Yeah that’s correct. It’s pretty wild that things work this way. Most people think that we still have fractional reserve banking, which is where the bank has $1 in reserve and they lend it to many borrowers simultaneously. With no reserve requirement they can essentially loan money that doesn’t exist. Banks want to avoid succumbing to a bank run where too many clients make withdrawals at the same time. But essentially they operate like a retail business that determines how many products to keep on hand in order to meet demand on any given day. Bank loans create both a credit (to the borrowers account) and a debit in the bank’s main ledger, the debit is a liability as we discussed, the bank must be prepared to pay.

Banks are limited by their ability to find qualified borrowers who will repay their loans.