|
Banks also need a bank
Banks need to have enough cash in reserve. They also need an account in order to make payments on behalf of their customers and for their own payments. For this purpose they open a sight deposit account at the National Bank. Banks can use money from this account to buy the banknotes from the National Bank which they need when paying out money.
But these sight deposit accounts are also used for another purpose. They are used for channelling money from the National Bank to the banks. Whereas the banks increase the supply of money to the economy by lending to their customers, the National Bank creates new money by lending to the banks. It does this by means of an exchange transaction that takes place between the banks and the National Bank. The banks exchange securities or foreign currencies for money at the National Bank. As soon as such an exchange transaction has been concluded, the amount in question is transferred to the bank's sight deposit account. In this way the National Bank's money enters into circulation. The National Bank acts as "banker to the banks".
|
|
|
 |
|
|
|
Money is created when a bank concludes an exchange transaction with the National Bank. Money is given in exchange for securities or foreign currencies.
|
|
