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I think everyone in their life once asked to themselves: how bank creates money? how are they able to give huge loans to many people and not go bankrup? do they have infinite money? how does a bank work?

In this blog i will do my best to provide information and videos to give an answer to all those questions that we once had, i will focuse mainly on how they actually create money.

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Big question everyone has asked at least once in their life : how money works? in this image we have an illustration that explains it really well, its a cyrcle around the bank which has a reserve which is given as a loan which is then deposited back in the bank

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What Is a Bank?

A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.

There are several types of banks including retail banks, commercial or corporate banks, and investment banks.

In the U.S., banks are regulated by the national government and by the individual states.

Understanding Banks

Banks have existed since at least the 14th century. They provide a safe place for consumers and business owners to stow their cash and a source of loans for personal purchases and business ventures. In turn, the banks use the cash that is deposited to make loans and collect interest on them.

The basic business plan hasn't changed much since the Medici family started dabbling in banking during the Renaissance, but the range of products that banks offer has grown.

Basic Bank Services

Banks offer various ways to stash your cash and various ways to borrow money.

Checking Accounts

Checking accounts are deposits used by consumers and businesses to pay their bills and make cash withdrawals. They pay little or no interest and typically come with monthly fees, usage fees, or both.

Today's consumers generally have their paychecks and any other regular payments automatically deposited in one of these accounts.

Savings Accounts

Savings accounts pay interest to the depositor. Depending on how long account holders hope to keep their money in the bank, they can open a regular savings account that pays a little interest or a certificate of deposit (CD) that pays a little more interest. The CDs can earn interest for as little as a few months or as long as five years or more.

It is important to note that the money in checking accounts, savings accounts, and CDs is insured up to a maximum of $250,000 by the federal government through the Federal Deposit Insurance Corp. (FDIC).

Banks make loans to consumers and businesses. The cash that is deposited by their customers is lent out to other customers at a higher rate of interest than the depositor is paid.

At the highest level, this is the process that keeps the economy humming. People deposit their money in banks; the bank lends the money out in car loans, credit cards, mortgages, and business loans. The loan recipients spend the money they borrow, the bank earns interest on the loans, and the process keeps money moving through the system.

Just like any other business, the goal of a bank is to earn a profit for its owners. For most banks, the owners are their shareholders. Banks do this by charging more interest on the loans and other debt they issue to borrowers than they pay to people who use their savings vehicles.

For example, a bank may pay 1% interest on savings accounts and charge 6% interest for its mortgage loans, earning a gross profit of 5% for its owners.

Brick-and-Mortar and Online Banks

Banks range in size from small, community-based institutions to global commercial banks.

According to the FDIC, there were just over 4,200 FDIC-insured commercial banks in the United States as of 2021. This number includes national banks, state-chartered banks, commercial banks, and other financial institutions.

Traditional banks now offer both brick-and-mortar branch locations and online services. Online-only banks began emerging in early 2010s.

Consumers choose a bank based on its interest rates, the fees it charges, and the convenience of its locations, among other factors.

How Are Banks Regulated?

U.S. banks came under intense scrutiny after the global financial crisis of 2008. The regulatory environment for banks was tightened considerably as a result.

Depending on their business structures, U.S. banks may be regulated at the state or national level, or both. State banks are regulated by each state's department of banking or department of financial institutions. This agency is generally responsible for issues such as permitted practices, how much interest a bank can charge, and auditing and inspecting banks.

National banks are regulated by the Office of the Comptroller of the Currency (OCC). OCC regulations primarily cover bank capital levels, asset quality, and liquidity. As noted above, banks with FDIC insurance are also regulated by the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 following the financial crisis with the intention of reducing risks in the U.S. financial system. Under this act, large banks now have to submit to regular tests that measure whether they have sufficient capital to continue operating under challenging economic conditions. This annual assessment is referred to as a stress test.

Types of Banks

Most banks can be categorized as retail, commercial or corporate, or investment banks. The big global banks often operate separate arms for each of these categories.

Retail Banks

Retail banks offer their services to the general public and usually have branch offices as well as main offices for the convenience of their customers.

They provide a range of services such as checking and savings accounts, loan and mortgage services, financing for automobiles, and short-term loans such as overdraft protection. Many also offer credit cards.

