Money, Banking and Credit
Money, Banking
& Credit.
Modern money is a network of balance-sheet relationships. Discover how bank lending creates deposits, why reserves are not household money, and how capital, liquidity, risk and demand constrain credit.
Observe
Follow both sides of the entry.
A bank loan creates
an asset and a liability.
When a bank approves a €100,000 business loan, it records the loan as an asset and credits the borrower’s deposit account by the same amount. The deposit is new broad money; repayment destroys the deposit and reduces the loan.
Every financial asset is someone else’s liability. Ask whose balance sheet expands—and what matching entry appears.
Think
Separate money by issuer and user.
Not all money is
the same instrument.
Central-bank money consists of currency and bank reserves. Commercial-bank deposits are promises by banks to households and firms, convertible at par into central-bank money. Most everyday payments use deposits.
Medium of exchange
Reduces the transaction costs of barter.
Unit of account
Provides a common measure for prices and contracts.
Store of value
Transfers purchasing power through time, imperfectly under inflation.
Analyse
Expand a bank balance sheet.
Simulate credit creation
with accounting consistency.
The bank begins with €100m deposits, €15m reserves, €75m loans and €10m equity. Add a new loan; its matching deposit appears automatically.
Bank balance-sheet laboratory
INTERACTIVE CREDIT CREATION
The loan and deposit expand together. Reserves do not automatically rise at origination.
Commercial bank (€m)
Apply
Understand constraints and fragility.
Banks do not lend
without limits.
Credit creation is constrained by borrower demand, expected profitability, creditworthiness, bank capital, liquidity management, regulation and monetary-policy conditions. A bank can be solvent yet temporarily illiquid—or liquid yet insolvent.
Can it pay now?
The bank needs settlement assets when payments leave for other banks.
Are assets worth enough?
Losses can exhaust equity when asset values fall below liabilities.
Will borrowers repay?
Expected defaults influence lending standards, pricing and capital needs.
Productive finance
Loans fund investment, innovation and working capital.
Can raise capacity and income.
Excess leverage
Rapid credit growth can inflate asset prices and weaken lending standards.
Can amplify later downturns.
Decide
Record the entries correctly.
What happens when a bank
originates a new loan?
A commercial bank grants a household a €50,000 loan and credits its current account.
MACROECONOMICS · MODULE 10 COMPLETE
You can now read
money as a balance sheet.
Bank lending creates deposits, repayment destroys them, and financial stability depends on capital, liquidity, asset quality and credible institutions.
