Banks Don't Have to Amass Funds before Lending

• Unlike loan sharks

• In loan contract, bank purchases a promissory note from customer

  • Records loan amount as an asset

  • Records same amount in customer's checking account: bank liability

                    Bank's Balance Sheet
        Assets                              Liabilities

        + $1,000 (loan note)                + $1,000 (customer demand deposit)

• The customer makes corresponding entries on her balance sheet but in reverse

                   Customer's Balance Sheet
        Assets                              Liabilities

        + $1,000 (customer demand deposit)  + $1,000 (loan note)

• Loans create deposits