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by soVeryTired
2824 days ago
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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. |
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