Banks are not intermediaries?

It has become fashionable recently to claim banks are not intermediaries, i.e. apparently they don’t collect savings from savers and lend on those savings to borrowers. E.g. see here, here, and here.

If that’s the case, one has to wonder why banks have dished out billions over the last fifty or hundred years to depositors and bond-holders by way of interest: the object of the exercise is to attract money from depositors and bond holders isn't it? But if banks do not need that money before making loans, why dish out those billions?

It could perhaps be argued in the case of depositors that the object of the exercise is to grab customers with a view to then selling those customers the other services, like supplying credit cards, mortgages, administering current accounts (“checking accounts” in US parlance). I.e. the interest paid on some current accounts is perhaps a loss leader.

But that argument is doubtful. Supermarkets go in for the loss leader trick, but the actual loss leader items change from one year to the next and from supermarket to supermarket. That is, in one year supermarket A may offer cut price baked beans, while supermarket B offers cut price fruit. Then next year A will try “buy one get one free” for some items, while B will try cut price beer.

In contrast, while some banks have paid no interest on instant access accounts in recent years because of the fall in interest rates over the last twenty years or so, they INVARIABLE pay interest on one or two month term accounts. That makes it look like the latter interest is not just some sort of cheap trick designed to pull in new customers.

Plus in the case of bond-holders, the loss leader idea is as good as irrelevant. That is banks do not sell bonds with a view to turning bond-holders into purchasers of other products.

The reality is that a bank cannot simply lend out millions willy nilly without somehow or other having money FLOWING IN, otherwise the bank will run short of reserves and will have to go cap in hand to other banks or the central bank with a view to borrowing reserves.

But that’s not to say a bank has to have exactly $X dollars flowing in for every $X flowing out in the form of loans. I.e. banks do have some leeway. That is, to a limited extent, they can lend money without having any corresponding amount of money flowing into their coffers. But if a bank goes too far in that direction, that means, to repeat, it will have to borrow reserves, something banks do almost every day. But amounts borrowed that way are small compared to their total assets or liabilities.

So I suggest that rather than claim banks are not intermediaries, it would be more accurate to say that basically they are intermediaries, but that they have limited scope for acting in what might be called a  “non intermediary” fashion