And you think that the bank just keeps sitting on that cash until you withdraw it again, paying you interest in the meantime?

If they are sitting on excess cash, they can lower interest rates on deposits.

The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.

Sure, but you don't get a useful model of a bank by only looking at the short term like this.

> The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.

They do change: Cash is a (risk-free, modulo safe storage) asset, the deposit is a liability. This has consequences for all kinds of metrics vital to the running of a bank.

Correct, although if they don't do something to make money with the cash they take in as deposits, they won't have sufficient income to cover their expenses, let alone make a profit.

The effecf of the deposit is separate from the effects of decisions the bank makes after the deposit.

The deposit creates a cash asset and an equal liability for the increases account balance.

Other transactions have other effects.

It’s cash, until the bank converts it to something else. For example a loan.

Yes, it is initially cash. But if the bank wants to make any money, it needs to convert that cash into some other vehicle for generating interest.

One way to generate interest is to simply park it at the Fed. Check out The Narrow Bank for the story of an upstart that wanted to make that their whole business model.

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...

Thank you for this! Very interesting.

You're right, the full million isn't a liability. But anyone depositing 1M isn't putting it in a non-interest bearing account. So now you are generating liability every second you sit on the cash. Which means you need to "invest" it.

No one is showing up at a bank and depositing $1M of physical cash (except maybe Mexican drug cartels).

That $1M you're depositing is presumably the liability of another bank.

Doesn't matter if it's physical cash or an electronic ledger since both the electronic ledger and the physical green pieces of paper are liabilities of the banking system, specifically for US dollars they're both liabilities of the Federal Reserve.

> specifically for US dollars they're both liabilities of the Federal Reserve.

I don't think that's right. There are banks outside the US that hold US dollars that the Federal Reserve has no jurisdiction over. They create more currency through fractional reserve lending for their local currency as well as any dollar denominated loans they make. I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?

Dollars are bank notes “promises to repay”. It used to be many different bank issues notes payable in gold, now it’s one bank - the Fed, and it’s no longer gold.

It doesnt matter if the US dollars is held outside the US. The dollar represents a promise by the fed to pay, and thus is a liability to the fed.

Of course the fed has the power to create and destroy dollars.

> Of course the fed has the power to create and destroy dollars.

So to banks outside the US. That's how fractional reserve banking works. If I go to the UK and deposit $1m USD, and they loan out $900k of that to you, that UK based bank has created $900k.

> I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?

To my sibling: Missing is the fact that US dollars are bank notes issued by the Federal Reserve. Issuing a note creates a liability.

https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...