If banks do not lend on their deposits, as they used to do, and many banks have very little in the way of deposits now, how the heck does the banking system work? Remember when banks would do almost anything to get deposits? Free toaster ovens and other items? Now they seem annoyed if you have a savings account. If they are not lending on deposits, it must all be a house of cards.
Slice and dice and create derivatives. I'll take interest only months 72 to 86 of that package of 30 year mortgages.
Banks still lend on their deposits. The problem is that deposits tend to be pulled out of banks at the times when banks need them most (recall the scene from Its a Wonderful Life). To make them less susceptible to liquidity issues, the fed wants them to take on more long term debt which is more stable. Also, if a bank does eat through its equity, losses will then fall on these creditors and not on depositors, who the FDIC then has to make whole.
The lending they do is of their deposits.
and many banks have very little in the way of deposits now,
Our banks have over $2 trillion in excess reserves. Call it extra deposits.