The Fed started paying interest on bank deposits as a way of pushing liquidity into the market when the banks themselves were unwilling to do enough lending to

The Fed started paying interest on bank deposits as a way of pushing liquidity into the market when the banks themselves were unwilling to do enough lending to restart the economy. With the deposit rate at 1.95%, a bank has to decide whether they can earn more lending to clients than just parking the cash at the Fed. Obviously at 1.95% there is still an incentive to engage in lending, otherwise the fed would drop the deposit rate to encourage that behavior.