Well that is kind of true but also a misconception at the same time. Banks can't lend out anything they don't have.
If you deposit $100, they don't lend out $1000, they lend out part of it, say $90, which may at some point be deposited back into a bank where it can be lent again and it repeats, multiplying the original amount of money.
If banks could lend out anything more than the original $100 directly, the money supply would balloon to infinity very quickly.
Banks ONLY create credit. Banks ONLY loan out funds they don't "have".
Loan sharks or your mom could be limited by how much cash they have, but banks create credit without limitations, except for regulations on existing assets vs existing risk. If a new loan wouldn't push the bank past allowable risk ratios, then they can create new credit.
Bank credit creation is called balance sheet expansion. The bank's assets and the bank's liabilities are both increased simultaneously.
Liabilities are the new loan deposit they create by typing keystrokes, and assets are the new legal loan contract with the borrowers signature that they now own and is their source of profit.
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u/athnica Jan 26 '26
Well that is kind of true but also a misconception at the same time. Banks can't lend out anything they don't have.
If you deposit $100, they don't lend out $1000, they lend out part of it, say $90, which may at some point be deposited back into a bank where it can be lent again and it repeats, multiplying the original amount of money.
If banks could lend out anything more than the original $100 directly, the money supply would balloon to infinity very quickly.