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Central Iowa | John, your understanding or perception of bank accounting, and accounting in general, is WAY off the mark.
For starters, a bank is bound by the same accounting principles as any other business. The left side of of their balance sheet - assets - is made up mostly of cash, receivables (loans and related accrued interest), investments (treasury securities, bonds, etc) and fixed assets (furniture, equipment, buildings, and land). The right side of the balance sheet - liabilities and equity - consists mostly of payables (accrued interest on deposits and other borrowings), borrowings (customer deposits, fed borrowings, etc), and equity (paid in capital and earned income).
Just like any other business, the sum of a bank's assets always exactly equals the sum of their liabilities and equity. So when a customer makes a $100 deposit in the bank, the bank's liabilities (deposit liabilities) increase by $100 and it's assets (bank cash) increases by an identical $100. So, all else being equal, that $100 deposit gives the bank a MAXIMUM OF an additional $100 they can convert to loan receivables.
In the example where a bank customer borrows $30,000 to buy a car, the bank's recivables account (it's loan receivables) would increase by $30,000. And in most cases the bank would issue a $30,000 cashiers check to the seller of the car, thereby reducing the bank's cash asset by that same amount. So in this example, the bank's total assets and total liabilities remain exactly the same. However, if the bank chose to place the loan proceeds in the borrower's deposit account instead, the bank's total assets (loan receivables) would increase $30,000 as previsously described, and its liabilities (deposit liabilities) would increase an identical $30,000.
The only way a bank generates "money out of thin air", as you suggest, is via interest earnings, investment income, and fee income. However, the bank incurs a rather large expense burden to make those things happen...
John, please carefully study Iowegian's description above as he speaks the truth!
Edit for clarity: Iowegian and I are referring to the business of banking (i.e. commercial banks, thrifts, credit unions, etc.) and NOT the Fed or "central bank" as it were
Edited by Cypul 12/12/2014 13:44
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Banking, one more time....
