How Banks Create Money

Banks create money by making loans. When a customer takes out a personal loan, the bank records it on the assets side of its balance sheet and credits the customer’s deposit account on the liabilities side.

The bank’s balance sheet has grown on both sides, and the supply of money into the economy has increased, by the size of the loan. The bank has created ‘broad’ money without any change in the amount of ‘base’ money in the economy. Paying off a bank loan, mortgage or credit card, conversely, destroys money.

Money has three functions in a modern economy: a store of value, a unit of account and a medium of exchange. And it exists in different forms. By making loans, banks create money, but several factors limit their ability to do so.

Key learning objectives:
What functions does money have?
What types of money exist?
How do banks create money by making loans?
What limits banks’ ability to create money?

You can learn more about the functions of money and find other videos on how banks create money here: https://financeunlocked.com/how-banks...

Tim Skeet is a banker with more than 35 years experience in the financial markets. Tim has been an ICMA board member and an ECBC steering committee member. Tim is also a Freeman of the City of London.

You can find more of Tim Skeet’s videos here: https://financeunlocked.com/expert/ti...

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