What is Commercial bank money
Commercial bank money (bank money) refers to the money created by commercial banks through the process of lending. When a commercial bank makes a loan, it creates new money by crediting the borrower’s account with the loan amount. This new money is in the form of digital entries in the borrower’s account.
In other words Commercial bank money consists of deposit balances that can be transferred either by means of paper orders (e.g., checks) or electronically (e.g., debit cards, wire transfers, and Internet payments). Commercial bank money is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions.
How is is Commercial bank money created
Commercial bank money is created through fractional-reserve banking. This is the world’s practice where banks obliged to keep only a fraction of the deposits that have been given them as reserve and lend out the remainder.
Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.
The process by which commercial banks create money through lending is known as the money multiplier effect. When a bank makes a loan, it creates new deposits, which can then be used to make new loans and create more deposits. This process can continue until the total amount of new money created is limited by the Reserve requirements, which is the amount of funds that a bank is required to hold in reserve against its deposits.
Debt is Money
Technically we can state Debt is Money. Debt for the lender is the asset of money. Debt for the borrower is his liability to the lender, because technically a just a newly created record about the money that banks owns the lender. In this sense money is created by new records in the Banks Books out of “nothing”. We know there are Reserve requirements, so banks are required to secure their loans by a central bank by lending a money at the the central bank. But the central banks money (not currency) is created the same way. It’s debt-generated money in this sense, because the commercial banks lend money at central banks and central bank then credits the loan amount to the commercial bank’s account at the central bank.
You might be interested in Monetary Base article at this place.
Relation to the Money supply
Commercial bank money is a significant component of the Money Supply in most modern economies. It is a crucial driver of economic activity, as it enables individuals and businesses to borrow and invest, which can help to stimulate growth and create jobs. However, the creation of commercial bank money can also contribute to inflation if the supply of money outstrips the demand for goods and services in the economy.
Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple (greater than 1) of the amount of the Monitory Base created by the country’s central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators.
The Money Supply defines several different money aggregates, but generalized held to be the total amount of currency in circulation plus the total of the Commercial bank money for the country. In modern economies, relatively little of the money supply is in physical currency, the was majority (Approx 97%!) of money is created by private banking!
Commercial Bank Related Statistic
Deposits, All US Commercial Banks
Bank Credits, All US Commercial Banks
Consumer Loans: Credit Cards and Other Revolving Plans, All US Commercial Banks
Total Assets, All US Commercial Banks
Cash Assets, All US Commercial Banks