They also offer access to investments in CDs, mutual funds, and individual retirement accounts (IRAs). The larger retail banks also cater to high-net-worth individuals with specialty services such as private banking and wealth management services.

Examples of retail banks include TD Bank and Citibank.

Commercial or Corporate Banks

Commercial or corporate banks tailor their services to business clients, from small business owners to large, corporate entities. Along with day-to-day business banking, these banks also offer credit services, cash management, commercial real estate services, employer services, and trade finance,

JPMorgan Chase and Bank of America are examples of commercial banks, though both have large retail banking divisions as well.

Investment Banks

Investment banks focus on providing corporate clients with complex services and financial transactions such as underwriting and assisting with merger and acquisition (M&A) activity. They are primarily financial intermediaries in these transactions.

Their clients include large corporations, other financial institutions, pension funds, governments, and hedge funds.

Morgan Stanley and Goldman Sachs are among the biggest U.S. investment banks.

Central Banks

Unlike the banks above, central banks does not deal directly with the public. A central bank is an independent institution authorized by a government to oversee the nation's money supply and its monetary policy.

As such, central banks are responsible for the stability of the currency and of the economic system as a whole. They also have a role in regulating the capital and reserve requirements of the nation's banks.

The U.S. Federal Reserve Bank is the central bank of the U.S. The European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People's Bank of China are among its counterparts in other nations.

Bank vs. Credit Union

Credit unions offer banking services but, unlike banks, they are not-for-profit institutions created for and managed by their members or customers. Credit unions provide routine banking services to their clients, who are generally called members.

Credit unions are created, owned, and operated by their clients, and are generally tax-exempt. Members purchase shares in the co-op, and that money is pooled together to fund the credit union's loans.

They tend to provide a limited range of services compared to banks. They also have fewer locations and automated teller machines (ATMs).

How Do I Know My Money Is Safe in a Bank?

Are Any Non-Bank Accounts Insured?

Should I Choose a Retail Bank, Credit Union, or Commercial Bank?

What Other Factors Go Into Choosing a Bank?

The Bottom Line

At the very least, a bank is where you stash your cash until you use it to pay the bills or withdraw money. It can also be the place where you get a loan to buy a car or a mortgage to buy a house. If you're running a small business, it may be where you go to borrow money to expand or improve.

Before choosing a bank, you should make a comparison of the various fees and charges that come with your accounts or any loans you might need. A bit of research and comparison will ensure you find the right fit for safeguarding your money, establishing credit, making payments, applying for loans, receiving funds, and saving money for future needs such as retirement, emergencies, and homebuying.

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How Banking Works, Types of Banks, and How To Choose the Best Bank for You

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A bank is a financial institution licensed to receive deposits and provide other services such as mortgage loans and individual retirement accounts.

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As mentioned on the video the bank of Canada its the main one of the country, it oversees public debt program, manage the country's financial system before it was the bank of montreal.

I thought this video was important to add as it explains the role of the bank of Canada and a little bit of history.

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This website explains mainly how the Bank of Canada creates money, letting us know that they do so by making asset purchases or making loans. it also mentions that the majority of money created in Canada is withing the private banking system every time banks extend new loans like mortgages, consumer loans and business loans.

I thought this website has value information to contribute to the topic as it focus mainly on the bank of Canada and it also explains about how Canada in general creates money, it is also a website that goes straight to the point on answering the question "how does the bank of canada creates money?"

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Executive Summary

Money is created in the Canadian economy in two main ways: through private commercial bank loans or asset purchases, and through the Bank of Canada's asset purchases. The majority of money in the economy is created by commercial banks when they extend new loans, such as mortgages. However, with the Bank of Canada's unprecedented asset purchases to reduce the negative impacts of the COVID‑19 pandemic on the Canadian economy and to bring inflation back up to target, greater attention has been paid to the Bank of Canada's money creation and its impact on inflation. An examination of the differences between these two methods shows that money creation through asset purchases by the Bank of Canada is essentially an internal government process, mostly limited by inflation. The examination concludes that external factors, like financial market dysfunction, cannot cause the federal government to run out of money.

"The process by which money is created is so simple that the mind is repelled."
- John Kenneth Galbraith

1 Introduction

This paper explores the operational and legal aspects of how the Bank of Canada creates money by buying newly issued federal government bonds and Treasury bills. 1 It also discusses how private commercial banks create money.

