Re: Why do the banks need my money? (CD offerings)

From: William F Hummel (wfhummel_at_comcast.net)
Date: 07/27/04 

Date: Tue, 27 Jul 2004 03:57:27 GMT

On Tue, 27 Jul 2004 02:31:45 GMT, Mason A. Clark
<masoncNOT@THISix.netcom.comQQQ> wrote:
>
>Apropos of banking, money, credit, the Fed, etc.
>
>Local banks are advertising CD's at "high" interest
>rates -- high compared to bank accounts and high
>compared to the Fed discount rate.
>
>Why do the banks need this money? Is it just a
>marketing scheme to get new depositors? But if
>so, why do they need new depositors? Can't they
>make loans to create money and depositors?
>
>(I know this has been answered by my memory ain't good.)
>
Banks sell CDs when they want to extend the average maturity of their
deposit liabilities, or when they want to convert demand deposits into
term deposits. Reserves are required against demand deposits but not
term deposits such as CDs. By converting demand deposits to term
deposits, the bank frees up reserves that it can then use to issue
more loans. Alternatively the bank could borrow reserves in the money
market to support increased lending, but the money market interest
rate is normally higher than what the bank must pay on CDs of the same
maturity.

A bank doesn't acquire reserves by selling CDs to its own depositors.
That is simply an internal bookkeeping switch. But if a buyer pays
for the CD with a check on another bank, the bank will acquire the
reserves lost by the other bank.

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