Why do banks need our deposits?

It doesn't matter, whether loans create deposits or vice versa, banks still need some cash to lend it to borrowers. And the cheapest way to do it - collect money from people and pay them some interest (lower than bank's required return on equity).

Are you sure about your conclusion that reserve requirements should be kept at minimum (regulatory) levels? Deposits will also count for the net stable funding ratio.

Why is the grass green? Why is the sky blue? How do magnets work? Do all dogs go to heaven? I don't think anyone knows the answer to any of these questions we just accept them as fact and move on with our lives.

In Commercial banking, plain vanilla stuff, you care about your net interest margin which is the spread between which you pay (or buy money, depending on how you view it) interest and what you lend (sell money) at. Pretty simple stuff. There are many different sources of funding and I think this is where you are getting hung up. You can raise capital to lend out via selling shares to investors, taking in deposits and paying out interest on them then loaning them out or via more wholesale type funding sources such as money from other banks or whatever. You take said deposits, keep 10% of the money in reserve, and loan out the rest. Why would I want more deposits? Scale is a wonderful thing. The bigger you get, the more money you can make. That's the whole point, really and that is why banks are constantly seeking deposits. Deposits are a relatively cheap source of funding.

The whole point is to make money, and taking in more deposits and making more loans accomplishes that goal. Period. Unless they suck at lending, of course.

And, by the way, this loans create deposits is true only for the banking system as a whole. On individual level every bank is operating as described by above posts. And combining macro and micro view may be tricky.

Also, to my limited knowledge, banks fight to make more loans much more aggressively than the do for deposits. Low interest rates, etc.

@BulatD,

But arent the capital requirements the only constraint when it comes to lending. So basically, why do I have to pay for excess deposits when my lending amount is fixed with my capital (ie. pretty much my equity, given few amendments due to bank capital definition)

I am probably missing something crucial here; but imagine I have a new bank with 300 equity. Isn't my lending fixed at 3000, given my equity levels? (say hypothethically Basel requirements for capital are %10) Well when I have more deposits I have more cash and my liabilities increase too, however my lending should not increase as a result of more deposits right? Cause deposits are not form of capital.

So If i have say enough deposits from households to cover my daily needs (or weekly, or monthly whatever), then I don't need people to bring me more money right? Because we are assuming there wont be bank runs and people wont demand money at the same time. But that was the initial theory with money creation and banking, no?

I mean if I could only lend out with what households brought me, I would not be able to create more money right. But even if I keep a fraction of that money (say 10%), then I am still assuming the same no bank run thing. Hence how do more deposits increase my lending?

@Skinnayy

Actually what I've been saying initially was that your example in reality was not correct. What you're describing is the money multiplier right?

But what I understand from here, is that the bank actually does not need that initial 1000 USD deposit to create that money (around 9 times), in fact, it does it through lending and then writing the deposit.

Or am I missing something here? check this out

Ah I cant post links but please write bank of england money creation in google, there is a pdf about it.

@ BulatD, King Kong

Aren't you both assuming that banks need to have deposits first in order to be able to loan funds? However as you may read from their report (Bank of England, how money is created)

"The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses. In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks."

Am i missing something here, or is it suggesting that you really do not need deposits to be able to make the loan, so in my equity example, in order to make that 3000 loan, I really don't need to have 3000 deposits. Well even without that no bank has that money if all depositors ask for their money anyway right.

But here they suggest that the money multipler as you tried to desrcibe, is also wrong. They don't seem to be lending the money you and I bring to the bank. It just seems they don't need that.

Historically, value-added created deposits, which, in turn, would enable loans. In the modern world, it's all gotten quite a bit more complicated, such that it's become a chicken/egg problem.

Banks require funding to operate, since what they do is, simplistically, maturity and liquidity transformations. Deposits are considered a good source of funding since they are relatively "sticky"/stable. That's why banks want your deposits.