Lending rate Banks lend at different interest rates depending upon the amount and duration of the loan, and the creditworthiness of the borrower. Their lowest rate, known as the prime rate , is reserved for major companies who are regular borrowers. The prime rate is normally based on a markup from the Fed funds rate which in turn sets the cost that banks must pay to acquire loanable funds. Equity A bank's equity is the difference between what it owns and what it owes, in other words total assets minus total liabilities. Bank equity, also known as bank capital , grows with retained earnings.
Negative equity implies insolvency.
Do not confuse the total market value of a bank's outstanding shares, sometimes referred to as its market capitalization, with its equity position. This is the ratio of a bank's equity to its assets. Bank lending increases a bank's assets but not its equity since bank liabilities increase equally by the deposit created to fund the loan. However interest earned on loans, together with fees and income from other bank investments, increase both equity and assets. This is the ratio of a bank's reserves to the amount of its demand deposits, i.e. its checking deposits.