Final answer:
Banks primarily use three sources of funds: Deposits from customers, borrowings from other entities, and their own bank capital. The percentage these sources contribute can vary widely among banks, with deposits usually being the largest source.
Step-by-step explanation:
The sources of funds utilized by banks can be varied, but three main sources are:
- Deposits: This is the primary source of funds for most banks, where the money comes from the bank's customers' savings, checking, and time deposit accounts. The percentage of deposits can vary from bank to bank.
- Borrowings: Banks may borrow from other financial institutions or access Federal Reserve funds. Again, the percentage of borrowings will vary depending on the bank's funding strategy and market conditions.
- Bank Capital: This includes the bank's equity capital and retained earnings. The percentage this contributes to the overall sources of funds is generally smaller compared to deposits and borrowings.
In addition to the above, banks must comply with banking regulations, such as maintaining a required reserve ratio, which is a fraction of money the bank must set aside and not use for loans. The specific percentage, such as 20% reserve ratio, is determined by banking regulations and is based on the amount of deposits the bank holds.