> 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:
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.