There is a lot of confusion as to what is called a 'bank', so it is difficult to understand the author's analysis. I believe there are several business models

There is a lot of confusion as to what is called a 'bank', so it is difficult to understand the author's analysis. I believe there are several business models in place: 1. Traditional deposit/lending. Essentially, banks fund themselves short-term through deposits and then lend long and medium term to businesses. This duration mismatch is always risky (think of 'run on a bank'), but one can argue that banks perform essential function in the economy by analyzing credits and channeling savings to small/medium business. 2. Transaction business It is common for a major bank to have a lock-in onto most of day-to-day transactions that people conduct. Salaries get paid by wire, then get withdrawn through many of cash machines, letters of credit are written for international trade transactions etc. For large corporate business, an international bank can arrange financing for a new oil field, then distribute this funds through its international branch network. This business is not particularly high-risk and it is not 'immoral' however you look at it. It is simply passing money around. 3. Securities and derivatives trading A broker firm who sits between the issuer of securities (or derivatives like swaps etc.) and the buyer of securities/derivatives is not supposed to expose itself to much risk. That's why they are called a 'broker'. Godlman Sachs is a broker, and so was Lehman Brothers. They don't do deposit/lending business of any significance. Of course, in real life they do proprietary trading as well and can get hurt (like Lehman did, who carried a lot of unsold junk in its books). These institutions can also can hurt others, stuffing their clients' books with crap assets (like sub-prime mortgages etc.). But then... buyer beware, isn't it? Actually, even through the public lumps all three above business models into 'banks' category, I would stick to orthodox definition and separate them into 'commercial banks' (doing (1/2) above) and 'investment banks' (doing (3)). So why so many 'banks' gone bust recently and why there is so much pain around? It is because 'commercial banks' from category (1/2) above took the easy path and stuffed their balance sheets with securities/derivatives with embedded nonlinear risk. They were supposed to do straightforward lending to businesses, yet they went into buying 'AA' rated securitized junk. The same applies to insurance companies who also have to carry assets on their balance sheets to off-set their promises to policy-holders. And now populist press are blaming traders/brokers for greed and irresponsible behaviour of commercial banks managers. As to the questions 'why do they make money', we need first to define which 'banks' are we talking about. Investment banks? Commercial banks? There could be another post altogether.