[kahnpro]

Why would a bank take deposits at all then?

I'm not saying you're wrong. It just seems like something is missing from the picture in your explanation.

When I opened my bank account, I deposited say £5000 cash. What does the bank do with this money?

I was under the impression that the bank doesn't actually keep this £5000 in cash, only £500 maybe, and uses the rest to lend money, but you seem to be saying that they can't actually use my deposit.

[soVeryTired]

Deposits are a relatively cheap way of attracting reserves. When you added £5000 from say an account at Santander, Santander lost a liability (the deposit) and simultaneously transferred some reserves to your current bank.

Banks can also attract reserves by borrowing in money markets (cheap but short term) or issuing long term debt (stable but expensive), or by persuading customers to open accounts and keep them in positive balance. In practice it will use a mix of all three, attempting to match the maturity profile of its liabilities.

The central bank will also create reserves and lend them to your bank if your bank can't raise them elsewhere for some reason. But borrowing from the central bank can spook investors, and it's also expensive.

A bank that doesn't have reserves can't settle its debts to other banks (like the debt you incurred by moving your £5000) and so can't function in the banking system. It has to get reserves from somewhere, and persuading consumers to park deposits in an account is one useful way to do so.

[neilwilson]

"When I opened my bank account, I deposited say £5000 cash. What does the bank do with this money?"

It burns it. Probably quite literally.

The cash represents a transfer from the central bank into the commercial bank's deposit account at the central bank - for which it receives an interest rate.

Cash is just a receipt for deposits held at the central bank.