Why banks attract deposits: the role of banks in the economic system, is it worth trusting high rates. What are negative rates, and what is the reason for their appearance?

The classic answer that first comes to mind: banks attract deposits, issue loans and earn money on this. This is partly true, but then why do banks have different interest rates, moreover, they are radically different in different countries? Recently, the practice is quite widespread when the depositor pays the bank extra for the deposit, and the borrower, on the contrary, receives compensation from the bank instead of interest. How is this possible? Read in this review about the role of banks and bank deposits in the general macroeconomic system, why banks basically need deposits, and what are negative rates.

Bank deposits: purpose, value for the bank and macroeconomics

The answer seems obvious: banks attract deposits, issue loans and earn on the difference between interest rates on loans and deposits. The classic distribution of funds in the economic environment. However, not all so simple. For example, have you noticed that in some countries deposit rates are higher than loan rates? Yes, we are talking about deposits for individuals and targeted loans for legal entities. But still, the fact is true. And in some countries, the situation is even more interesting: deposit rates are negative! That is, those who invest money in deposits now also pay for it. But the borrowers are satisfied. For example, in Denmark, banks also pay extra to mortgage borrowers (we are not talking about interest in using a loan). Seems incredible? In fact, everything is quite logical.

In this review I will try to answer the following questions:

  1. Why do banks need deposits, and what functions, in principle, do banks do in the money cycle?
  2. Why do banks have different deposit rates, and is it worth trusting high rates?
  3. Where did the concept of negative rates come from, and why some banks do not need our money?

Banks and people: the cycle of money in nature

Banks act as intermediaries in the financial services market. In a simplified form, they accumulate money from one source and redistribute it to other sources. Sources of money for the bank are deposits of legal entities and individuals, income from settlement and cash transactions (from operating activities), from investing in various kinds of assets, including securities, income from lending to private and legal entities, and other banks. Banks can distribute money in loans, investments (purchase of securities, derivatives), deposits in other banks, including central banks, etc.

Maintaining own liquidity

Bank assets are divided into groups by time. In simple words, the bank needs to service instant overdrafts, short-term consumer loans, issue long-term loans, have sufficient cash reserves, etc. Accordingly, the bank’s liabilities have a structural division into a time range. In order to maintain short-, medium- and long-term liquidity, the bank may change deposit rates. For example, to set higher on short-term deposits or vice versa to attract long-term deposits without the right of early withdrawal for long-term lending.

It is also worth adding here that the bank may need money to fulfill the liquidity and capital adequacy requirements of the Central Bank. Sometimes there may be minor cash gaps, that is, a shortage of money in the short term. You can borrow money on the interbank market or conduct repos. And you can increase deposit rates.


Deposits are not just a tool for banks to earn money on the subsequent issuance of loans. Deposits and loans are only a part of the country’s monetary system, which ensures a fair distribution of resources between all its participants’ thanks to, among other things, the central bank’s leadership. It is the Central Bank that contributes to what deposit rates are set by banks.

How to use this for ordinary depositors:

  • Take your time to carry money at attractive rates. It is possible that this is the last banking measure before bankruptcy.
  • To amuse yourself as a beloved, that taking a deposit to the bank, albeit mediocre, you take part in the country’s economic development. Because your money does not lie under the pillow but works for the good of the country. Unless, of course, deposit rates are above zero.
  • Search for alternative types of earnings.

It is the last piece of advice in the light of negative rates or rates that do not cover inflation in developing countries that seems most reasonable. You can store money in a safe, but it is better to increase it using other methods. Recently, banks have been needed more likely for quick transactions and broker (managerial) functions, as well as for regulating the money supply in the country. Therefore, it is better to make money directly or on the stock, commodity markets, or currency speculation. And here the exchange or over-the-counter market (Forex) is most suitable. However, for those who are ready to freeze money for a long time with the prospect of earning up to 100% per annum, I recommend an article on future investments (link to an already prepared article.

Are you for deposits or against? Waiting for your comments after the article!

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