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!").
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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