Bankers banks function
Answers
The commercial banks maintain a current account with the central bank and can borrow money in the very short term. Thus, the banks which have to supply banknotes for their customers (either over the counter or through automatic teller machines) obtain them from the central bank which has an issuing monopoly.
The central bank debits their current accounts accordingly. Balances held on accounts with the central bank are also used to settle debts between banks. Finally, the central bank may require the maintenance of a minimum credit balance on the account: the monetary reserves.
All these factors create a need for liquidity which causes the banks to make use of central bank credit. It is by fixing the terms for such credit that the central bank influences interest rates.
In the euro area, Eurosystem lending to commercial banks is effected mainly by a special procedure which consists in granting credit every week for a two-week period.
The commercial banks have to lodge a number of guarantees with the central banks; in the case of banks established in Belgium these are lodged with the National Bank. They also indicate the amount of credit which they wish to obtain and the interest rate which they are prepared to pay, the minimum rate being fixed by the ECB Governing Council.
These bids are sent to the European Central Bank (ECB) by the National Bank and by the other national central banks of the Eurosystem. The ECB decides the amounts to be lent by granting credit first to the banks offering to pay the highest interest rates.