Financial institutions need to have money, or capital, available in order to make loans. Financial institutions earn a profit by paying depositors less than they charge borrowers. So, a financial institution may pay depositors 3 for every dollar on deposit, but charge borrowers 7 for every dollar borrowed. The financial institution keeps the 4 difference. When a financial institution lends money, the transaction is referred to as a loan.
Loans are serious obligations.
Remember, financial institutions use depositors' money to make loans. Financial institutions try to be very careful to make sure the people they lend money to will be able to pay the financial institution back. Financial institutions do not lend out all the money they have on hand from depositors. They are required by law to reserve a certain amount for their depositors' needs. After all, the financial institution doesn't know when a customer might want to withdraw some money from their account.