THE LOAN THAT CREATES NEW MONEY WITHOUT PRINTING A SINGLE BANKNOTE
When a bank approves a loan, something strange happens: new money can appear in your account even though nobody printed it.
Imagine you walk into a bank and receive a €100,000 mortgage.
Most people imagine the bank must already have €100,000 sitting somewhere, waiting to be handed to you.
But modern banking doesn't work quite like that.
When a commercial bank makes a loan, it can simultaneously create a new deposit in the borrower's account.
The loan becomes an asset for the bank.
The new deposit becomes a liability.
And new deposit money has been created.
THE €100,000 MORTGAGE
Suppose a bank approves your €100,000 mortgage.
Before the loan:
Your bank account: €0
After the loan:
Your bank account: €100,000
But there wasn't necessarily a pile of €100,000 banknotes moved from the bank's vault into your account.
Instead, the bank records:
Asset: +€100,000 loan
Liability: +€100,000 deposit
The Bank of England describes this as a matching creation of a loan and a deposit.
The money you can now spend exists as a bank deposit.
BUT WHERE DID THE MONEY COME FROM?
This is where the idea becomes counterintuitive.
The bank didn't simply take €100,000 from another customer's savings account and hand it to you.
In the act of lending, the bank creates a new deposit.
This is one reason the popular idea that banks simply "lend out deposits" is incomplete.
The Bank of England specifically says that banks do not simply act as intermediaries taking existing deposits and multiplying them into loans.
The balance sheet expands.
New loan → new deposit
THEN YOU BUY THE HOUSE
Now suppose you use the €100,000 deposit to pay the seller.
Your account falls:
€100,000 → €0
But the seller now has €100,000 in their bank account.
The money hasn't disappeared.
It has moved.
If the seller uses a different bank, the banks settle the payment between themselves using central-bank money, such as reserves.
So there are actually two different things moving through the system:
Commercial bank deposits
and
Central-bank reserves used for settlement between banks.
THE BANK DIDN'T CREATE €100,000 OF WEALTH
This distinction is crucial.
The bank created money.
It did not create €100,000 of wealth.
You now have:
+€100,000 deposit
but also:
+€100,000 debt
The bank has:
+€100,000 loan asset
and
+€100,000 deposit liability
The economy now has additional bank deposit money, but it also has an additional financial obligation.
Money creation and wealth creation are not the same thing.
AND THEN SOMETHING EVEN STRANGER HAPPENS
You start repaying the mortgage.
Suppose you repay €1,000 of principal.
Your outstanding debt falls.
But the corresponding bank deposit money is also removed from the banking system.
So:
Loan repayment → loan decreases → deposit money decreases
The Bank of England describes this as money being "deleted" as loans are repaid.
This means commercial bank money can be created and destroyed through the lending cycle.
SO CAN BANKS CREATE INFINITE MONEY?
No.
This is where the story is often misunderstood.
A bank cannot simply decide:
"Let's create €1 trillion today."
Banks face constraints including:
The Bank of England explicitly notes that banks cannot create money without limit and that profitability, regulation and financial constraints restrict lending.
WHAT ABOUT CENTRAL BANKS?
Commercial banks create deposit money.
Central banks create central-bank money, including physical currency and bank reserves.
These are different forms of money.
For example, the Federal Reserve explains that reserve balances are liabilities of the Federal Reserve and assets of commercial banks, and that only the Federal Reserve can create those reserves.
So when you see a €100,000 balance in your checking account, you are not looking at €100,000 of central-bank notes sitting somewhere.
You're looking at a claim on your commercial bank.
THE OLD "MONEY MULTIPLIER" STORY IS TOO SIMPLE
You may have heard a textbook explanation like this:
Bank receives €1,000 → keeps 10% → lends €900 → another bank lends €810 → and so on.
That model can be useful for introducing certain monetary concepts.
But it is not a good description of how modern banking actually creates most deposit money.
The Bank of England has explicitly said that banks do not simply multiply central-bank money into loans and deposits in the way that simple money-multiplier models suggest.
Modern bank lending works much more directly:
Bank approves loan
↓
Bank creates deposit
↓
Borrower spends deposit
↓
Money moves between accounts
↓
Loan remains outstanding
↓
Repayment gradually destroys the corresponding deposit money
WHY THIS MATTERS
This mechanism is one reason bank lending is so important to the economy.
When banks increase lending, they can increase the amount of deposit money circulating through the economy.
When lending contracts or borrowers repay debt, the amount of deposit money can fall.
The Bank of England's July 2026 Monetary Policy Report still describes bank lending as an important driver of changes in broad money.
So the banking system isn't simply moving around a fixed pile of money.
It is continually creating and destroying deposit money through financial transactions.
THE REALLY STRANGE PART
The next time someone says:
"Banks can only lend money that someone else deposited first."
The answer is more complicated.
A commercial bank can create a new deposit when it makes a loan.
But that doesn't mean banks can create unlimited money, and it doesn't mean they create wealth from nothing.
They create a financial claim.
The borrower receives money.
The bank receives a loan asset.
Both sides of the balance sheet expand.
And when the principal is repaid, the corresponding deposit money can disappear.
MAACAT PERSPECTIVE
One of the strangest things about modern money is that a bank doesn't need to print a banknote to create new money.
Sometimes, it only needs to make a loan and update its balance sheet.
Loan → deposit → spending → repayment → money destruction
That's why understanding banking requires looking beyond physical cash.
The money in your bank account isn't necessarily a stack of notes waiting for you.
It is part of a financial system built around claims, liabilities, loans and deposits.
And every time a bank approves a loan, that system can create something that didn't exist in the money supply before:
new deposit money.
