Banks can create money
Banks can create money
Did you know banks create money when they lend it?
It might sound surprising, but banks don’t just hand out money that people have deposited. When you take out a loan, the bank actually creates new money.
💰 Here is a simple example:
You are approved for a $500,000 home loan.
The bank does not take that money from someone else’s account.
Instead, it simply adds $500,000 to your account as a deposit.
That money did not exist before—it is created when the loan is made.
This is how most money in the economy is created: not by the government, but by commercial banks through lending.
But banks cannot create unlimited money. They are tightly regulated in Australia to keep the financial system safe.
Key limits include:
✅ Capital adequacy requirements – Banks must hold a certain amount of their own money (called capital) as a safety buffer.
👉 Example: If a bank has $100 million in capital and the capital ratio is 10%, it can only lend up to around $1 billion. This limits how much money it can create through loans.
✅ Liquidity rules – Banks must hold enough cash or assets they can quickly turn into cash to meet withdrawals.
✅ Borrower demand – If customers do not want to borrow, or cannot repay, lending stops.
✅ Interest rates – Set by the Reserve Bank of Australia. Interest rates influence how much borrowing takes place.
