Is money really only created by banks

Money creation: where do banks get the money for loans from?

Above all, money lives from trust. But where does money actually happen? How does it get into the payment cycle? And where exactly does the consumer credit money come from? The money lent by banks comes from customer deposits, but also from so-called refinancing loans that commercial banks can take out from the central bank.

Central bank money: money creation out of nothing

Money is created by the central banks of the states and currency areas. These include the European Central Bank in Frankfurt am Main, the US Federal Reserve, the Bank of England and Nippon Ginkō in Japan. The central banks work practically as monetary authorities, because only they are allowed to issue legal tender. Fresh money arises when the central banks lend to commercial banks or when they buy government and corporate bonds on a large scale. The equivalent value is booked as a sight deposit on the central bank account of the payee, who then has the money and can bring it into the economic cycle.

Commercial banks create additional deposit money

Credit institutions also create money themselves. The result of this is also known as deposit money. If a commercial bank grants a loan of € 10,000, it posts the amount as a credit claim on its balance sheet. She then credits the customer with this € 10,000 in his current account, which increases the amount of money in the market accordingly. The loan customer can then transfer the amount to others, use it for shopping with the EC card or withdraw cash from the machine. With this type of money creation, a powerful leverage comes into play, because commercial banks are allowed to grant multiple times their deposits as loans. In return, they only have to deposit a minimum reserve with the central bank. In the euro area this is currently only 1% of the loan amount.

What does this mean for loan customers?

The monetary policy of the central banks is primarily aimed at price stability and balanced economic development. By setting the key interest rate and the minimum reserve rate, the central banks can decisively influence the interest rate level on the market. If the so-called refinancing interest rate is low, at which the commercial banks can provide themselves with fresh money, the cheap money can be passed on to private and corporate customers in the form of cheap loans. On the other hand, if key interest rates rise, loans will inevitably become more expensive.

The short-term refinancing rate in the euro zone is currently at a very low 0.00%. Commercial banks receive central bank loans practically free of charge. The aim is to encourage lending, effectively stimulate private consumption and create an attractive environment for business investments. The low interest rates also make it easier for many countries to service their high debts and to get cheap new money.

How will the credit market develop?

If you expect interest rates to rise, you should hurry to borrow and write down the current low interest rates in your loan agreement for as long as possible. Nobody can say with certainty whether there will actually be a turnaround in interest rates in the near future. As a rule, key interest rates are only raised when there is an acute risk of inflation. However, this is currently not the case in the euro area or in the other major currency regions.

One tip: You can also use the current low interest rates for cheap rescheduling of old loans that you have taken out at higher interest rates. Construction loans that have become too expensive can also be rescheduled inexpensively as soon as the contractual fixed interest period expires.

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