Bank lending is one of the most misunderstood parts of our monetary system. While banks lend new reserves that spend like new money, those reserves are "obligations" of the bank that accrue interest. As borrowers pay down their principal the banks are required to retire their reserves in equal amounts, reducing the overall money supply.

The interest charged to banks by the Fed is the base rate it maintains by buying and selling Treasury bonds on the secondary market. Any profit made by the Fed in such transactions is returned to the Treasury yearly when both are audited and their combined balance sheets are reconciled.

Any interest or fees paid by the borrowers is, of course, kept by the banks. The creation of credit-based reserves is to allow for interbank transfers of loaned funds, which is why banks are extremely competitive in chasing new commercial business. Their reserve requirements apply to their aggregate balances, not each individual loan. Such "intrabank" tranfers would not be subject to the Fed's reserve requirements and would not accrue interest.