The 20-year-old will compete with the Bantams until the end of the season, looking to build on previous loans to Alloa Athletic and Dunfermline Athletic.
Banks joined Palace in January 2020 and played 17 times in the 2021/22 Premier League 2 – scoring 10 goals. He has made 36 professional appearances over the course of his career and featured twice during Palace’s pre-season tour.
Commenting on the move, Banks said: "Bradford's a great club with real history, and I'm looking forward to testing myself in League Two.
"It's a brilliant opportunity to learn under a manager like Mark Hughes, so I'm really grateful to everyone at both clubs who has enabled this."