Banks earn profits by selling with attractive combinations of liquidity, risk, and return, and using the proceeds to buy with a different set of characteristics.

Banks earn profits by selling "financial products" with attractive combinations of liquidity, risk, and return, and using the proceeds to buy "assets" with a different set of characteristics.

Here's the step by step explanation:

1. Banks sell financial products: These can include loans, mortgages, investments, credit cards, and more. These products are designed with certain levels of liquidity (how quickly they can be turned into cash), risk (the chance that the bank will not get its money back), and return (the profit the bank makes from the product).

2. Customers buy these products: Customers choose these products based on their own needs for liquidity, risk, and return. For example, a customer might choose a high-risk, high-return investment product if they are willing to take the chance of losing their money in exchange for the potential of a high return.

3. Banks use the proceeds to buy assets: The money that banks earn from selling financial products is used to buy assets. These assets can include things like government bonds, real estate, or other investments.

4. These assets have different characteristics: The assets that banks buy with the proceeds from their financial products have different levels of liquidity, risk, and return. For example, a government bond might have low risk and low return, but high liquidity.