While there are people who fail to pay their debts, there are those who do pay their dues regularly, and on time. I suppose that's where the money used to pay interest on your savings comes from. I assume it's not that hard to pay the interest on savings accounts, even during a recession. The interest paid by banks is not substantial anyway. How much interest does a usual savings account get? A few dollars? Sometimes a few cents?

The interest paid by the banks comes from a variety of sources. 1. Banking fees. The bank charges overdraft fees, wire fees, fees for negotiable items like Cashiers checks and money orders and travelers checks. All of this is income for the bank. 2. The bank is making money off your money through investments. Your savings account is essentially a loan to the bank. They take that money and invest it in a variety of ways and pay you interest just like you would pay them interest on a loan that you took out. 3. Loans. As we know, we have to pay the bank interest for loans we take out. Naturally, the interest we pay them is much higher than the interest they pay us. It's still a business after all. Most banks aren't making a lot on their investments right now, so savings acct interest rates have dropped over the past 9-10 months and loan rates have gone up. At my bank, the basic savings account was getting about .75% last winter, now it's .25%. For a Money market savings, it was between 3-4%, now it's between 1-2%. When the economy gets better, you'll see the rates go back up.

When the economy is in recession,it doesn't mean that everything has stopped. It only means that it has stopped growing, or may be shrinking a bit. But if the economy shrinks by, say, 2% over a year, that means that 98% of it is still carrying on normally. 98% of borrowers are paying interest on their loans, and so the bank can carry on paying interest to their depositors. Banks live off the small difference between two large numbers. The get huge amounts of money in one side, and lend the same huge amount of money out the other side, at a lightly higher interest rate. They make their profits from that difference in interest rate, minus an allowance for bad debts, minus their costs. Their own money, their capital, is a tiny fraction (maybe 4-8%) of what the both borrow and lend, and is intended to smooth out the bumps: to soak up the odd bust borrower, or handle the days when an unexpectedly large number of depositors want their money back. What has happened is that for a few banks, their total losses have swallowed that capital, so thay have no money to pay the next depositor who wants his money back, and are therefore bankrupt. In good times, they could dash down the street to another bank and borrow the extra million or two to tide them over. But in bad times, the bank down the street is hanging onto his money in case the same happens to him. But, while the bank is bust, most of the borrowers will, eventually, pay their loans. Less now than in good times, but still most. So there will be money, eventually, to pay back most depositors. Just not now. Which is where the government money comes in: they will buy the loans (at a discount), which gives the banks the money to refund depositors. If they get it right, the government may even profit when the loans are paid off in a few years time.

The bank takes in your money and pays you interest. Then, it takes your money and lends it out at a higher interest rate. If you look, you will always see that the interest cost of borrowing is higher than the interest paid on savings or money market investments. Therefore, the profit for the banks.

Some people actually are still repaying loans. A bank lends out some of your money and makes the difference between the high interest it charges the borrower and the lower interest it pays to your deposit. If the bank comes up short it borrows money from the Fed. At the fed funds rate and lends it out for a higher interest rate same as above. If it doesn't collect enough to make money on the spread or too many want their deposits, then it fails and the Feds insure your money to the limit of the insurance. The differnce above that, you lose.

they play the lottery?