Posted: Mar 29, 2013 8:08 am
Panderos wrote:Blackadder, thanks for replying. I know the video referred to it but this thread isn't intended to be about the financial crisis, and I don't disagree about what you said there. Here I'm really interested in how banking / central banking works (and I'm not, at least not yet, interested in their new post-crisis 'innovations'. Just the 'normal stuff').
Anyway, couple of questions (for now)
First, do you know why banks are offering accounts with interest rates higher than the Central Bank Base rate? I mean if they can borrow at 0.5% from the Bank of England, why set up a 5% current account?
Generally (and as always I am simplifying) there are two reasons why a bank may be offering a rate of interest that is significantly higher than the base rate.
First, note that the BofE base rate is a rate for overnight deposits. It is therefore the rate for the shortest possible deposit. Most of the time (although there are exceptions), rates for longer term deposits are higher than for shorter terms, for numerous reasons that I will skip over for now. This is referred to as a "positive yield curve". The yield curve plots the interest rates that apply in a market at each point in the time scale from overnight out to 25 years. A bank offering a "high" interest rate will probably require you to lock up your funds for 3 to 5 years, I would expect. It can offer a higher rate since it can invest your deposit at a higher rate than the overnight headline rate. Here's a graph of a current UK yield curve.
The second reason, (and the two reasons can sometime both apply) is that the bank is trying to build its depositor base
and is willing to offer an off-market rate just to get you in. This is no different to a supermarket loss-leader product. It is usually temporary and lasts only until the bank has achieved its target for new deposits.
Panderos wrote:
Second, is it your understanding that accounts with a central bank are separate from accounts within commercial banks? That is, a bank cannot just type a number into one of their current accounts and then transfer that into their account with the central bank?
I'm not sure whose accounts you mean. I assume you mean a commercial bank's account with a central bank as opposed to a commercial bank's account with another commercial bank? They are certainly separate. They are not different, so a bank cannot simply "type a number" into its system and claim that it has created money. There clearing and settlement systems in every country that the banks use to process transfers between each other. A bank cannot simply initiate a transfer to another bank without showing which account the money is leaving. Otherwise the transfer will fail to settle and be voided.