2. What do Banks do?

Interest on deposits

Commercial banks pay interest on deposits. For current accounts, this may be very low, but for saving accounts, the interest rate can be significant. In a period of inflation, interest rates on deposits are very important for maintaining the real value of your savings. For example, if inflation is 4% then keeping cash will see the value of savings decrease in value. However, if the bank is paying an interest rate of 6%, then the real value of your savings will increase. For some customers, such as pensioners, interest payments on their bank savings can be an important source of income.

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