How is new money created in bank accounts?
Correct answer
Answer D: Through lending: the bank creates a new account balance.
Quick explanation
This is called deposit money or bank money. It is not printed as cash but created as an account balance. At the same time, the borrower takes on a debt.
Detailed explanation
When a commercial bank grants a loan, it does not necessarily transfer banknotes already deposited by another customer. It records a loan claim on the asset side of its balance sheet and credits the borrower with a deposit on the liability side. This deposit can be used for payments and counts as deposit money.
The new purchasing power comes with an obligation to repay. When the loan is repaid, the loan claim and corresponding amount of deposit money are generally reduced again. Interest and fees follow their own payment flows.
Banks cannot create unlimited money this way. Credit demand, creditworthiness, collateral, capital rules, liquidity requirements, funding costs and economic risks constrain lending. If the newly created balance is transferred to another bank, the payment between banks must be settled in central bank money.
Creating deposit money is therefore not free profit or an arbitrary keyboard entry. It is a balance-sheet operation within a regulated banking and central banking system.
Example or everyday application
A bank lends 20,000 euros for a car and credits the amount to the account. At the same time, the customer owes the bank 20,000 euros plus agreed interest.
Common misconception
The typical misconception is that banks can only pass on money already deposited, or that they can create unlimited new money. Both are oversimplifications.
What the sources support
The Bundesbank describes how commercial banks create bank deposits through lending. Bitcoin mining documentation shows a different creation mechanism: new bitcoin are issued only as a rule-bound block subsidy in valid blocks.