Morgan's Site

Written April 2018

Commercial Bank Money

3.4% of money circulating in the United Kingdom's economy is created by the Bank of England; 96.6% is created by commercial banks such as HSBC, Barclays and Lloyds.[1]

Commercial banks create new money when they make loans. When a customer takes out a loan with a commercial bank, the bank funds the loan by creating new money.[2]

"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."
 - Bank of England Quarterly Bulletin 2014 Q1

To illustrate this concept with an example, when Olivia takes out a £200 000 mortgage with HSBC so that she can purchase a house, the bank does not loan existing money to Olivia, instead it creates £200 000 of new money and deposits it in Olivia's account with HSBC.

Conversely, commercial banks destroy money when a customer makes repayments on a loan. The bank keeps the interest paid on the loan to cover operational costs, pay interest on liabilities (e.g. savings accounts) and make profit.[2]

"Just as taking out a new loan creates money, the repayment of bank loans destroys money."
 - Bank of England Quarterly Bulletin 2014 Q1

If Olivia makes total repayments of £254 100, £200 000 will be destroyed in the process of repaying the loan. The £54 100 of interest will remain in circulation as commercial bank money.

If you want to read more on the topic, and from an authoritative source, read the Bank of England Quarterly Bulletin 2014 Q1.