This is a very confused assessment. Commercial banks hold deposits from households and pay an interest. These are liabilities on the bank’s balance sheet. The interest rate paid out here is unrelated to the interest charged on loans made by the bank. These loans are made ex nihilo; they are *not* contingent on retail deposits. Interest charged on loans is a function of bank determination taking into account factors such as perceived risk, profit targets, competition etc.
Deposits are a liability that the bank must honour, but the bank can always manage its liquidity through central bank reserves, interbank markets, or other funding, so the cost of deposits is not a strict constraint on lending rates.
Central bank policy rates can shape the interest rate window for banks as they need to manage reserve liquidity. Central bank rates affect the cost of banks accessing liquidity.
As for depositors, some may well draw down bank deposits and shift to more volatile assets such as securities. But this is not akin to changing the broad structure of enterprise financing, which remains dominated by bank lending.
The prevailing argument has been that it reduces long-term household incomes. The thinking goes that people then save more to compensate for the interest on their deposits that they would have otherwise received, which thus reduce consumption.
Arthur Kroeber does a great job of describing this process in his book "China's Economy - What Everyone Needs to Know" (2016), which came out almost a decade ago. Financial repression - in the form of artificially low deposit rates - was a key feature of China's economic policy during the early 21st century, and considered a key cause of low consumption compared to earlier in the reform era.
This is a very confused assessment. Commercial banks hold deposits from households and pay an interest. These are liabilities on their balance sheet bank’s balance sheet. The interest rate paid out here is unrelated to the interest charged on loans made by the bank. These loans are made ex nihilo; they are *not* contingent on retail deposits. Interest charged on loans is a function of bank determination taking into account factors such as perceived risk, profit targets, competition etc.
Deposits are a liability that the bank must honour, but the bank can always manage its liquidity through central bank reserves, interbank markets, or other funding, so the cost of deposits is not a strict constraint on lending rates.
Central bank policy rates can shape the interest rate window for banks as they need to manage reserve liquidity. Central bank rates affect the cost of banks accessing liquidity.
As for depositors, some may well draw down bank deposits and shift to more volatile assets such as securities. But this is not akin to changing the broad structure of enterprise financing, which remains dominated by bank lending.
This is a very confused assessment. Commercial banks hold deposits from households and pay an interest. These are liabilities on the bank’s balance sheet. The interest rate paid out here is unrelated to the interest charged on loans made by the bank. These loans are made ex nihilo; they are *not* contingent on retail deposits. Interest charged on loans is a function of bank determination taking into account factors such as perceived risk, profit targets, competition etc.
Deposits are a liability that the bank must honour, but the bank can always manage its liquidity through central bank reserves, interbank markets, or other funding, so the cost of deposits is not a strict constraint on lending rates.
Central bank policy rates can shape the interest rate window for banks as they need to manage reserve liquidity. Central bank rates affect the cost of banks accessing liquidity.
As for depositors, some may well draw down bank deposits and shift to more volatile assets such as securities. But this is not akin to changing the broad structure of enterprise financing, which remains dominated by bank lending.
Why does lowering the interest pay on deposits lower consumption?
Econ would argue the opposite - lower rates make spending today relatively more attractive and should encourage consumption.
The prevailing argument has been that it reduces long-term household incomes. The thinking goes that people then save more to compensate for the interest on their deposits that they would have otherwise received, which thus reduce consumption.
Arthur Kroeber does a great job of describing this process in his book "China's Economy - What Everyone Needs to Know" (2016), which came out almost a decade ago. Financial repression - in the form of artificially low deposit rates - was a key feature of China's economic policy during the early 21st century, and considered a key cause of low consumption compared to earlier in the reform era.
This is a very confused assessment. Commercial banks hold deposits from households and pay an interest. These are liabilities on their balance sheet bank’s balance sheet. The interest rate paid out here is unrelated to the interest charged on loans made by the bank. These loans are made ex nihilo; they are *not* contingent on retail deposits. Interest charged on loans is a function of bank determination taking into account factors such as perceived risk, profit targets, competition etc.
Deposits are a liability that the bank must honour, but the bank can always manage its liquidity through central bank reserves, interbank markets, or other funding, so the cost of deposits is not a strict constraint on lending rates.
Central bank policy rates can shape the interest rate window for banks as they need to manage reserve liquidity. Central bank rates affect the cost of banks accessing liquidity.
As for depositors, some may well draw down bank deposits and shift to more volatile assets such as securities. But this is not akin to changing the broad structure of enterprise financing, which remains dominated by bank lending.