# why do banks lend to each other?



## z106 (8 Oct 2008)

Why do banks lend to each other?

If bank A lends to bank B, and then needs to borrow from bank C, then why lend so much to bank B in the first place?


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## mathepac (8 Oct 2008)

qwertyuiop said:


> Why do banks lend to each other? ...


Because no-one else trusts them?


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## Stifster (8 Oct 2008)

Amazing what you learn in a crisis eh? banks have different needs for different amounts of money daily. none of them actually have any money just lots and lots of promises to repay loans


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## Gulliver (10 Oct 2008)

It is a hugely interesting question which is at the heart of the current crisis.  The strangest bit is that all banks require to borrow huge amounts inter-bank - how can a market be created if everyone wants to borrow - and of course part of the answer is that there are other participants apart from banks in the inter-bank market.

The more fundamental part is - if inter-bank participants do not lend to banks, what do they do with surplus funds - answer: they place it with the Central banks - at a rate below inter-bank.  Is it not possible that the Central Banks could act as a broker to recirculate those funds into the market at a much greater rate than they do now?

When this current crisis is eventually over, there will be a return to good old-fashioned banking values whereby a bank is largely funded by its own depositors.  This will severely limit their capability to expand rapidly - or to boost the economy.  Capital will have to be rationed and directed towards productive sectors.  We are looking at a massive reduction in residential construction (which eats up capital for long periods) for quite a long time


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## NorfBank (10 Oct 2008)

qwertyuiop said:


> Why do banks lend to each other?
> 
> If bank A lends to bank B, and then needs to borrow from bank C, then why lend so much to bank B in the first place?




Because B is willing to pay a higher interest rate to A than the interest rate that C is charging?


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## dodonoghue (11 Oct 2008)

A lends to B
B lends to C and 
C lends to A


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## iggy (11 Oct 2008)

Stifster said:


> Amazing what you learn in a crisis eh? banks have different needs for different amounts of money daily. none of them actually have any money just lots and lots of promises to repay loans


 I always thought that each bank had a load of dosh stashed away in their vault and just used that as they needed it....what a simplistic `ol fool I`ve been.


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