </federal_cynicism>
Deal Guru
Feb 9, 2009
12381 posts
11307 upvotes
Investment accounts are generally held in trust (Waterhouse for example) the banks ARE NOT ALLOWED to use that money to make loans. The only thing they can do with your shares (say you own individual stocks) is lend that to someone to short. However, the shares are still technically owned by you and if you want to sell the brokerage would have to sell (though in largely held blue chip stocks this is never an issue since so many shares of say...BCE or TD Bank are held in all the customers accounts so shares never have to be "Called" back from the shorter)

RSP, whether in Waterhouse or not, is also a trust account and the banks are not allowed to touch this money for any reason. They are hoping though that if you bring your RSP account that you establish a "relationship" with them for things like chequing accounts, loans, etc.

They can however use the money in your chequing, savings and term deposits to loan money out. That's their basic butter and butter banking.
Deal Addict
Jan 19, 2011
3208 posts
1526 upvotes
I think that none of this matters to the banks really, as since they all perform equally 'adequately', the rate at which pissed off consumers make a statement by taking their money out and parking it at another bank is probably similar across the big five.

so for every five out, five come in, as there are no other choices, as far as the big banks go.
"The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is."
Just a guy who dabbles in lots of stuff learning along the way. I do have opinions, and readily share them!

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