Final answer:
Banks charge higher interest rates for loans to cover risks and earn profits; they pay lower rates on deposits to manage liquidity and ensure the institution's financial health, resulting in a net interest margin.
Step-by-step explanation:
Banks charge higher interest rates to consumers borrowing money because they need to make a profit to cover the risk of loan defaults and operational costs. When consumers deposit money in the bank, these funds are not simply stored in the vault but are used to issue loans to others. However, since deposits can be withdrawn at short notice, while loans are repaid over longer periods, there is a risk of an asset-liability mismatch. To mitigate this risk and ensure profitability, banks pay a lower interest rate to depositors. The difference between what they pay to depositors and what they earn from loans is known as the net interest margin, which is a critical factor in a bank's financial health. Furthermore, if a bank has less confidence in a borrower's ability to repay, they will charge a higher rate as a form of protection against potential default.