The cost to financial institutions for holding deposits

I'm hoping someone can explain why banks are charged for holding our deposits.

I get paid from my employer - no cash exchanges hands. A balance on one ledger decreases and is increased on another. So far as far as I can see it's only digits on a computer that have changed.

The banks then lodge these 'digits' with the central bank for safe keeping and get charged interest. Therefore no banks want to carry high levels of deposits and will potentially charge negative interest rates.

I'd understand if the banks had to deposit a level of gold, but I doubt that's the case. I'm obviously missing something. Can someone explain please?

mickdw

When you add in the whole loan book and then lending multiples of deposits, it makes no sense.

athlone573

Its done to encourage spending rather than saving.

Good explanation here :

https://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp

https://boards.ie/discussion/comment/117650920#Comment_117650920

The gist of that article is that deposits are good as it means banks don't have to borrow from the central bank and avoid interest charges. But, at the moment deposits are 'bad' costing banks money. This article doesn't explain that.

athlone573

Read it again.

Interest rates are a lever used by the Central Bank to influence public behaviour. Low interest rates to encourage spending and borrowing. High interest rates to encourage saving and cool down the economy.

https://boards.ie/discussion/comment/117654321#Comment_117654321

How does that relate to my query in the OP? Specifically to banks not wanting deposits?

athlone573

Banks don't want deposits because interest rates are negative and it costs them money to hold excess cash

This is because of central bank policy as I mentioned earlier

The fact that the money involved is electronic rather than paper or metal is neither here nor there.

Dohnjoe

https://www.boards.ie/discussion/2058200397/the-cost-to-financial-institutions-for-holding-deposits

I can't answer specifically for commercial banks, but long balances (via deposits) can represent risk/liability. Regulators may not want individual commercial banks to have high levels of deposits therefore may charge them in order to curb/reduce the exposure. This is speculation on my part, but on higher level banking for market infrastructure, that's how it works, we don't like the risk exposure.

athlone573

No that's not it (it may apply in certain cases but you're overcomplicating it)

This (monetary policy) is a basic of macroeconomics and there are any number of Wikipedia pages and articles about it.

Donald Trump

Banks will need to deposit reserves into their account at the central bank (or hold it in cash). The reserves are calculated based on certain inputs. The relevance to your question is that, all else equal, for every additional Euro you put into your account, the bank will need to put a certain additional amount into their own CB account. And they will be charged negative rates on that.

Another perspective is that if you deposit 100k with your bank, then your bank can go on to lend out a certain amount based on that. And it pays you 0% interest. But what if, instead of taking in your money and given you 0%, it could get it from a CB and pay a negative interest rate on that. 0% is higher than the negative rate. So it would be better for it if you did not give it your deposit