Why do banks have to settle with each other at the end of the day? - ProProfs Discuss
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Why do banks have to settle with each other at the end of the day?

Asked by Charlie, Last updated: Nov 25, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The bank of canada states the following: throughout any given day, the lvts members send payments back and forth to each other. when the transactions are added up at the end of the day, some of these financial institutions may end up needing money, while others may have funds left over. every day, lvts members borrow and lend money to each other on a one-day basis, to cover their net lvts positions. If a bank takes in more than it sends out on a given day, they are required by the bank of canada to reduce their net balance to zero. if a bank sends out more than it takes in on a given day, they are also required by the bank of canada to reduce their net balance to zero. That means those banks that have excess money lend their funds to those banks that run deficits for the day. the interest rate charged on these loans establishes the overnight rate of interest.

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