Why does a bank pay interest to a depositor?

A bank pays interest to a depositor primarily because it allows the bank to use those deposits to earn profits through lending and investment. When individuals deposit money in savings or checking accounts, that money does not remain idle; instead, the bank loans it out to borrowers or invests it in various financial products. This process of utilizing deposits to generate income is fundamental to the banking business model. By paying interest, the bank incentivizes individuals to deposit their money, which in turn provides the bank with the capital it requires to operate profitably.

The other options do provide some context or rationale but do not capture the primary reason for interest payments. While encouraging more people to open accounts can be a secondary benefit of paying interest, it is conditional on the bank's ability to generate profit from those deposits. Compliance with federal regulations is also important, but it is not the main reason interest is paid. Similarly, while paying interest might contribute to increasing a bank's overall assets by attracting more deposits, the central motive remains tied to the potential for profit generation from the deposited funds.