I'm a bit slow at times. Patriot81 raised this question in a thread last year and I did not have a good answer for it.

"2- if they [banks] can create their own money, why would they want our deposits?"

The background to this question is this thread.

A very good question. When a bank makes a new loan it creates brand new money which becomes a deposit. Loans create deposits, not the other way around as most people believe. So a very good question is why do they need deposits at all if they create deposits with new loans? I did not have a good answer (remember, I am high school educated with my senior year spending 5 out of 6 hours in shop class - couldn't get out of a required English class - I'm not a PHD economics professor) at the time.

Then reading about Fed minutes concerning the MF Global debacle it dawned on me (dughhhh). But a very key point to remember concerning banking is that when you go to the bank and make a deposit, either cash or check, the money that you deposit that was yours is no longer yours. It now belongs to the bank. You are merely an unsecured creditor to a demand account where the bank promises to repay you on request. Either by cashing it out, writing a check, debit card, wire transfer or whatever. But it is the banks money till you demand it back. Very importand distinction to understand why banks may want your deposits.

Here is the quote from the above linked article:

"The path of MF Global serves as an example of the vulnerability of firms that are heavily reliant on short-term wholesale funding. As shown in the bottom-right panel, the firm had a narrow equity buffer, and its liability structure was relatively unstable. Indeed, the firm had little longer-term unsecured debt and, since it was not a bank, no retail deposits. Instead, the firm had 61 percent of its liabilities in the form of repo transactions and other trading liabilities."

No retail deposits (my emphasis) Liquidity is why banks need your deposits. Your deposit is both an asset and a liability to them. But it is also an asset that they are free to use for whatever liquidity they might need short term. That is why they may need your deposits. And also a reason to question the viability of a bank if they are offering paying unusually high interest rates on deposits (they might be in shaky position and need the liquid asset). I'm remembering some of the high relative interest rates Savings and Loan Banks were paying right before the S&L crisis or some banks were paying before the latest financial meltdown and bank bail outs.

I would welcome additions or corrections from someone in banking or someone familiar with banking accounting. I'm no expert and have never claimed to be. I only discuss in the hopes of enlightenment for myself and others. I welcome correction if my assumption above is incorrect.

John