To soften the negative impact of the COVID‑19 pandemic on the Canadian economy and to bring inflation back up to its target rate, 2 the Bank of Canada recently injected the largest amount of money in its history into the financial system. Through various asset purchase programs, the Bank of Canada has bought federal, provincial and corporate bonds, commercial paper, bankers' acceptances, Canada Mortgage Bonds, Treasury bills and short-term provincial securities. These asset purchases increased the size of the Bank of Canada's balance sheet from $120 billion on 11 March 2020 to a peak of $575 billion on 10 March 2021. After winding down some of its asset purchase programs, the Bank of Canada reduced its balance sheet to $478 billion on 12 May 2021. 3

Although these measures were taken in the most extraordinary circumstances of a global pandemic, the Bank of Canada also purchases financial assets as part of the regular management of its balance sheet to offset its liabilities, which consist mainly of bank notes in circulation and government deposits. 4

2 The Bank of Canada's Process for Creating Money Through Asset Purchases

The Bank of Canada helps the Government of Canada borrow money by holding auctions throughout the year at which new federal securities (bonds and Treasury bills) are sold to government securities distributors, such as banks, brokers and investment dealers. However, the Bank of Canada itself typically purchases some of the newly issued bonds and a sufficient number of Treasury bills to meet its needs at the time of each auction. 5 These purchases are made on a non-competitive basis, meaning that the Bank of Canada does not compete with the government securities distributors at auctions. Rather, the Bank of Canada is allotted a specific number of securities to buy at each auction. 6

In practical terms, when the Bank of Canada purchases government securities at auction, it means that the Bank records the value of the securities, each of which has a unique International Securities Identification Number, as a new asset on its balance sheet. It simultaneously records the proceeds from the sale of the securities as a deposit in the Government of Canada's account at the Bank - a liability on the Bank's balance sheet (see Appendix, Table 1).

Since the Bank of Canada is a Crown corporation - wholly owned by the federal government, yet independent of it in the conduct of its monetary policy - the Bank's purchase of a newly issued security from the federal government can essentially be considered an internal transaction. It records new and equal amounts on the asset and liability sides of its balance sheet, creating money through digital accounting entries. 7 The federal government can then spend that newly created money in the Canadian economy as it sees fit, subject to Parliament's approval.

The creation of money by the Bank of Canada through the purchase of assets like Government of Canada securities has fundamentally the same financial impact as the Bank making loans to the federal government, 8 yet the Bank's governing law, the Bank of Canada Act, 9 does not explicitly empower it to make loans of this nature. 10 Rather, this Act gives the Bank the power to "buy and sell securities issued or guaranteed by Canada or any province" (section 18(c)), as well as the power to "accept deposits from the Government of Canada and pay interest on those deposits" (section 18(l)). Taken together, these two provisions appear to empower the Bank to create money through the direct purchase of Government of Canada securities at debt auctions.

As the Bank of Canada explains, its purchases of Government of Canada securities are not a way of financing the government's spending and debt at no cost; the federal government has to repay the securities when they become due. Moreover, the Bank of Canada does not believe that its asset purchases since the beginning of the pandemic will generate high inflation rates, because the Canadian economy is currently facing low inflation. Its decision on when and how to scale back these purchases will be tied to the outlook for inflation. 11

3 Money Creation in the Private Banking System

Private commercial banks also create money when they purchase newly issued government securities as primary dealers at auctions. They do so by making digital accounting entries on their own balance sheets: the asset side is augmented to reflect the purchase of new securities, and the liability side is augmented to reflect a new deposit in the federal government's account with the bank.

However, it is important to note that the majority of money in the Canadian economy is created within the private banking system every time banks extend new loans like mortgages, consumer loans and business loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money (see Appendix, Table 2).

One key similarity between money creation in the private banking system and money creation by the Bank of Canada is that both are realized by simultaneously increasing the asset and liability sides of a balance sheet.

One notable difference between the two types of money creation is that there is no external limit to the total amount of money the Bank of Canada may create through its asset purchases, other than the impact the additional money created has on inflation. 12 In contrast, the amount of money that a private commercial bank is permitted to create depends on the amount of the bank's equity relative to its assets. The limiting rules, known as capital constraints, are established by Canada's banking regulator in a set of guidelines. 13 Another significant difference is that the key factor in a private commercial bank's decision to give a loan to a private entity is the creditworthiness of the borrower, whereas the key factor in the Bank of Canada's decision to purchase assets is its ability to achieve its inflation target.

