If banks started simply depositing money with each other, then what else? [Source:] If banks started simply depositing money with each other, all else aside, then what would happen? Keep in mind that the interest rate is basically the price of money. Supply-and-demand would dictate that ... ♦ a huge inflow of capital => you can lower the interest rate paid on that capital ♦. Banks don't pay high interest (and certainly wouldn't do so to each other) because of their intristic good will; they pay high interest because they cannot secure capital funding at lower rates. This is a large reason why the large banks will generally pay much lower interest rates than smaller niche banks; the larger banks are seen as more reliable in the bond market, so are able to get funding more cheaply by issuing bonds.


I understand (and so ask NOT about:) that interest rate = the price of money = opportunity cost of money, and also the implication that I surrounded with ♦ (a lozenge). What else would result? Please differentiate and segregate the positive and negative effects.
The purpose of paying interest is to get people to lend you their money (by depositing it) so you can lend it out at a higher rate of interest. The argument here is that if the deposits outstrip the bank's ability to invest/lend, they don't need to offer as much interest to get those deposits. However, given current banking practice i don't think there is ever going to be more deposited funds than the bank can find profitable uses for, so the thought experiment sorta falls apart.