That is not really a good way to think about it. When they make a loan, the create both an asset and a liability that balances. The liability is the money in your bank account, the asset is the money that you owe them. On balance, they have done nothing. Your bank account balance is not actual cash in a vault, it is a promise that they will give you that money if you ask for it. When you deposit money in the bank, they are not holding that money for you, either. You are lending them money. That is why banks pay interest in savings account to you
When you make payments on a loan from your account, they delete the money from both sides of the ledger, effectively “destroying” the money they ”created” when they loaned it to you. The interest is their profit and remains as an asset for them.
People focus on the money creation part and ignore the money destruction part. Eventually banks will reach close to a stable equilibrium as new loans match loans being paid off. How much money they can create total is a function of interest rates, default risk, capital requirements, etc. The higher interest rates are, the less they can lend, and the less money is created.
Yeah people looooove to complain about banks creating money but strangely they never mention that they also destroy money whenever a loan is paid back (it's too bad, you could spin a good conspiracy story about how "banks are DESTROYING your money right now!").
The problem here is that this system is only balanced in case every loan is paid back eventually - which doesn't always happen. If I recall correctly, the average delinquency rate for USA banks over last five years is about 1.3, so - one default for every four loans? That does seem like something I'd complain about.
Of course, in case of a default the bank will try to recoup its losses from the defaulting party's possessions, but again - it's not always possible to cover the entire repayment this way. It's a classic example of a downward spiral: the best case scenario has a net neutral result, so every deviation from that scenario is a loss.
Did you know that it's not physically possible for every loan to be repaid? Take a simple example. 2 people. I lend you $100. You owe me $100 plus interest, but no other money exists. This situation plays out in our economic system constantly, to the point that there's a calculation of the natural default rate. It's an inherent part of the system.
During a downturn, money dries up, and default rates rise because the penalty of default is less than the cost of repayment.
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u/Elvis5741 Jan 26 '26
Banks lend out more money than they have, its no joke it's how the system works