A bank loan creates the deposit it pays out
When a commercial bank approves a loan, it normally records a new loan asset and credits the borrower with a new deposit liability. The deposit did not need to be transferred from a saver first. Repayment destroys that bank-created deposit money, while interest and interbank settlement follow additional flows.
A bank’s balance sheet expands on both sides: the borrower owes the bank, and the bank owes the depositor. If the borrower pays someone at another bank, reserves move between banks or are borrowed to settle the payment. Capital, liquidity, credit risk, regulation, funding costs and demand constrain lending; banks cannot create unlimited purchasing power without consequence. Central banks influence conditions through rates, reserves and regulation, but reserve balances are not usually multiplied mechanically into deposits by a fixed textbook ratio. Cash, bank deposits and central-bank reserves are distinct forms of money.
The sequence changes how questions about saving, lending and monetary policy are framed. Banks are not merely warehouses passing on identical units deposited by savers, yet neither are they unconstrained printers. Money creation is an accounting operation embedded in capital rules, settlement networks and borrowers’ ability to repay.
The borrower gains a spendable deposit and an equal debt. At loan creation, their net financial position has not increased by the face value, although access to liquidity has. The bank gains an asset and a matching liability, with expected profit and risk rather than free net worth. Later spending can finance real investment or inflate asset prices; the balance-sheet origin does not decide the economic use. That makes the case a model of disciplined inference, not permission to infer an unseen mechanism from resemblance alone.
A bank can credit its own ledger immediately, but customers spend across banks. Outgoing payments require reserve settlement, collateral, funding or incoming flows. A bank consistently making poor loans loses capital and confidence. Regulation and the central bank shape the price and availability of settlement liquidity. The power to create a deposit is local and immediate; the obligation to honour it is networked and persistent.
If banks create deposits, why do they compete for customer savings and wholesale funding?
Because deposits are relatively stable funding and outgoing payments create settlement needs. A loan may initially create a deposit at the same bank, but the recipient can move it elsewhere. Funding composition affects liquidity risk, regulatory ratios and cost. Attracting deposits is fully compatible with creating them during lending; it helps a bank retain or replace the liabilities it has issued.
Balance-sheet evidence showing that ordinary bank lending can occur only after an equal pre-existing customer deposit is transferred would contradict the described mechanism.
Which familiar flow diagram hides a balance sheet that changes the sequence?
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