4 Conclusion

Both the Bank of Canada and private commercial banks create money by making asset purchases or making loans. However, money creation by the Bank of Canada through purchases of Government of Canada securities is essentially an internal government process; this means that external factors, such as financial market dysfunction, cannot cause the federal government to run out of money. 14

Inflation is the main limit to the amount of money the Bank of Canada can create through asset purchases.

Notes

Appendix - Money Creation

Table 1 illustrates how the balance sheets of the Bank of Canada and the Government of Canada are affected when the Government of Canada issues new securities and the Bank of Canada purchases these securities directly.

Balance Sheet

Type of Entry

Bank of Canada

New Government of Canada securities purchased

New deposit from the Government of Canada

Government of Canada

New deposit at the Bank of Canada

New Government of Canada securities issued

Note: When the Bank of Canada purchases new Government of Canada securities, it simultaneously records the value of the securities as a new asset on its balance sheet and records the new deposit from the Government of Canada as a liability on its balance sheet. On the balance sheet of the Government of Canada, the new deposit at the Bank of Canada is recorded as an asset and the new securities issued are recorded as a liability.

Source: Table prepared by the Library of Parliament.

Table 2 illustrates how the balance sheets of a private commercial bank and a private entity are affected when that bank gives a new loan to the private entity.

Balance Sheet

Type of Entry

Private commercial bank

Loan to the private entity

Deposits created for the private entity

Private entity

Deposits at the commercial bank

Loan from the commercial bank

Note: When a private commercial bank provides a new loan to a private entity, it simultaneously records the value of the loan as an asset on its balance sheet and records the deposits created for the private entity as a liability on its balance sheet. On the balance sheet of the private entity, the deposits at the commercial bank are recorded as an asset and the loan from the commercial bank is recorded as a liability.

Source: Table prepared by the Library of Parliament.

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How the Bank of Canada Creates Money Through its Asset Purchases

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Money is created in the Canadian economy in two main ways: through private commercial bank loans or asset purchases, and through the Bank of Canada's asset purchases. The majority of money in the economy is created by commercial banks when they extend new loans, such as mortgages.

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In this 1 minute video we can learn the basics of how the banking system works, it explains the history, interests and fractional reserve banking.

i Thought it was important to understand exactly how banks have money , this video has history on it and explains it really well on how it works now.

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How do banks actually create money? We explain

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In this website we learn how loans work in banks, it explains that with the deposits they get daily they are able to make long-term loans to people and this works for them because they pay less to depositors and they receive more from the borrowers.

I added this website as it is important to understand how loans work in a bank and how it is sustainable for them, also loans and deposits make a big part on how they create their money,

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Now this one its really interesting, it explains how banks work in general, from a deposit that you make they make a loan to other person with high interest , so , in other words , you deposit certain amount and they give you an interest for that money but then when they loan the same amount to someone else they receive a higher interest rate for it, and , thats how they are creating money.

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If we are talking about banks and how they work i believe knowing this is important. Banks can fail and they can go bankrupt, when that happens it may try to borrow money from other solvent banks to pay its depositors. If the failing bank cannot pay its depositors, a bank panic might ensue, causing depositors to withdraw their money from the bank (known as a bank run).

I thought this website was important to add i believe we have all asked ourselves "what happens if a bank goes bankrupt?" this answers it pretty well and in general, it doesn’t focus in any specific bank.

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What Is a Bank Failure? Definition, Causes, Results, and Examples

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A bank failure is the closing of an insolvent bank by a federal or state regulator. Learn what causes a bank failure, which banks have failed, and what happens to your money if your bank fails.

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In this image we can see the main Banks of Canada which are 5 of them , Canada Trust, Royal Bank Of Canada, Canadian Imperial Bank Of Commerce , Scotiabank and Bank of Montreal. Also you can see a graphic of the deposits made to them, unfortunately its outaded

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knowing how banking works is highly important to understand how money works, with this we know that if we make a $100k deposit one day we cannot take it out the next day because that money probably isnt in the bank anymore and we will have to wait some time for the bank to give out that high amount back again, its an ongoing chain but the money we see reflected on our account its not necessarily physically there. With this investigation i was able to learn more about how banking works.