How would the banks make money then? I imagine the profit margin of debts is pretty small

1. Bank gives you $X to buy an asset and burdens you with debt of $Y, which is much more than $X as it includes interest.

2. Bank sells the debt at $Z because holding the debt is risky and the bank would rather have cash than debt. Its counterparty would rather have more cash over time and is fine with the risk but does not want to bother with the whole process of closing the loan. $X < $Z < $Y.

3. Profit! Bank spent $X to get $Z, which is greater than $X.

Volume!