If the bank lends you money, the opportunity cost of that money is the Fed funds rate. This, along with legal limits on how much lending it may pile on top of its equity, is the operational constraint on bank lending. This is irrespective of the rate it pays on deposits, or the volume of deposits.

Yes, it can use deposits to defray that expense, if it can obtain them at less than the Fed funds rate. But if it can obtain deposits at less than the Fed funds rate, it could also just place them in the interbank market or at the discount window to make the Fed funds rate on them. If the bank made no loans at all, it would still be trying to attract those deposits. And if the bank had no depositors, it would not alter one whit the quantity or interest rate of its lending.

OK, in Goldman's case this is not true. Goldman doesn't take deposits because of a business case for taking deposits. Goldman takes deposits so it can hold them hostage if the federal government decides that Goldman needs to go away. But Goldman is special.

- Jake

Friends come and go. Enemies accumulate.