4 ms·

If the central bank doesn't set a rate, then the interbank rate will drift to zero - because money is near costless to produce and no chance of non-payment beca

If the central bank doesn't set a rate, then the interbank rate will drift to zero - because money is near costless to produce and no chance of non-payment because there is only one central bank in a currency and central bank money can't go anywhere else. That doesn't stop the rate for lending to businesses being higher than that because there is a risk of non-payment there. There is more than one commercial bank. Every form of money has its 'own' rate. There is no One Interest Rate to Rule Them All - contrary to neoliberal myth.

PeterisP 4y ago
Wait, that's not how central bank lending works - you seem to equate "not setting a rate" with "setting a rate to 0" and offering limitless lending to commercial banks at that rate - which is a very high level of intervention IMHO; I'd rather equate "not setting a rate" by the central bank reducing its participation in the interbank lending and stopping this injection of 0-rate money, in which case the interbank lending rate will become dominated by the actual market competition, because commercial banks can't arbitrarily produce money.
- neilwilson 4y ago
  That's exactly how central bank lending works. You have a fallacy of composition. In reality the central bank doesn't lend to banks. The banks lend to each other and they do arbitrarily 'create money' to do so. The commercial banks have accounts with each other. That's what interbank lending is, and what they clear to at the end of the day. In Bank A it is DR Bank B, CR Customer 2 Deposit. In Bank B it is DR Customer 1 Loan, CR Bank A. They can't clear interbank payments unless that happens.[1] The Bank of England has a full document on it [0] [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... [1]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos...
  - reese_john 4y ago
    > In reality the central bank doesn't lend to banks. Central banks absolutely do lend to banks through discount window lending and other means. > The commercial banks have accounts with each other. That's what interbank lending is, and what they clear to at the end of the day. > In Bank A it is DR Bank B, CR Customer 2 Deposit. In Bank B it is DR Customer 1 Loan, CR Bank A. They can't clear interbank payments unless that happens.[1] There is not a one true way to do interbank lending, since it depends on regulation and the underlying market infrastructure used - therefore it is not a fact that banks arbitrarily 'create money' to do so. Banks can lend to each other using central counterparty clearing houses (CCP) as intermediates, in that case, Bank A and Bank B will have accounts with the CCP, who will do all the clearing & settlement.

PeterisP 4y ago

Wait, that's not how central bank lending works - you seem to equate "not setting a rate" with "setting a rate to 0" and offering limitless lending to commercial banks at that rate - which is a very high level of intervention IMHO; I'd rather equate "not setting a rate" by the central bank reducing its participation in the interbank lending and stopping this injection of 0-rate money, in which case the interbank lending rate will become dominated by the actual market competition, because commercial banks can't arbitrarily produce money.

neilwilson 4y ago
That's exactly how central bank lending works. You have a fallacy of composition. In reality the central bank doesn't lend to banks. The banks lend to each other and they do arbitrarily 'create money' to do so. The commercial banks have accounts with each other. That's what interbank lending is, and what they clear to at the end of the day. In Bank A it is DR Bank B, CR Customer 2 Deposit. In Bank B it is DR Customer 1 Loan, CR Bank A. They can't clear interbank payments unless that happens.[1] The Bank of England has a full document on it [0] [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... [1]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos...
- reese_john 4y ago
  > In reality the central bank doesn't lend to banks. Central banks absolutely do lend to banks through discount window lending and other means. > The commercial banks have accounts with each other. That's what interbank lending is, and what they clear to at the end of the day. > In Bank A it is DR Bank B, CR Customer 2 Deposit. In Bank B it is DR Customer 1 Loan, CR Bank A. They can't clear interbank payments unless that happens.[1] There is not a one true way to do interbank lending, since it depends on regulation and the underlying market infrastructure used - therefore it is not a fact that banks arbitrarily 'create money' to do so. Banks can lend to each other using central counterparty clearing houses (CCP) as intermediates, in that case, Bank A and Bank B will have accounts with the CCP, who will do all the clearing & settlement.