What is the primary source of funds for loans made by commercial banks?

The primary source of funds for loans made by commercial banks is deposits. When customers deposit money into their checking and savings accounts, that money becomes a liability for the bank, as it must be returned to the account holders upon demand. However, banks can use a portion of these deposits to fund loans to borrowers. This practice is a cornerstone of the banking system and is known as fractional-reserve banking, where banks are required to keep only a fraction of deposits in reserve while the rest can be loaned out.

Deposits provide a stable source of funding for banks, allowing them to support various types of loans, including personal loans, business loans, and mortgages. This relationship between deposits and lending is essential for facilitating economic growth, as it allows banks to leverage customer savings to finance investments by businesses and consumers. In contrast, investments, shareholder equity, and government grants do not routinely provide the same consistent and scalable funding model for loan origination in commercial banking.