How do commercial banks work

The central bank is the “bank of the banks”. How does this work?

The commercial banks maintain a current account at the central bank and can thus borrow money at very short notice. The banks get the banknotes that they have to issue to their customers (be it at the counter or at the ATM) from the central bank, which has the monopoly on issuing banknotes. This debits their current accounts with the corresponding amounts.

The funds held in the central bank's account are also used to settle debts between the banks. Finally, the central bank can also stipulate that a minimum balance be held in the account: the minimum reserves.

All of these factors create a need for liquidity that drives banks to borrow from the central bank. By setting the terms on these loans, the central bank influences the interest rates.

In the euro area, the Eurosystem's lending to commercial banks is mainly carried out through a special procedure that consists of granting weekly loans with a maturity of two weeks.

The commercial banks have to deposit certain guarantees with the central banks; banks established in Belgium must do so at the National Bank. They also indicate the amount of loan they want to take out and the interest rate they are willing to pay, being the Minimum rate determined by the Governing Council.

These offers are passed on to the European Central Bank (ECB) by the National Bank as well as by the other national central banks of the Eurosystem. The ECB decides on the amount of credit to be granted, giving preference to those banks whose interest rates were the highest.