How does a banking system function when interest rates are 0%?

Banks make their money on the difference between the cost of borrowing money and how much they make lending it out.

Most banks borrow money from a central bank and lend it out at a higher rate. Only a small proportion

of their loan book is money from depositors.

If the interest rate is at zero, then the economy is most likely suffering deflation with prices getting cheaper.

People and companies need to store the money they need in the short to medium term in banks.

The interest is based on the inflationary trend. Usually the interest is less when there is no inflation in that country. Depositors keep their amount in the bank for their convenience. The check transactions and the usages of credit cards save a lot of currency dealing ( carrying)

Banks are getting income through foreign exchange dealings ( difference between buying and selling rate) money transfers, issuing of guarantees, LCs , handling documents of imports and exports etc..

ideal position to submit this. in reality, expenses of activity are had to information the housing bubble. enable me clarify. The advance cycle takes position as banks (usually lead through a needed monetary corporation) advance the provision of money, which may be finished with the help of money printing, fractional reserve banking, and different ability. As banks personal loan this funds out, it motives the provision of loanable funds to advance. This ends up in decrease expenses of activity. those decrease expenses of activity cascade into the upward thrust area of the corporation cycle, because it misleads people into doing unsustainable events, alongside with making undesirable investments or procuring an unaffordable domicile. The unsustainable events are printed and the bust occurs at the same time as the banks elect to sluggish the speed of economic creation, it truly is what the fed did. This will advance the activity price, because the low activity price is now no longer sustained through the money pumping. This raising of the activity price to the authentic element shows people the topic matters. the topic matters linked with a recession, activity loss, foreclosure, and so on. are a right away results of this. it isn't a lot that expenses of activity upward thrust, as that they go back to round an similar stages they were at formerly the money pumping.

In far eastern economies, the tradition of saving is so ingrained that most people save approximately 15% of net income annually, the level of interest payable by the bank makes little difference.

in the uk ... the interest rate of 0% only applies to savings.

Loans etc are all at about 5% interest.

thats how it works!

plus, mortgages are about 75% over the lifetime of the mortgage so you borrow £110,000 and pay back £275,000.

charges for going overdrawn etc all mount up too!

dont feel sorry for the banks EVER cos they are minted!!

thats the entire point.

the central bank keeps interestrates low in situations where the economy needs boost. saving becomes less interesting and people will spend their money instead of put it in a bank account. increasing the available capital for coorporations by making stock more interesting. is done by keeping interestrates low.

US answer:

Banks make loans from the federal governement at seriously low rates to stimulate lending to people to boost the economy.

they could get money from the government or use what little money they have from clients (people like you and me) and invest in whatever they like and hope that they get alot of money back