Digital currency calls into question the role of traditional commercial banking. If you don't need to store your money in a bank anymore then what service do banks provide to their depositors? I've been imagining for a while now that commercial banks will eventually start looking more like investment intermediaries. You only put money in the "bank" if you're willing to take on some risk.
Why do you think banks care that much about depositors storing money in them?
The main way banks make money is by lending money, which also creates matching bank deposits. They do require some reserve-backed deposits for liquidity, capital adequacy ratios/reserve requirements, but not that much.
The main way banks make money is by lending money, which also creates matching bank deposits.
Yes. But this only works if the banking system, on average, holds onto the deposits it creates. This way of doing things would break down if everybody withdrew their deposits into cash every time they got a loan and everybody only transacted in cash. The same thing would happen if borrowers immediately withdrew their deposits into CBCoin.
> what service do banks provide to their depositors?
Risk.
That is, banks should pay more interest (or have less-negative rates) than the CB currency, because
1. They're riskier. They can have solvency problems and liquidity problems (mitigated by the CB and the law, now and in the future to varying extents)
2. They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits.
> They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits.
As I understand it banks don't use deposits to back-up lending. There are folks in HN more knowledgeable then myself that may correct me, however, banks leverage Tier 1 capital to create loans. Deposits are the result of the loans and not vice versa. So banks aren't paying you interest because they need your deposits in order to lend.
Steps 2 and 3 usually happen at the same time, AIUI you don't actually have the money in your bank account.
Now, in the general case the "someone else" belongs to another bank. When "you" give them the money, your bank has to fork over a chunk of cash. They actually have to get that cash from somewhere. Either that have loads of spare money, or they have deposits, or they get loans themselves. If they get a loan they pay the loan rate (say the Fed funds rate), if they have deposits they presumably pay less.
On the other hand, if the "someone else" belongs to the same bank, the bank actually still needs to have some (though not as much) cash to support this -- that's the "fractional" in "fractional reserve lending". The loan to you is an asset, the other guy's balance is a liability, but the bank is legally required to have cash to support deposits, not just promises and collateral.
> "They want your money to lend to other people at yet higher interest rates."
Banks don't rely on existing deposits to make loans, the loans are backed by themselves, they're created out of nothing. I'd recommend this short video which shows how banks create money from loans:
> banks will eventually start looking more like investment intermediaries
As you stated if you divorce payments from lending they are simply investment intermediaries. I'd argue that today the payment systems versus lending mechanisms are completely independent and yet TBTF banks are protected via CB from failing as if the two (payment systems and lending) were inseparable.
it's also worth mentioning that the current generation digital currency only functions because it's got a field-tested decentralized trust model. That's a pretty new thing. It's nice to have a corporate entity that you can trust will handle your transactions and won't (usually) absocond with your assets.
